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

SEMBCORP INDUSTRIES LTD (SGX:U96) SEMBCORP MARINE LTD (SGX:S51)

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

Given the successful EGM held yesterday by both Sembcorp Industries and Sembcorp Marine, with all three inter-conditional resolutions easily passed, the companies will demerge by the year-end at the latest.
In our view, the demerger is a positive for Sembcorp Industries in both the near and the long term, while Sembcorp Marine Share Price may face selling pressure in the near term post the in-specie distribution of its shares to Sembcorp Industries shareholders.

Maintain BUY on Sembcorp Industries but downgrade Sembcorp Marine to SELL. Maintain MARKET WEIGHT.

Results of the concurrent Sembcorp Industries (SGX:U96) and Sembcorp Marine (SGX:S51) EGMs held yesterday were in line with expectations, with all three inter-conditional resolutions passed. See Sembcorp Announcements, Sembcorp Marine Announcements - Thus, Sembcorp Marine will proceed with its S$2.1b 5-for-1 rights issue, Temasek will not have to bid for the remaining stake of Sembcorp Marine that it does not own, and Sembcorp Industries will be demerged with Sembcorp Marine. The timeline of the rights issue and the demerger will be released in the Offer Documents in the next few weeks.

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.

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.

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.

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.

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.

Our SOTP-valuation uses a target P/B of 0.6x for the utilities segment, while the Sembcorp Marine valuation contribution uses the low end of the 4.27-4.91 Sembcorp Marine shares (for every 1 Sembcorp Industries share) that will be distributed to Sembcorp Industries shareholders.
Risks to the company achieving our target price include uncertainty about the pace of regional and global economic recovery, given the COVID-19 pandemic, which negatively affects energy and utilities demand.
In the longer term, Sembcorp Industries remains a play on urbanisation and electrification.
See Sembcorp Share Price; Sembcorp Target Price; Sembcorp Analyst Reports; Sembcorp Dividend History; Sembcorp Announcements; Sembcorp Latest News.

We downgrade Sembcorp Marine to a SELL with a lower target price of S$0.29, which equates to its theoretical ex-rights price. In the near term, the stock will likely face selling pressure from Sembcorp Industries shareholders that may not want exposure to the O&M sector.
Industry headwinds persist as day rates and utilisation rates for rigs have deteriorated further since our last update on 24 Junethus chances of a recovery in the O&M sector in the near to medium term remain low, in our view.
In our base-case scenario, the industry outlook remains challenging and new order flow may only re-surface in 1H21. This reinforces our view that an upcycle is more than two years away.
Entry price is S$0.20.
See Sembcorp Marine Share Price; Sembcorp Marine Target Price; Sembcorp Marine Analyst Reports; Sembcorp Marine Dividend History; Sembcorp Marine Announcements; Sembcorp Marine Latest News.

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

SELL DOWNGRADE HOLD 0.29 DOWN 0.490