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Brokers' take: Analysts positive on SCI, Sembmarine deal; latter's share price slides

THE massive two-part proposal that will see Sembcorp Industries (SCI) and Sembcorp Marine (Sembmarine) parting ways is likely to be a boon for both companies, analysts said on Tuesday morning.

That said, Sembmarine’s share price is still set to see some short-term pressure. The marine giant's stock tumbled 28.8 per cent or 24.5 Singapore cents to trade at 60.5 cents as at 11.55am on Tuesday. Some 71.8 million shares changed hands, making it the most heavily traded by volume on the Singapore bourse for the morning.

CGS-CIMB analyst Lim Siew Khee said the drop in Sembmarine's share price is expected as the market could view the rights issue as highly dilutive.

RHB maintained its “buy” call on Sembmarine, but lowered the target price (TP) to S$1.13 from S$1.28 previously given the “tough business environment”.

The proposed deal will help Sembmarine “better ride through the tough business conditions”, although its share price could fall in the short term, RHB's Leng Seng Choon said.

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“We see potential for further restructuring beyond the proposal just announced,” he added.

Meanwhile, Sembmarine’s parent SCI was upgraded to “add” from “hold” by CGS-CIMB, with a higher TP of S$2.49, up from S$1.76 previously.

RHB maintained its “buy” call on SCI while raising the TP to S$2.11, factoring in the proposal to incorporate Sembmarine’s reduced TP and a lower conglomerate discount of 20 per cent applied only on the energy and urban businesses.

SCI shares jumped 39.9 per cent or S$0.61 to S$2.14 on 53 million shares traded as at 11.55am on Tuesday.

RHB’s Mr Leng said the proposed deal will enable SCI to focus on its energy and urban development arms.

“Even if the offshore business takes a longer time to recover, SCI will not be adversely affected after the demerger, in our view,” he added.

CGS-CIMB’s Ms Lim likewise said SCI will have a “cleaner” structure after parting ways with the marine arm, although the structural challenge of obtaining long-term contracts remains.

The two companies on Monday jointly unveiled a massive S$2.1 billion recapitalisation deal for Sembmarine as well as a demerger from each other, which will result in Temasek Holdings having a direct stake in Sembmarine.

Sembmarine is looking to raise about S$2.1 billion via a proposed five-for-one renounceable rights issue of up to 10.46 billion new shares at an issue price of S$0.20 each. SCI will subscribe for up to S$1.5 billion of these rights shares, while Temasek Holdings will sub-underwrite the remaining S$0.6 billion. With the proceeds, Sembmarine will repay a S$1.5 billion subordinated loan from SCI.

After the proposed rights issue, SCI plans to distribute its 61 per cent stake in Sembmarine to SCI shareholders. This will see the latter receiving between 427 and 491 Sembmarine shares for every 100 SCI shares they own, depending on the number of rights that Sembmarine’s shareholders subscribed for, with no cash outlay required.

CGS-CIMB’s Ms Lim wrote: “We think the market has undervalued SCI’s stub (energy and urban development), and the stock could rerate on the new CEO’s reviewing and restructuring, and its FY21 year-on-year improvement in earnings without Sembmarine losses and post-Covid sentiment.”

CGS-CIMB estimates SCI’s pro forma book value, excluding its perpetual bonds, to be about S$3.73 billion for FY20, or S$2.09 per share. “We believe the market could ascribe a 0.6-times price-to-book band for SCI stub to account for its energy and urban development business, to S$1.25 per share,” Ms Lim said.

“Although we estimate forward return on equity to be about 8 per cent for FY20, execution and confidence in management could take time to rebuild,” she added.

As for existing Sembmarine shareholders, the positive from the deal is that the funding risk could be resolved with the recapitalisation and debt repayment, according to CGS-CIMB. 

Sembmarine expects its pro forma FY19 net gearing to improve to 0.45 times, from 1.82 times as at Dec 31, 2019.

RHB’s Mr Leng said the “sharply lower” gearing is a “big positive” for Sembmarine, as this will help the company better engage potential customers and better meet banks’ loan covenants.

Post transaction, Temasek's stake in SCI will remain unchanged, while the state investment firm could end up with anything between 29.9 per cent and 58 per cent of Sembmarine, depending on shareholders' take-up of the rights issue.

Ms Lim said that Temasek having direct control in Sembmarine "paves the way" for potential yard consolidation with Keppel Offshore & Marine.

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