Rolf ‘s Insight : Sembcorp Marine Rights Issues to raise SGD2.1B in a demerger deal with Sembcorp Industries

Undoubtedly, this is the topic of the day for Singapore stock exchange. Many analysts have covered this topic, but since I am personally in the sector for close to two decades, I also will like to share my humble views here and hopefully it can provide added insight on top of the analysts’ or any other news reports.
Sembcorp Marine Ltd – S51.SI (SCM) announces rights issue to raise SGD2.1b. Of which, SGD1.5b will be used to return the loan she owed to her parent, Sembcorp Industries Ltd – U96.SI (SCI). At the same time, both Temasek and SCI has pledged their support to the five-for-one renounceable rights issues. Up to 10.5B new shares will be issued at a price of 20 cts each.
SCI, which owns 61 per cent of SCM has under undertaken to subscribe SGD1.27B of her entitlement, plus 230M if necessary. The rest of the 600M will be backed by Temasek who owned 49.3 per cent of SCI. The rights price is 31 percent discount to the TERP (theoretical ex-rights price) base on SCM last five day’s weighted average price of 74 cts.
The other part of the deal includes a demerger of SCI with SCM. This will be done via post rights’ exercise where SCI will issue to the SCM shareholders the shares in the form of dividends on a pro-rata basis. Without any cash outlay, SCI shareholders are to receive between 427 and 491 SCM shares for every 100 SCI shares owned.  
Both deals are inter-conditional to each other. Both companies will seek shareholders’ approval on the transactions with meetings to be held end-August or early September. The completion is targeted to be final quarter this year.
SCM opened at 50.5c, peaked at 67c and close at 62c. Day increase of 23%.
SCI opened at 1.94, peaked at 2.23 and close at 2.09. Day increase of 8%
But take note, that trading has been halted since last Thursday and SCM was last traded at 85c and SCI at S$1.53. In effect, SCM decline 27% and SCI has rose 37% since trading halt.
Cough out cash or risk dilution
The rights issues may mean that SCM investors to cough up extra cash in an environment of economic uncertainty, or risk shares dilution. Current low oil price will result in new project award delays with lesser projects on the table. Covid situation in dorm is affecting workers’ capacity. Other problems of supply chain delay will also further delay deliveries of current projects. Therefore it is a double whammy downward hit to not just near term profits, but future revenue.  
Stronger balance sheet.
The post rights exercise will reduce SCM gearing to 45 percent from 182 percent, and net tangible assets will rise from SGD1.9B to 4B. This is good news for the investors.
Boost of confidence
The commitment of Temasek will not only gave investors a big boost of confidence, but also the clients of SCM. In the current dire outlook, clients are also worry that shipyards are unable to survive the ordeal in the midst of the projects. The support of government owned Temasek will also give clients a peace of mind when they are awarding to SCM.
Price premium
This financial stability and SCM previous good track records, can perhaps help the company to gain some price premium over her competition to win more future projects with better margin.
Focus on its core business
The demerger can allow SCI to focus on its core business of energy, utilities and urban developments and not being burdened by the unstable business of marine oil and gas.
Better bottom line
Since SCM has not been earning money in the past few years, SCI earnings will no longer get bogged down by the poor and cyclical results of SCM’s marine business.
Shares dividends
With no cash outlay, SCI investors can receive dividends in the form of SCM shares. That said, if I own shares of SCI, I will prefer to receive cash dividends rather than SCM shares which in my opinion has little room of growth, as it seems now.
Post transaction,
·       Temasek’s stake in SCI will remain at 49.3 percent.
·       Temasek’s stake in SCM will be between 29.9 – 58 per cent depending on the undertaking of SCM shareholders of the rights issue.
It is no secret that there has been long-held speculation on the merger of Keppel Offshore and Marine (KOM) and SCM. This deal of SCI and SMM disconnect, further reinforce the possibility of a merger of KOM and SCM.
Even if is not a merger in near term, but at least it will make a future merger easier.
Please also refer to my earlier article:
No surprise at all. It is a sensible and practical deal from Temasek’s point of view. There is no question that SCM requires to recapitalise because her balance sheet is weak. At the same time SCI can free herself from SCM’s sporadic business, and focus on growing her core business and bottom line.
In this deal, I think it is a win-win for both SCI and SCM overall. But perhaps more tilted towards SCI side.
SCM investors faces dilution of shares if they do not subscribe fully to their entitled rights. And for retail investors who are cash-strapped, it will be a difficult decision. To spend more cash on a (SCM) business that does not evidently exhibit bright future prospects, or to conserve cash for other stocks, and let your current shares of SCM dilute?  
Or maybe there is a hope that SCM and KOM will merge soon, and through the merger SCM share price will soar! Or perhaps Temasek will take both companies private and merge them offering a good price for SCM’s investors. Everything is possible.
But one thing I am pretty sure is that the merger of SCM of KOM will not happen within this year or perhaps not even by end of next year. It is not as easy an easy merger as what, we outsiders thought. First Temasek needs to acquire more shares of Keppel Corp being KOM’s parent to have a majority right. Then Temasek can then either sell private company KOM to public listed SCM with the approval of both Keppel and SCM’s shareholders. And this is not all.

Because KOM and SCM are two world’s largest oil rig builders, combining these two giants in the oil and gas sector will mean almost complete monopoly in this segment of business. The global anti-competition authorities will have to give the approval, which they may reject the merger, or the process may just drag on and on. This is exemplified in the case of Korean yards HHI and DSME merger, which gave rise to multiple protests and delays.