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Low likelihood of Sembcorp Marine shareholders accepting Temasek offer: CGS-CIMB

Atiqah Mokhtar
Atiqah Mokhtar9/23/2021 02:31 PM GMT+08  • 4 min read
Low likelihood of Sembcorp Marine shareholders accepting Temasek offer: CGS-CIMB
CGS-CIMB has reiterated its "hold" recommendation for Sembcorp Marine.
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CGS-CIMB Research analyst Lim Siew Khee has kept her “hold” recommendation for Sembcorp Marine with an unchanged target price of 9.3 cents following a conditional mandatory general offer (MGO) launched by Temasek Holdings on Sept 22.

See also: Temasek announces general offer for Sembcorp Marine at 8 cents per share in cash

Startree, an indirect wholly-owned subsidiary of Temasek, is making a MGO as its shareholding in Sembcorp Marine increased by more than 1% as a result of Startree’s participation in Sembcorp Marine’s $1.5 billion rights issue.

The offer price of 8 cents per share in cash is in line with the rights issue price.

If Temasek’s concert parties receive more offers that result in them acquiring more than 50% of Sembcorp Marine, the MGO would become unconditional.

In a Sept 22 research note, Lim highlights that Temasek intends to keep Sembcorp Marine listed. If the company’s free float falls below 10%, it would have to be delisted according to Rule 723 of the listing manual, but Lim thinks the likelihood of that happening is “low for now”.

“We believe the likelihood of shareholders accepting the offer at 8 cents could be low, unless there is a correction in the overall equity market. In addition, the free float of circa 53.4% provides some buffer in the event of an irrational sell-down,” she opines.

Lim also views that the “better-than-expected response” from minority shareholders with Sembcorp Marine's rights issue oversubscribed by 1.18 times indicates some confidence and hope in Sembcorp Marine’s performance going forward, underpinned by Temasek’s credibility.

“Sembcorp Marine is committed to improve its operating and financial performance via cost optimisation, among other things,” Lim points out. She also notes that a potential merger with Keppel Offshore & Marine (KOM) would translate to a mega yard with a potential combined order book of $7.5 billion.

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The indicative date for the closing of the MGO will be about 42 days from 22 Sept. Key dates include the electronic dissemination of the offer document which will be between Oct 6 to Oct 13, the electronic dissemination of Sembcorp Marine’s circular (within 14 days after the dispatch of the offer document), and the closing date of MGO (28 days after the posting of the offer document).

Meanwhile, DBS Group Research has also kept its "hold" rating, with an adjusted target price of 9.3 cents which takes into account the recent rights issue and impairments recorded for the 1HFY2021 ended June.

The target price is still pegged to 0.7 times book value, which is 1.5 standard deviation below its mean valuation since 2014. "Its valuation multiple could rise on the back of the emergence of more signs of a firm recovery in orders and earnings as well as positive yard restructuring," says DBS analyst Ho Pei Hwa.

The way Ho sees it, the completion of Sembcorp Marine's rights issues in Sept 2020 and this year have strengthened its liquidity position and balance sheet, putting it in a better position to weather through the current severe industry downturn. In addition, she believes Temasek’s MGO at 8 cents provides support to the share price.

Looking ahead, Ho says more data points on operational improvement and a successful yard merger with synergy creation are key rerating catalysts to monitor.

"Order wins is the key indicator for recovery, as Sembcorp Marine's order backlog is running low at circa $1.6 billion, barely enough to cover one year’s revenue. Positive signs have been observed with new orders picking up from nil in 2020 to circa $600 million in 1H2021," she says.

As at 2.31pm, shares in Sembcorp Marine are down 0.1 cents or 1.21% lower at 8.2 cents.

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