Offshore & Marine - UOB Kay Hian 2020-08-12: A Fork In The Road For Sembcorp Industries & Sembcorp Marine

Sembcorp Industries & Sembcorp Marine | SGinvestors.io SEMBCORP INDUSTRIES LTD (SGX:U96) SEMBCORP MARINE LTD (SGX:S51)

Offshore & Marine - A Fork In The Road For Sembcorp Industries & Sembcorp Marine

Results of the concurrent Sembcorp Industries (SCI) and Sembcorp Marine (SMM) EGMs

Short and long term positive for Sembcorp Industries...

  • With Sembcorp Marine off its books, we believe that Sembcorp Industries’ valuation should be able to re-rate upwards in the medium to long term, and trade more in line with its regional utilities peers rather than reflect the fortunes (or otherwise) of Sembcorp Marine and the offshore & marine (O&M) industry.
  • In the short term, we see value in Sembcorp Industries given that up to S$0.97/share or half of its current share price is made up of ‘free’ Sembcorp Marine shares. On our estimates, Sembcorp Industries ex Sembcorp Marine is currently trading at a 2020F P/B of 0.42x – a 62% discount to its regional utilities peers’ 1.1x P/B.

...and long-term neutral to positive for Sembcorp Marine.

  • With the upcoming S$2.1b rights issue, Sembcorp Marine will raise S$600m in cash with the remaining S$1.5b being a debt-to-equity swap for Sembcorp Industries. Thus, the significant deleveraging from this rights issue is positive in our view as net gearing will decline from 1.35x as at end-1H20 to 0.45x after the rights issue.
  • On our estimates, the lifeline of S$600m will be able to last Sembcorp Marine for at least two years based on our forecast operating expenses and maintenance capex. However, we remain cautious due to O&M industry headwinds.

Rig dayrate and utilisation data have continued to deteriorate since our last update

  • With the exception of mid-water semi-subs, utilisation levels for other types of assets have declined by an average of 13% ytd vs our previous update in mid-Jun 20 which showed a 9% decline. On the dayrate front, the experience has been similarly negative with both mid-water semi-subs and jack-ups declining by 11% ytd; only drill ships witnessed an increase of 10% since the start of 2020.

One in three rigs have no work

  • Globally, there are 252 rigs (or 32%) that are uncontracted at present, with 117 of these rigs being cold stacked. Although there are fewer cold-stacked rigs in Asia, the fact that we are witnessing one in three rigs not working indicates an industry that remains in a very uncertain and difficult state at present.
  • In our view, and despite the recent stabilisation of the Brent oil price above US$40/bbl, it will take very bullish market conditions to reactivate the cold-stacked rigs given the time and cost required to bring them back up to fully operational standards.

Continued growth in renewables remain as medium-to long-term opportunities for Keppel Corp and Sembcorp Marine.

  • Offshore wind capex in Europe surpassed US$10b in 2015 and has since ranged between US$10b-15b per year. According to Rystad Analytics, European capex on offshore wind is set to reach parity with oil & gas capex in 2021 and surpass it by 2022 as a consequence of both lower oil prices and increasing levels of offshore wind activity in Europe.
  • In Asia, Taiwan has been a major force in spending on offshore wind, while in Jul 20, Vietnam announced the 3.5GW La Gan project with estimated capex in the region of US$10b.

Sembcorp Industries – we retain our BUY rating on the stock with an unchanged target price of S$2.20

Sembcorp Marine – we downgrade the stock to a SELL

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-08-12
SGX Stock Analyst Report BUY MAINTAIN BUY 2.200 SAME 2.200