OCBC upgrades Sembcorp Industries to 'neutral'

OCBC Credit Research on Friday upgraded the issuer profile of Sembcorp Industries (SCI) to "neutral", on the back of the recently announced two-part deal under which Sembcorp Marine (SMM) will separate from its parent company. 

OCBC is of the view that the proposed deal is credit-positive for SCI as the separation of SMM could see SCI's return on equity increase to 7.9 per cent on a pro forma basis, compared with 3.5 per cent in 2019. 

In August last year, OCBC had lowered SCI's issuer profile to "negative" from "neutral", following financial support extended by SCI to SMM. OCBC said that at the time, the burden of supporting SMM had fallen "on SCI debt holders".

As is common across parent-subsidiary relationships, SMM had relied on SCI for some of its credit facilities. For example, SCI would have granted guarantees to banks, aiding SMM in obtaining such credit facilities, said OCBC.

But with the impending change of shareholding at SMM, following a distribution in specie of SMM shares to SCI shareholders, SMM would no longer be reliant on SCI for funding.

On an overall basis, OCBC added, the separation would lower SCI debt levels, given that debt at the SMM-level would be spun-off. As at Dec 31, 2019, including lease liabilities, SMM's debt was S$3.2 billion, against SCI-consolidated debt of S$11.3 billion.

SCI, excluding SMM, is also likely to see stronger interest coverage. Based on OCBC's calculations for SMM on a standalone basis, a loss before interest, tax, depreciation and amortisation of S$35.8 million was recorded in Q4 last year.

Using Q4 2019 financials as a starting point, by removing SMM's losses and interest expense and adding back impairments that were reported in cost of sales, Ebitda for SCI (excluding SMM) was calculated at S$375.8 million in Q4 2019, resulting in an Ebitda-to-interest ratio of 3.2 times, compared with 2.3 times on an SCI-consolidated level, said OCBC. 

Leverage levels at SCI are also expected to fall post-separation. After the demerger, SCI's remaining two segments of energy (power generation, gas, waste and water) and urban development (integrated townships, industrial parks) would be its key drivers, said OCBC.

SCI shares closed up two Singapore cents to S$2.00 on Friday.