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Sembcorp May Consider Diluting, But Not Sell its Marine Arm, Say Analysts

Singapore conglomerate Sembcorp Industries Ltd. may sell a part of its stake in its ailing marine business, but many analysts believe it won’t exit the business.

Sembcorp’s announcement this week of a “complete review of our business and strategic direction” over the next few months revived speculation that the utilities-to-oil rig building firm may either take Sembcorp Marine Ltd. private, or sell it.

There has also been market chatter about a merger of the offshore arms of Sembcorp and Keppel Corp. Ltd., both of which have Singapore’s state investment fund Temasek Holdings as a major investor. Temasek owns 49% of Sembcorp and 21% of Keppel. Sembcorp in turn owns a 61% equity stake in Sembcorp Marine.

The review comes as Sembcorp’s new chief executive Neil McGregor took the helm of the company in April.

The mention of “strategic review gives rise to speculation,” DBS Vickers Securities analyst Pei Hwa Ho wrote in a note for clients. She said the company’s comments might revive talks of a potential “rationalization” via an equity deal between the offshore arms of Sembcorp and Keppel.

Spokespersons for both Keppel and Sembcorp didn’t immediately respond to emailed queries for comment.

An earlier prolonged slump in oil prices hurt orders for both companies, after a cyclical boom saw the duo notch record orders in 2015.

Both Keppel and Sembcorp Marine have seen a spate of order cancellations and requests from customers to delay delivery of almost-ready rigs. Sembcorp has relied on its more stable utilities and urban development businesses, while Keppel has leaned on its property and infrastructure segments to ride offshore industry’s downturn.

Sembcorp Marine reported a 78.7 million Singapore dollar (US$56.2 million) net profit last year, after a S$289.7 million net loss in 2015. It was profitable in the first quarter of this year only because of a S$47 million sale of a shipping yard stake.

As well, both Sembcorp Marine and Keppel’s offshore and marine orderbooks have dwindled. Sembcorp Marine had a net orderbook of S$4.7 billion as at the end of last year, down from S$10.4 billion at the end of 2015. Keppel’s orderbook fell to S$3.5 billion as at March 31, from a record S$14.2 billion in 2013.

Nonetheless, with average oil prices rising over last year, the companies and analysts have predicted a revival in demand.

“Oil prices appear to have stabilized. Global exploration and production spending is expected to increase in 2017, compared to the last two years,” Sembcorp Marine said with its earnings report in April. The company reported strong levels of customer queries for its non-drilling products, especially liquefied natural gas solutions.

Sembcorp’s strategic review may focus on its utilities and urban development businesses, according to CIMB analysts Lim Siew Khee and Cezzane See. “We do not expect a big shake-up in the core businesses in the short-term,” they said, describing the marine business as more of an “investment.”

Nonetheless, some analysts caution that the weakness Singapore’s shipyards may not be a cyclical downturn, and business could be hit in the coming years.

If orders don’t revive, mashing together different marine companies in Singapore may make them stronger, they say. The offshore and marine segment of Singapore’s manufacturing industries has been a laggard in recent months amid better performance in most other sectors.

Sembcorp Marine’s shares were last down 2.8%, after closing up 9.2% Thursday on hopes of a potential sale or merger. Meanwhile, Keppel’s stock was last down 1.7%, after closing Thursday’s session up 2.2%

Sembcorp’s Mr. McGregor started on April 1 and the company hasn’t yet appointed bankers to advise it on the strategic review. That may mean that for now, all options are on the table.
Source: Dow Jones

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