Singapore yards could finally consolidate. Who wins?

TL;DR

• Talks have commenced on the potential combination between Sembcorp Marine and Keppel Offshore and Marine (KOM).
• The combination of both companies could remove excess capacity and accelerate the transition to clean energy.
• Keppel appears to be the winner for now, with shareholders potentially getting a special dividend from the sale of KOM.
• Sembcorp Marine’s balance sheet would improve with another rights issue, but new orders need to recover for losses to narrow.

What happened?

The merger of the offshore and marine assets of Keppel and Sembcorp Marine has always been a sacred cow within Singapore Inc. For those who are unfamiliar with these companies, Beansprout would like to start with a short trip back in time to recall that merger discussions were brought up back in early 2000s, but subsequently fell through due to differences between the two companies.

It is hence with bated breath that we have been anticipating the combination of both companies, especially with the weakness in oil prices exacerbated by the pandemic.

Finally, it was announced that talks have commenced on the potential combination between Sembcorp Marine and Keppel O&M, the offshore and marine subsidiary of Keppel Corp.

This will entail the following:

• A S$1.5bn rights issue by Sembcorp Marine
• Sembcorp Marine will effectively be acquiring the operating assets of Keppel Offshore and Marine through the creation of a combined listed entity
• Keppel will receive S$500mn in cash and shares in the combined entity

What does this mean?

• Long awaited consolidation. Singapore yards have been struggling with losses in recent years as the weaker oil price has led to lower new orders. This has unfortunately come after Sembcorp Marine had invested massively in new yard capacity, with more than S$1bn spent to build a mega-yard in Singapore! The combination of both companies could lead to removal of some of the excess capacity and reduce operating costs for the yards.
• Position towards energy transition. Both Keppel O&M and Sembcorp Marine have been accelerating their transition away from oil-related equipment as demand fell. The combination could consolidate their capabilities in renewable and gas solutions, raising their competitive edge against Korean and Chinese yards in these segments.
• Await details of transaction. The discussions on the potential combination are at a preliminary stage, and will likely take several months to be negotiated. We will also find out about the valuation at which various assets are injected into combined entity later.

What would Beansprout do?

Keppel appears to be winner for now

With the order outlook in the offshore and marine sector still uncertain, Keppel appears to be the winner for now with the exit from the offshore and marine business.

• Shareholders could get a special dividend from the S$500mn of cash proceeds
• As part of its Vision 2030, Keppel is re-positioning its business towards sustainable urbanization. It has also put its logistics business up for sale.
• As a result, Keppel has announced a target to achieve a Return on Equity (ROE) of 15% from negative 4.6% in 2020.
• Based on a share price of S$5.50, the stock still trades below its book value per share of S$5.9

Sembcorp Marine – Orders need to come

Sembcorp Marine’s shareholders will probably still remember a $2.1bn rights issue completed in September last year. The additional S$1.5bn of fund raising thus comes as a negative surprise, which explains the sharp fall in its share price after the announcement.

However, Sembcorp Marine’s balance sheet will be significantly improved with net gearing falling to 0.25x from 0.75x upon the completion of the rights order. The cash injection is also expected to meet all the company’s operational funding needs to end-2022.

With less concerns on its balance sheet, the key question would then be whether the combined entity would be able to receive sufficient orders to fill its yard capacity. A recovery in oil prices to above $70 per barrel is positive for capex, but there is still stiff competition from Chinese and Korean yards. This is why Beansprout would argue that more needs to be done to help Singapore yards with financing orders.  

Would you subscribe to Sembcorp Marine’s rights issue? Share with us your views below!