SEMBCORP INDUSTRIES LTD (SGX:U96)
SEMBCORP MARINE LTD (SGX:S51)
KEPPEL CORPORATION LIMITED (SGX:BN4)
YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)
Sembcorp Industries & Sembcorp Marine - A Sea Change
- Sembcorp Industries (SGX:U96) and Sembcorp Marine (SGX:S51) announced a significant two-stage transaction yesterday with the latter raising S$2.1b via a 5-for-1 rights issue, followed by a de-merger of the two companies. After repaying a S$1.5b loan to Sembcorp Industries, Sembcorp Marine will end up with S$600m cash which it needs to bridge current difficult industry conditions.
- In the short term, both stocks may underperform, however we are hopeful that business conditions will improve for both in the next 6-12 months.
A major transaction - Demerger of Sembcorp Marine from Sembcorp Industries.
- Sembcorp Marine (SGX:S51) and Sembcorp Industries (SGX:U96) announced they will undertake a two-stage transaction involving:
- Sembcorp Marine undertaking a rights issue to raise S$2.1b; and
- Sembcorp Marine to de-merge from Sembcorp Industries.
- See Sembcorp Industries Announcements; Sembcorp Marine Announcements.
First stage.
- In the first stage, Sembcorp Marine will undertake a 5-for-1 rights issue at S$0.20 per rights share, raising gross proceeds of about S$2.1b. Sembcorp Industries will undertake to subscribe for up to S$1.5b of the rights to set off against the S$1.5b principal amount outstanding under its Subordinated Credit Facility with Sembcorp Marine. Temasek has agreed to subscribe for up to S$0.6b of the rights.
Second stage.
- In the second stage and post the completion of the rights issue, Sembcorp Industries will distribute in specie and on a pro rata basis its stake of Sembcorp Marine to its shareholders. For every 100 Sembcorp Industries shares, the shareholder will receive 427-491 Sembcorp Marine shares with no payment required. As a result, Temasek will end up being a direct shareholder of Sembcorp Marine instead of an indirect shareholder via Sembcorp Industries.
Use of S$2.1b rights proceeds.
- Sembcorp Marine will repay the S$1.5b outstanding principal due to Sembcorp Industries (72% of funds raised) via a set-off agreement. The remaining S$0.6b (28% of funds raised) will be used for working capital and general corporate purposes, including debt servicing. Sembcorp Industries’s remaining S$0.5b undrawn credit facility to Sembcorp Marine will be terminated.
Timetable.
- The expected Extraordinary General Meeting (EGM) to vote on the necessary resolutions for this transaction is expected in late-August to early-Sep 20 with a view towards deal completion in 4Q20. Thus, the dates for lodgement of Sembcorp Marine’s offer information statement, trading of Sembcorp Marine’s rights and Sembcorp Industries’s record date for the distribution of its Sembcorp Marine shares are not known at present.
Approvals required.
- There are three shareholders’ approvals required at the EGM, all with simple majority ( > 50%) present and voting:
- approval for Sembcorp Industries to distribute its Sembcorp Marine shares in specie (Temasek will abstain),
- approval for Sembcorp Marine to undertake the rights issue (Sembcorp Industries will be voting in favour of this resolution), and
- approval from Sembcorp Marine shareholders for a Whitewash Resolution to waive their rights to receive a mandatory takeover offer from Temasek (Sembcorp Industries will abstain on this resolution) as Temasek may end up as a > 30% stake in Sembcorp Marine.
- Note that all three of these resolutions are inter-conditional, ie all of them will need to be passed for the transaction to proceed.
Rationale behind the de-merger.
- On both the Sembcorp Industries and Sembcorp Marine’s analyst calls, the companies emphasised that while there were synergies before (and stated by Sembcorp Industries as recently as Jun 19 when it extended the S$2b loan to Sembcorp Marine), they did not currently see meaningful synergies between them, given the new paradigm of the COVID-19 pandemic and the downturn in the oil & gas cycle.
