SINGAPORE (June 9): RHB Group Research analyst Leng Seng Choon is reiterating a “buy” call on Sembcorp Marine (Sembmarine) with a target price of $1.13, representing a 32.9% upside for the stock. 

In a Tuesday report, Leng identifies the joint announcement by Sembmarine and Sembcorp Industries for a $2.1 billion recapitalisation and demerger as a “positive” for the company, especially in light of a tough business environment. 

Under the proposal, Sembmarine will issue rights at 20 cents per rights share, representing a 31% discount to the theoretical ex-rights price based on a five-day volume weighted average price of 74 cents per share. 

Notably, Sembcorp Industries has undertaken the subscription of up to $1.5 billion worth of rights by setting off the subordinated loan of $1.5 billion it had previously extended to Sembmarine. Additionally, Temasek has agreed to sub-underwrite the remaining $0.6 billion. 

See: Sembcorp Marine to raise $2.1 billion via rights issue; parent Sembcorp Industries to distribute stake in-specie to shareholders

“This will strengthen Sembmarine’s balance sheet and result in Temasek becoming a direct shareholder of Sembmarine,” says Leng.

“We view the proposal positively, as this will help Sembmarine better ride through the tough business conditions, although the share price could fall in the short term,” he adds. 

The way Leng sees it, Sembmarine’s net gearing, which stood at 1.82 times as at end-December 2019, is set to plunge after the rights issue is completed. He notes that the company’s gearing levels would have fallen to a pro-forma 0.45 times if the transaction had been completed in 2019. 

“Sembmarine’s net tangible assets was $1.9 billion on Dec 31 2019, and would have risen to $4.0 billion on a proforma basis,” says Leng. 

“We view the sharply lower gearing a big positive, as this will help Sembmarine better engage potential customers and also to better meet banks’ loan covenants,” he adds. 

Following the rights issue, Sembcorp Industries will distribute its holdings of Sembmarine shares to its own shareholders, who will receive between  427 and 491 Sembmarine shares for every 100 Sembcorp Industries shares, with no cash outlay required.

“This will allow both companies to focus on their respective industries. Temasek will become a significant direct shareholder of Sembmarine, with a stake of at least 29%,” says Leng. 

In light of a fall in borrowings, RHB has refined Sembmarine’s FY2021-22 net profit forecasts, as well as revenue forecasts to factor in “increased uncertainties” due to the Covid-19 pandemic. 

Leng also adds that Sembmarine’s FY2020F book value per share will fall to 33.5 cents from pre-rights value of $2.01 per share.

As at 2.08pm, shares in Sembcorp Marine are changing hands 21.5 cents lower, or 25.3% down, at 63.5 cents. With some 104.1 million shares traded thus far, the counter is also one of the most heavily traded today.