Sembcorp Marine

Shareholders of Sembcorp Marine shareholders received the notice of extraordinary general meeting (EGM) informing them of the lodgement of the Proxy Form and the date & time of the EGM. Nothing exactly new. The proposal is to raise $1.5 billion to beef up its working capital.  This entails the issue of 3 rights shares for every 2 existing shares owned. In total, the rights issue is 18.83 billion rights shares.

What’s there for Sembcorp shareholders?

Startree, a subsidiary of Temasek Holding (TH), which held 42.6% of Sembcorp Marine had given an irrevocable undertaking to vote in favour of the Rights Issue Resolution and, to take up the excess rights not taken by existing shareholders, up to 67% of the total rights issue. The other 33% shall be underwritten by DBS. In other words, it is an absolute certainty for Sembcorp Marine to obtain the full funding of $1.5 billion.

For minority shareholders, who have held the shares longer than a year, it has been disastrous. The share price has been on a gradual decline in the last few years without any significant respite. The $2.1billion rights shares issue raised in year 2020 was simply insufficient, after paying for the debt of $1.5billion owed to Sembcorp Industries. Now, after only a span of 12 months, Sembcorp Marine has to dip into the pockets of shareholders again to raise another $1.5billion for its working capital. In short, the existing shareholders have been stamped twice within a year. The five-for-one rights shares issue held in year 2020 has been extremely dilutive causing the share price to plunge below $0.20 and locked most of the shareholders underwater. With the price now trading at a premium over the proposed rights issue price of 8 cents, it is likely that existing shareholders would subscribe to the coming rights issue. In fact, in all likelihood, those who still held the shares till today will not only subscribe to their entitlement but also to apply for excess rights in order to stand a fighting chance to recoup their losses. In effect, the writing is already on the wall. The resolution is almost certain to pass even before the EGM is convened, barring unforeseen circumstances.

Is there a really a floor price at eight cents?

Interestingly, Mr Van Sreenivasan in the Monday 27 July 2021 article mentioned that the whitewash waiver (A waiver to absolve TH from making a mandatory general offer (MGO)) was not included in the proposal. This could provide an avenue for the MGO be triggered given that the shareholding of TH is very close to the mandatory general offer (MGO) threshold. Consequently, it creates a floor price of 8 cents per share. The article seemed to help pushed the share price from its lowest point at 10.3 cents to over 12 cents before it dropped to 11.9 cents as of yesterday. While the article may carry some truth in this regard, I am not a corporate lawyer to interpret this sufficiently.

Going forward

Perhaps, the best way is to treat this rights issue as if it is carrying out an Initial Public Offer (IPO). The share price can be both higher as well as lower than the rights share issue price going forward. The long-term business viability is still the key. If it is unable to win contracts going into the future, the share price will continue to tank. The rights issue in year 2020 has helped to bring down its debt level, paving only a need for working capital in the coming rights issue just like in an IPO. The provision of $472m is certainly a boon for the business, at least for the next 1-2 years.

By this time, those that are still holding the stock are likely to participate in the coming rights issue. For most, it is out of no choice. There is no doubt that a huge part of the financial risk has been cushioned off after the rights issue last year, and that value is emerging as the stock price falls. Right now, it is trading about 50% of its book value, but good value has to translate to good cash flow and profitability. It can go either way going forward. It may even be using good money to chase after the bad.

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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