Highlights

Sembcorp Marine - A Large S$1.5b Rights Issue, and a Bitter Pill to Swallow

Date: 28/06/2021

Source  :  UOB KayHian
Stock  :  Sembcorp Marine       Price Target  :  0.12      |      Price Call  :  HOLD
        Last Price  :  0.08      |      Upside/Downside  :  +0.04 (50.00%)
 


  • Sembcorp Marine (SGX:S51)’s double announcement of its rights issue and a non-binding MOU with Keppel Corporation to combine their offshore marine businesses should not be a surprise. The former will nevertheless be painful for minority shareholders merely seven months after the prior rights issue at S$0.20.
  • In the longer term, the merger (if successful) is positive and necessary, but short-term challenges remain.
  • Maintain HOLD call on Sembcorp Marine with a lower target price of S$0.124 (S$0.180 previously).

What’s New for Sembcorp Marine

Large rights issue and even bigger dilution.

  • On 24 June, Sembcorp Marine announced a S$1.5b rights issue at an issue price of S$0.08 per share. The ratio is 3 rights shares for every 2 existing shares held, and at the issue price of $0.08, the theoretical ex-rights price (based on the last transacted price prior to the announcement) was $0.124.
  • Importantly, Sembcorp Marine’s major shareholder, 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.

Use of proceeds.

  • Concurrent with the announcement of the rights issue, Sembcorp Marine and Keppel Corporation (SGX:BN4) revealed that they had signed a non-binding MOU to merge.
  • During the analyst call on 25 June, and contrary to our and the market’s belief, Sembcorp Marine’s management repeatedly stressed that the use of the S$1.5b in proceeds is for working capital and general corporate purposes, and not as payment of S$500m in cash to Keppel Corporation as part of the consideration for the merger.

A rights issue was preferred by Sembcorp Marine.

  • During the analyst call, Sembcorp Marine’s management stated that the amount of loans it would have Sembcorp Marine viewed the S$0.08 issue price as one that is “accessible to all shareholders” bearing in mind that this is its second rights issue in under a year.

Not an easy pill to swallow.

  • This large believe that existing shareholders should subscribe to the rights; however we caution that it may be a tumultuous ride for the next 12 months for Sembcorp Marine given:
    1. its ongoing struggles with a COVID-19-affected supply chain and manpower shortages,
    2. the embryonic nature of the offshore financial impact due to project deferrals.
  • On the positive side, long-term oil prices are strong at about US$60/bbl.

Stock Impact

We expect Temasek to ask for a waiver to conduct a mandatory general offer.

  • The rights expect Temasek to request for a waiver to conduct the MGO.
  • In the unlikely event that an MGO is required, note that Temasek’s offer price will be the rights-issue price of S$0.08.

What we would have preferred.

  • Our preferred strategy would have entailed Temasek Marine (KOM) from Keppel Corporation and then merging Keppel Offshore Marine and Sembcorp Marine.
  • The combined Keppel Offshore Marine + Sembcorp Marine entity could have then been re-listed at a later date once market conditions were more favourable. In our view, this would have been a cleaner path towards consolidation of Singapore’s offshore marine industry and caused less pain to minority shareholders.

Improved order win visibility – but it’s the winning of the orders that counts.

  • Sembcorp Marine’s management stated that visibility for new Sembcorp Marine disclosed that FPSO and FPU order enquiries in particular have increased, and there has been an equal number of enquiries for both renewables and oil & gas projects.

Earnings Revision / Risk

Downside earnings risk.

  • While we have not made any 1Q21 business update, Sembcorp Marine stated that it expects to incur losses for 2021.

Valuation / Recommendation

  • Maintain HOLD rating but lower Sembcorp Marine's fair value to S$0.124 which equates to the company’s theoretical ex-rights price when the rights issue was announced on 24 June.
  • Sembcorp Marine's financials likely to remain poor in at least the next 2-3 quarters. With the company continuing to incur return to profitability with an orderbook of S$2.5b-4.0b, depending on the size of each individual order and type of project.

Share Price Catalyst

  • New orders for rigs, offshore renewable installations or fabrication works.
  • Loosening of inbound travel rules for Singapore, thus easing the acute manpower shortage e company.

Source: UOB Kay Hian Research - 28 Jun 2021

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