Demerger of Sembcrop Industries (SCI) & Sembcorp Marine (SCM)

On 8 June 2020, Sembcorp Industries (SCI) and its subsidiary, Sembcorp Marine (SCM), jointly announced a proposal of $2.1 billion renounceable rights issue for SCM. This involves a 5:1 rights issue to existing SCM shareholders as well as Temasek Holding (TH)’s upfront billion cash injection of $0.6 billion. Following the rights issue, SCM will be demerged from being the subsidiary of SCI to become a separate independent entity. The extra-ordinary meeting to convene the meeting is to be held on August/September period and will involve the two corporate entities as well as three parties, being TH, SCI shareholders and SCM shareholders.

Personally, I do not have any SCI or SCM shares. Therefore, I will not be involved in either of the two meetings. I can only envisage the possible situation and the post-merger impact on the companies if the resolutions are agreed upon.

The operations, post de-merger, will be neater for both Sembcorp Industries and Sembcorp Marine. Each entity can operate independently, focusing on their respective technical strength, and will not be encumbered by the other’s performance. However, this comes at a cost that requires $2.1 billion cash injections via rights issues from existing SCM shareholders and TH. Certainly, this is likely to be a sore point among the minority public shareholders, especially when this rights issue is highly dilutive. However, given the weight of SC’s holding of SCM shares, it is highly likely that this resolution will be successfully passed. The other two resolutions would be interesting to watch as the Security Investor Council (SIC) has ruled that TH and SCI be abstained from voting in the Whitewash Waiver in SCM EGM, and TH be abstained from voting in SCI EGM on the dividend distribution.

Post demerger, even though, the pressure on SCM’s debt obligations is somewhat relieved, the earning visibility is likely to remain very challenging. The oil glut situation leading to the recent crash in oil price is certainly going to weigh on SCM’s profitability and its share price in the near term. For SCI, the unloading of SCM would help boost its performance in its core business focusing on energy as well as urban developments. Lumpy revenues, high project costs and high debts remain the natural characteristics of the entities.

Good luck to shareholders of SCI & SCM.       

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

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