- Sembcorp Industries in particular noted rapidly altered demand patterns in Asia from the effects of rapid industrialisation, electrification and urbanisation and thus want to change tack to focus on these factors without the ‘constraints’ of Sembcorp Marine.
- On the Sembcorp Marine side, management said the de-merger would create a more focused company that would be able to pursue its own strategy with regard to clean-energy solutions.
More plausible explanation for Sembcorp Industries to de-merge, in our view.
- One of the key benefits of the demerger for Sembcorp Industries is that its more focused strategy on energy and urban developments should enable it to trade at valuation multiples that are comparable to the utilities sector rather than being shouldered with the offshore marine segment.
A lifeline for Sembcorp Marine.
- The short-term prospects for Sembcorp Marine to return quickly to profitability are remote, given current industry dynamics coupled with the COVID-19 workplace restrictions, in our view. With a reduced orderbook compared to 3-5 years ago, its financials have suffered, thereby putting pressure on the company’s liquidity and capital requirements.
- Sembcorp Marine has proactively attempted to respond by rightsizing the company and deferring capex, but even then, it needed the rights issue to maintain sufficient liquidity to ride out the current downturn.
Risks
COVID-19.
- The obvious risk factor is that of the COVID-19 pandemic weighing negatively on demand for utilities and the offshore marine industry’s products for a longer-than-expected period.
Oil prices.
- While Brent oil prices have rebounded nearly 120% from the lows in late-April, they are nevertheless still down 36% ytd. In our view, oil prices need to sustain at US$45/bbl or more over the medium term for the market to gain confidence, and for new orders to start trickling in.
Recommendation
- Maintain HOLD with a lower target price of S$1.20 which strips out the Sembcorp Marine business from Sembcorp Industries on a pro forma basis. We use target P/B multiple of 0.8x for Sembcorp Industries which is in-line with its ex-Marine P/B multiple over the past five years. Relative to its regional utilities peers which trade at around 1x P/B, we believe a discount for Sembcorp Industries is warranted as the company’s various business units may face weakness for at least the next six months due to our expectation that economic weakness will impact all of the company’s business units.
- Entry price is S$1.10.
- See Sembcorp Industries Share Price; Sembcorp Industries Target Price; Sembcorp Industries Analyst Reports; Sembcorp Industries Dividend History; Sembcorp Industries Announcements; Sembcorp Industries Latest News.
- Maintain HOLD and lower our target price to S$0.25 (S$0.81 previously) to take into account the potential 10.46b new shares that will be issued. We kept our target P/B multiple at 0.9x which we believe takes into account the expected lack of new orders in the near to medium term.
- Concurrent with the announcement of the transaction, Sembcorp Marine issued a business update which is as bearish as its 1Q20 update released on 13 May 20. Securing new orders remains extremely difficult while its repairs & upgrades business has been affected by disruptions in global shipping and cruises. As a result, we believe that 1H20 results, to be released at the end of July, will be extremely weak.
- Entry price is S$0.23.
- See Sembcorp Marine Share Price; Sembcorp Marine Target Price; Sembcorp Marine Analyst Reports; Sembcorp Marine Dividend History; Sembcorp Marine Announcements; Sembcorp Marine Latest News.
- Our target price of S$7.15 is based on SOTP-valuation. In our view, Temasek's partial offer for Keppel Corp at S$7.35 remains valid and is unlikely to be withdrawn. At its 1Q20 earnings call, management said that there were no material adverse changes to its financials during the quarter that would affect the Temasek offer.
- Keppel Corp's current one-year forward PE of 12.8x appears inexpensive as it is 14% below its 5-year average of 14.9x. In addition, the company's one-year forward P/B of 0.89x is below its -1SD level of 0.99x.
- See Keppel Corp Share Price; Keppel Corp Target Price; Keppel Corp Analyst Reports; Keppel Corp Dividend History; Keppel Corp Announcements; Keppel Corp Latest News.
Adrian LOH
UOB Kay Hian Research
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https://research.uobkayhian.com/
2020-06-09
SGX Stock
Analyst Report
1.20
DOWN
2.170
0.25
DOWN
0.810
7.150
SAME
7.150
1.220
SAME
1.220
