SEMBCORP INDUSTRIES LTD (SGX:U96)
Sembcorp Industries - Future Focus: Energy And Urban; Keep Buy
- Sembcorp Marine (SGX:S51) (see report: Sembcorp Marine - RHB Invest 2020-06-09: Stronger Balance Sheet Post Rights; Keep BUY) and Sembcorp Industries (SGX:U96) have jointly announced a proposal for Sembcorp Marine’s SGD2.1bn recapitalisation and de-merger, as Sembcorp Industries’s shareholders receive Sembcorp Marine shares.
- We view the proposal positively, as this will enable Sembcorp Industries to focus on its energy and urban development businesses. Hence, we lower our SOP conglomerate discount. Even if the offshore business takes a longer time to recover, Sembcorp Industries will not be adversely affected after the de-merger, in our view.
- Keep BUY with a higher SOP-derived SGD2.11 Target Price from SGD2.00, 38% upside. See Sembcorp Industries Share Price.
5-for-1 Sembcorp Marine rights issue.
- Sembcorp Marine will issue rights at SGD0.20/rights share, representing a 31% discount to the theoretical ex-rights price based on a 5- day volume weighted average price of SGD0.74. Sembcorp Industries has undertaken to subscribe for up to SGD1.5bn of rights by setting off the SGD1.5bn subordinated loan previously extended to Sembcorp Marine.
- Temasek has agreed to sub-underwrite the remaining SGD0.6bn.
De-merger of Sembcorp Marine and Sembcorp Industries via distribution in specie.
- Post rights issue, Sembcorp Industries will distribute its holdings of Sembcorp Marine shares to its shareholders. The latter will receive between 427 and 491 Sembcorp Marine shares for every 100 Sembcorp Industries shares with no cash outlay required. See Sembcorp Industries Announcements; Sembcorp Industries Latest News.
- This will allow both companies to focus on their respective industries, in our view. Temasek will become a significant direct shareholder of Sembcorp Marine, with a stake of at least 29%.
Sembcorp Marine shareholders’ approvals are required:
- An ordinary resolution to approve the rights issue and a whitewash resolution in respect of the proposed distribution, as this may result in Temasek holding > 30% of Sembcorp Marine’s shares. Sembcorp Industries’s shareholders will separately need to approve the resolution for proposed distribution. All these resolutions are inter-conditional.
We cut FY20F-22F earnings.
- As Sembcorp Marine will cease to be a subsidiary of Sembcorp Industries upon distribution, we have removed the former’s impact on the latter’s financials. We cut FY20F earnings by 9%, given the more challenging oil & gas sector – as the distribution should be done in 4Q20 – and cut FY21F- 22F earnings, as Sembcorp Marine’s forecasted positive earnings will not be consolidated into Sembcorp Industries.
- See Sembcorp Industries Share Price; Sembcorp Industries Target Price; Sembcorp Industries Analyst Reports; Sembcorp Industries Dividend History; Sembcorp Industries Announcements; Sembcorp Industries Latest News.
Our new Target Price of SGD2.11 factors in the proposal.
- This is derived from SOP, incorporating Sembcorp Marine’s new Target Price of SGD1.13 and a lower conglomerate discount of 20% (previously 25%) applied only on the energy and urban businesses (no discount for Sembcorp Marine).
- Post distribution, our Sembcorp Industries Target Price will fall to SGD1.30.
- See also report: Sembcorp Marine - RHB Invest 2020-06-09: Stronger Balance Sheet Post Rights; Keep BUY.
Leng Seng Choon CFA
RHB Securities Research
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https://www.rhbinvest.com.sg/
2020-06-09
SGX Stock
Analyst Report
2.11
UP
2.000
