Sembcorp Marine - OCBC Investment 2020-06-09: Finally Some New Developments

SEMBCORP MARINE LTD (SGX:S51)

Sembcorp Marine - Finally Some New Developments

Sembcorp Industries (SGX:U96) and Sembcorp Marine (SGX:S51) have proposed a recapitalisation of Sembcorp Marine through a S$2.1b renounceable underwritten rights issue, followed by a proposed demerger of the two companies via a distribution in specie (“Proposed Distribution”) of Sembcorp Industries's stake in the recapitalised Sembcorp Marine to Sembcorp Industries shareholders.
Sembcorp Marine has been doubly hit by the Covid-19 pandemic and the earlier collapse in oil prices, and this development will allow it to better address its urgent need to recapitalise, meet liquidity requirements, and strengthen its balance sheet.

A highly dilutive rights issue of up to 10.46b new Sembcorp Marine shares at an issue price of S$0.20 for each rights share has been proposed, on the basis of 5 rights shares for every one existing ordinary share. Gross proceeds are expected to be ~$2.1b (of which Sembcorp Industries is to subscribe up to S$1.5b of rights shares, and Temasek to subscribe for up to S$0.6b via a sub-underwriting arrangement with DBS).
The issue price of S$0.20 is at a 31% discount to the theoretical ex-rights price of S$0.29 as calculated based on the 5-day VWAP of S$0.74.

Sembcorp Industries and Sembcorp Marine will be seeking their respective shareholders’ approval for the Transaction at EGMs which are expected to be convened around end August / early September 2020. The rights issue is also conditional on Sembcorp Marine shareholders passing a resolution to waive their rights to receive a general offer from Temasek and its concert parties in connection with the Proposed Distribution, as Temasek may become a significant shareholder post the transaction.
Sembcorp Industries has given an undertaking to vote in favour of the rights issue resolution at Sembcorp Marine’s EGM. The Proposed Distribution and the rights issue are inter-conditional, and will only proceed if shareholder approvals are received for all resolutions at both companies’ EGMs.

Currently Sembcorp Industries owns 61% of Sembcorp Marine; the rest are owned by minority shareholders (of which retail forms the bulk. We understand that institutional accounts for less than a fifth of the minority shareholders.
Post distribution of Sembcorp Marine shares, Sembcorp Industries’s public shareholders would hold 30.9% to 35.4% of Sembcorp Marine; Temasek between 29.9% to 58.0% and Sembcorp Marine’s public shareholders 6.5% to 39.1%.

Should the demerger happen later, there will be change of control event that could impact loans with financial institutions. However, this may be aided by Temasek coming in as a significant shareholder. Meanwhile, we believe a recovery is still a long way off, given the challenging environment in the industry.
See Sembcorp Marine Share Price; Sembcorp Marine Target Price; Sembcorp Marine Analyst Reports; Sembcorp Marine Dividend History; Sembcorp Marine Announcements; Sembcorp Marine Latest News.
We update our assumptions and our fair value estimate is lowered from S$0.75 to S$0.55. Downgrade Sembcorp Marine to SELL.
See also report: Sembcorp Industries - OCBC Investment 2020-06-09: Separating From Marine.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-06-09

SGX Stock Analyst Report SELL DOWNGRADE HOLD 0.55 DOWN 0.750