Where next for Sembcorp Industries and Marine share price in 2020?

Sembcorp Industries’ shares soared nearly 30%, while Sembcorp Marine’s shares crashed as much as 47%, after a capital restructuring and demerger plan was proposed.

Shares of Sembcorp Industries continue to trade at a premium from last week, following a proposed demerger from Sembcorp Marine on Monday 08 June 2020.

As at 17:00 on Thursday 11 June, Sembcorp Industries has a bid price of S$1.97 per share – roughly 28% higher than the price it closed at last Wednesday just prior to a trading halt.

Meanwhile, Sembcorp Marine shares are not doing as great, with share price down as much as 47% since the announcement was made. The stock closed Thursday's session at a price of S$0.58 a share – a 20-year low.

What happened on Monday?

Both companies on Monday jointly stated via a press release that they are seeking a recapitalisation of Sembcorp Marine through a S$2.1 billion renounceable rights issue.

This will then be followed by a proposed demerger of the two companies via a distribution in specie of Sembcorp Industries’ stake in the recapitalised Sembcorp Marine to Sembcorp Industries shareholders.

Upon completion of the proposed transaction, Singapore sovereign wealth fund Temasek Holdings will retain a 49.3% stake in Sembcorp Industries, while its stake in Sembcorp Marine will range from 29.9% to 58%. Temasek has an indirect interest in Sembcorp Marine through Sembcorp Industries.

Why was a recapitalisation and demerger proposed?

It is no secret that Sembcorp Industries has been performing better than Sembcorp Marine.

Whereas Sembcorp Industries posted an annual net profit of S$247 million and turnover of S$9.6 billion for FY2019, Sembcorp Marine had struggled financially for FY2019, as it turned in a net loss of S$137 million for the year, up significantly from a net loss of S$74 million for FY2018.

Sembcorp Marine also revealed in a recent interim business update that the collapse in oil prices this year has significantly affected its ability to secure new orders for the foreseeable future.

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As such, the boards and management teams of Sembcorp Industries and Sembcorp Marine have decided that a rights issue and split would not only strengthen the two companies’ financial positions but would also help to unlock shareholder value.

In addition, they believe that the transaction will enable Sembcorp Industries and Sembcorp Marine to better focus on their own respective industries and strengths. With greater flexibility expected to arise as a result of the demerger, both companies can then pursue their own tailored growth paths.

By splitting up, Sembcorp Marine will also be able to better address its urgent need to recapitalise, meet liquidity requirements, and strengthen its balance sheet to ride through the prolonged downturn in the offshore and marine industry.

Why are Sembcorp Industries shares up while Sembcorp Marine is down?

That’s because Sembcorp Marine is viewed as the weaker link in this equation, as it has been doubly hit by the COVID-19 pandemic and recent collapse in oil prices, as compared to Sembcorp Industries.

As Bank of Singapore analyst Low Pei Han was quoted as saying in The Straits Times, the marine segment has weighed down on Sembcorp Industries’ results for some time, so the split from Sembcorp Marine will allow Sembcorp Industries to dedicate all its resources to improving performance.

Meanwhile, CIMB analyst Lim Siew Khee noted that the decline in Sembcorp Marine’s share price is also possibly due to the fact that the market views the rights issue as ‘highly dilutive’.

For now, analysts from CIMB, RHB and UOB have given Sembcorp Industries a consensus share price target of S$1.93. Sembcorp Marine received a median price target of S$0.69 from RHB and UOB.

How to trade Singapore stocks with IG

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