Sembcorp Marine - OCBC Investment 2021-06-25: To Combine With Keppel O&M

SEMBCORP MARINE LTD (SGX:S51)

Sembcorp Marine - To Combine With Keppel O&M

Keppel Corporation (SGX:BN4) and Sembcorp Marine (SGX:S51) entered into non-binding MOU with a view to combine Keppel O&M and Sembcorp Marine.
Terms of combination still being discussed; may take several months.
Sembcorp Marine (SGX:S51) proposes S$1.5b rights issue.

Since our last HOLD-rated report, “Clinches order after 2020 drought” on 9 April 2021, Sembcorp Marine's share price has corrected by 5% as of the close on 24 June 2021. This compares to a 2.2% drop for the Straits Times Index over the same period.

Both Sembcorp Marine and Keppel Corporation have entered into a non-binding MOU with regards to exclusive negotiations with a view to combine Keppel O&M and Sembcorp Marine, with the objective of creating sustainable value over the long term for stakeholders. The Combined Entity is envisaged to be a listed entity, and Sembcorp Marine's shareholders will hold shares in the Combined Entity, while Keppel Corporation will receive shares in the Combined Entity and a cash consideration of up to S$500m (or a cash component with the economic equivalent effect).

Keppel Corporation and Sembcorp Marine will undertake mutual due diligence and discuss terms of the potential combination, which is expected to take several months. Discussions are also at preliminary stage and there is no certainty that the potential combination will take place.

At the same time, Sembcorp Marine has also proposed to further raise approx. S$1.5b through a fully committed, renounceable rights issue of up to 18,833m new ordinary shares in the capital of the company (“Rights Shares”) on the basis of 3 new shares for every 2 existing shares held, which is expected to be completed in 3Q21. The rights issue price is S$0.08/share, representing a 35.7% discount to the theoretical ex-rights price (TERP) of S$0.124, based on last close of S$0.19 on 24 June 2021.
Startree Investments Pte. Ltd., a wholly owned subsidiary of Temasek, has committed to subscribe for its pro-rata 42.6% entitlement and excess rights such that its total subscription will be up to 67.0% of the rights issue; DBS (SGX:D05) is underwriting the remaining 33.0% of the rights issue.
After the rights issue, Temasek’s stake in Sembcorp Marine will range from 42.6% to 57.3%, depending on the take-up of the rights by other shareholders.

In terms of ESG performance, Sembcorp Marine fares well in labour management and governance, but is below industry average for toxic emissions & waste as well as opportunities in clean tech. We update our estimates and use a slightly higher P/B multiple of 0.8x on account that a combined entity would be a stronger player in the global arena, but lower our fair value estimate for Sembcorp Marine to S$0.09 to take into account effects of the rights issue.
See

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2021-06-25

SGX Stock Analyst Report SELL DOWNGRADE HOLD 0.09 DOWN 0.145