KEPPEL Corporation and Sembcorp Marine are likely to sell some non-core assets to raise cash - Keppel could let go its stake in M1 - before pursuing a cut in dividends and raising capital through a rights issue, a brokerage report has said.
In exploring the pre-emptive options for the two rigbuilders as oil prices may stay low for some time, OCBC Investment Research said Keppel is unlikely to acquire Sembcorp Marine, given that Keppel has been diversifying from the offshore-and-marine (O&M) segment, and already has spare capacity to handle.
The brokerage said: "Unless there is an agreement with Temasek, which will support Keppel financially as part of a larger plan for a merger, this is an unlikely scenario.
"In the longer term, should oil prices stay low longer than expected, the merger of Keppel's O&M division and Sembcorp Marine is not inconceivable, even though there are arguments against it and could be a difficult process. Sometimes, things happen not by choice."
But the brokerage warned that the gains through cost savings must be weighed against the knock-on effects down the value chain: "A merger would push those that are suffering to the brink as the list of approved vendors may shrink."
In January, Bloomberg reported that Temasek Holdings, which holds substantial stakes in Keppel and Sembcorp Marine, is weighing out divestments in the rigbuilders.
Temasek is looking at selling its 19.1 per cent stake in Singapore telco M1 Ltd and trimming its 44.6 per cent interest in office landlord Keppel Reit, said the Bloomberg report, citing sources.
With M1, "the possibility of Keppel divesting its stake is high", the brokerage said. This would net the group about S$400 million in proceeds at current prices.
Its stake in Keppel Reit, valued at more than S$1.2 billion, is considered core to the conglomerate's business, but the brokerages see room for Keppel to trim its stake.
OCBC Investment Research also expects Keppel to continue its capital recycling strategy with the creation of more trusts and Reits. In January, Keppel announced that it would consolidate its interests in all asset management companies under one umbrella, known as Keppel Capital Holdings.
Keppel holds stakes in the two other oil-and-gas firms, KrisEnergy and Dyna-Mac Holdings, the values of which have gone in lockstep with oil prices. That sale would bring in less than S$150 million now.
Sembcorp Industries, which owns Sembcorp Marine, has fewer divestment options. It has a stake in Sembcorp Salalah, which operates an electricity generation and seawater desalination plant in Oman. At current prices, its stake is worth about S$346 million, the brokerage said.
Keppel's dividend payout ratio, while down from 46 per cent to 40 per cent, remains in line with the group's 40-50 per cent payout range. OCBC Investment Research also expects a cut in dividend at Sembcorp Industries, from 16 Singapore cents a share in 2014, to 11 Singapore cents a share in 2015.
Meanwhile, Keppel and Sembcorp have more room to raise debt of about S$5 billion and S$3.2 billion respectively. Should they issue rights to raise funds, Temasek is expected to back them, given the duo's global standing, said the brokerage.
It added that a privatisation of Sembcorp Marine by Sembcorp Industries should only be considered amid greater clarity over the fate of the seven Sete Brasil rigs that Sembcorp Marine was due to deliver. Sete Brasil is looking to file for bankruptcy protection, and also has six semi-submersible drilling units on order at Keppel.
Shares of Keppel lost 12 Singapore cents to end at S$4.90 on Monday. Sembcorp Marine closed 5.5 Singapore cents lower at S$1.50.
This article was first published on February 2, 2016.
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