BOTH S51 (Sembmarine) and BN4 were heavily traded on Friday morning as both companies inked a memorandum of understanding to explore a merger between the former and Keppel Offshore & Marine (Keppel O&M).

Sembmarine also announced that it was planning an additional S$1.5 billion rights issue in a bourse filing on Thursday evening.

As at 9.04am, Sembmarine was down 24.7 per cent or 4.7 Singapore cents to 14.4 cents after 114.1 million shares had changed hands. Shares of the counter were still down 22.5 per cent or 4.3 cents to S$0.15 as at 11.55am.

As at 9.46am, Keppel was up 6.5 per cent or S$0.33 to S$5.44 after 8.7 million shares were traded. Shares of the counter later eased to S$5.40, up S$0.29 or 5.7 per cent as at 11.55am.

There were no married deals according to ShareInvestor Data. 

OCBC Investment Research said on Friday that it calls "sell" on Sembmarine at a target price of S$0.09, which uses a slightly higher price-to-book ratio of 0.8 times. 

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The target price takes into account the potential for the merged entity to be stronger as well as the effects of the rights issue that Sembmarine announced.

Sembmarine's proposed fully committed, renounceable rights issue will be for up to 18.83 billion new shares on the basis of three new shares for every two existing shares held, at S$0.08 per share. This comes after an earlier S$2.1 billion rights issue in September last year, and is expected to be completed in the third quarter of this year. 

The research team also expects Sembmarine to continue winning more orders, although it also advised investors to look beyond the group’s headline numbers for the company’s share in a consortium contract and its margins. 

"Losses are still expected for the group going forward, based on its current order book," the research team said, adding that order wins will still keep the yards utilised and improve the company’s track record in the renewable space.

In a briefing on Friday, UOB Kay Hian analyst Adrian Loh expected Sembmarine’s rights issue would be taken badly by the market, although he maintained “hold” on the counter with a fair value of S$0.18. 

He said that while the company’s rights issue would reduce the net gearing ratio of the company from 0.75 times to 0.25 times, Keppel will receive shares and a cash consideration of up to S$500 million in the potential merger. 

"Adding to the negative sentiment is the fact that Keppel Corp has stated its intention to distribute all of its shares in the combined entity to its shareholders, thus setting up a similar 'selling pressure' scenario for Sembcorp Marine post its demerger with Sembcorp Industries in 2020,” Mr Loh said. 

Furthermore, Lim & Tan Securities said in a research note on Friday that Sembmarine continues to face Covid-19 supply chain constraints and a shortage of skilled workers since foreign workers have not been able to return from India and Bangladesh, further delaying project completion.

Still, they expect the recapitalisation of Sembmarine through the rights issue to help it meet operational funding requirements and “strengthen lenders’ and customers’ confidence in their continued partnerships with Sembcorp Marine”. 

The firm also believes that the merged entity “would create a stronger player to capitalise on growing opportunities in the O&M, renewable and clean energy sectors”. 

“The combined entity would be better positioned to compete for larger contracts, whilst pursuing the synergies that can arise from the increased operational scale, broader geographic footprint and enhanced capabilities of a larger entity,” the firm said. 

Regarding Keppel's part in the potential merger, OCBC Investment Research also maintained "buy", noting the company's success with its multi-business strategy to support earnings during the downturn in the O&M sector. 

The research team said that the company's management has further reaffirmed its Vision 2030 and identified assets worth S$17.5 billion that can be monetised and pumped into growth initiatives, and the merger, if approved, would allow the company to exit its offshore rig building business. 

While the deal is not final, Keppel is expected to get an undisclosed number of shares in the combined entity as valuation of the assets are still being worked out, on top of the S$500 million in cash from Sembmarine. 

Keppel is also expected to pay out the S$500 million as a special dividend to shareholders if it cannot find any projects in other business units to invest in. 

"In terms of ESG (environmental, social and governance) performance, the group fares well in labour management, health and safety, governance and opportunities in clean tech. We update our estimates and also incorporate an ESG premium in our valuations, such that our fair value rises from S$5.50 to S$6.33," the research team said. 

Maintaining “buy” on Keppel with a target price of S$6.37, Mr Loh said that the sum-of-the-parts valuation of Keppel’s O&M unit at S$100 million would be accretive to the target price.

“Despite the lack of valuation numbers, we view the developments as generally positive given that Keppel will have offloaded a large part of its offshore marine exposure at the end of this process, if it goes through, and moves it closer towards its goal of generating more earnings via recurring income (instead of via order book) and sustainable solutions,” Mr Loh said.

DBS Research also said on Friday that it reiterated "buy" on Keppel as the merged entity would be a stronger O&M player. 

Keppel O&M's assets had earlier been split into three parts: An Operating Company (Op Co) to handle engineering, procurement and construction projects, a Rig Co to own stranded rigs and a Development Co (Dev Co) that will focus on finishing uncompleted rigs.

Bringing Keppel’s branding and market leadership, Sembmarine’s facilities and both their engineering and research and development strength could help the merged entity capitalise on growing opportunities in the O&M, renewable and clean energy sectors, the research team said. 

In the proposal, Op Co will be transferred and combined with Sembmarine. DBS Research notes that as the book value of Keppel O&M is around S$1.5 billion, the book value of Op Co assets to be transferred "should be much lower, pending further disclosure".

Furthermore, DBS Research said that its target price of S$6.20 does not take into account the divestment gains of Rig Co assets or the S$500 million in cash that Keppel stands to gain from the transaction.

Shares in Sembmarine closed at 13.9 cents, down 5.2 cents or 27.23 per cent, on Friday. Shares in Keppel closed at S$5.40, up 5.68 per cent or 29 cents.