Loan from parent eases concerns of imminent Sembmarine cash call

SINGAPORE (June 25): DBS Group Research says the $2 billion loan from Sembcorp Industries (SCI) to 61%-owned subsidiary Sembcorp Marine (SMM) is likely to ease concerns over an immediate cash call.

“Our sense is that the exercise buys SMM some breathing space as sector recovery takes time and hence, the urgency of a cash call in the near term is reduced,” says analyst Ho Pei Hwa in a Monday report.

To recap, SCI is providing SMM with a 5-year subordinated loan facility of $2 billion to strengthen SMM’s financial position amid the current downturn in the global offshore and marine (O&M) industry.

To fund the loan, SCI will issue $1.5 billion of bonds, with the remaining $500 million funded through its existing available resources and facilities.

SMM will use the bulk of the loan to retire some $1.5 billion of borrowings.

“The board of directors of SCI and SMM believe the proposed financing option is in the best interests of the companies after considering a wide range of options,” says Ho.

“Management will continue to evaluate options to increase liquidity, and at some point a recapitalisation exercise, in our view,” she adds.

DBS is keeping its “buy” calls on both SCI and SMM, with target prices at $3.90 and $2.40 respectively.

“SCI is a safer proxy to O&M recovery with its undervalued utilities business trading at 0.6x P/B while SMM is the pure O&M blue chip name in Singapore,” says Ho.

As at 1pm, shares in SCI are trading flat at $2.41 while shares in SMM are trading 2.0% down at $1.48.