SembCorp - Unwarranted cash call jittery

SembCorp Industries (SCI) has officially clarified (in response to a Dow Jones report this morning) that the Company’s request for rights issue at its upcoming Annual General Meeting (AGM) should not be seen as a disclosure that it is currently embarking on a rights issue.

1) A standard request at AGM was misconstrued as immediate fund raising request. SCI clarified that its request to seek mandate from shareholders at its AGM on 20 April 2009 is part of its annual exercise to gain flexibility on fund raising should the needs arise. This is a standard request that is present in all SCI’s AGMs since listing, and is in line with market practice. Indeed, this mandate has been adopted and approved by SCI’s shareholders at all previous AGMs.

2) SCI has room to gear up for its utilities business' acquisitions. We believe that SCI's need for an immediate cash call is low, given that SCI's biggest purchase to-date for its utilities business is UK-based subsidiary, Wilton International. The purchase price for Wilton was 100m British pound, or about S$300m at the point of purchase a few years back.

SCI's net debt (ex-SMM's net cash of S$1.8b) is S$0.2b. SCI's total equity (ex-SMM) is S$1.9b, and assuming that it gears up to a comfortable net gearing of 1x, SCI can theoretically make 5-6 acquisitions equivalent in size to Wilton International. While we can never rule out a pre-emptive cash call entirely in the future should a mammoth acquisition target appears, the chances are low for now.

3) SembCorp Marine's (SMM) now faces lower cash payment re-negotiation risk. The risk of a cash call by SCI's listed marine subsidiary, SMM, is also now lower vs. earlier in the year. As shown in our last two reports on SMM, we have argued for lower cash payment re- negotiation risk on the group’s existing order book, vs. our initial expectation. As the possibility of SMM needing external funds to bolster its already strong balance sheet gets lower, this implies that SCI’s need to raise cash to protect its 61% stake in SMM has also reduced.

SMM updates that its work progress for all rigs is on-schedule, with high cash payment collected to date. The two jackup rigs payment rescheduling with Seadrill should be seen as a one-off event, due to unusually lower cash payment collected, vs. corresponding work-in-progress.

While we believe that immediate cash call risk is lower than earlier in the year, and the price has corrected 4% this morning to S$2.14 (before trading halt), it is still higher than our unchanged fair value of S$2.00 for SCI. Maintain HOLD.

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