Offer from Temasek likely to be 'academic' for minority investors of Sembmarine, analysts say

IF SHAREHOLDERS of beleaguered Sembcorp Marine (Sembmarine) are hoping to be saved by an offer from Temasek, they are very likely to be disappointed.

On Friday, it was announced that Startree Investments, a wholly owned unit of Temasek, will pick up 49.3 per cent of Sembmarine's latest rights issue, pushing its stake in the company from 42.6 per cent to 46.6 per cent.

This means the state investment giant will now have to make an offer for all the Sembmarine (Sembmarine) S51 shares it does not already own.

At the moment, the precise details of the offer are unclear. Based on information already provided, however, it is very unlikely that any offer from Temasek will provide minority investors with an opportunity to sell their shares at a price higher than S$0.08 - if at all.

First of all, the price Temasek is required to offer is the highest price it has paid for Sembmarine's shares in the past six months - that is, S$0.08.

It has also been stated that the offer may be conditional on Temasek ending up with at least a 50 per cent stake in Sembmarine.

On top of that, Temasek has told Sembmarine that it intends to maintain its listing status - but its position on this matter could change.

With shares in Sembmarine trading at S$0.082 currently, Temasek's interests are likely to be served by making a conditional offer at S$0.08.

For minority shareholders, that means nothing.

Sembmarine's rights issue closed on Sept 14 with valid acceptances for 15.9 billion or 84.2 per cent of the rights shares on offer, and excess applications for 6.3 billion rights shares or 33.5 per cent of the total rights shares available.

These include the acceptances and applications of Temasek for 12.6 billion of the rights shares. Temasek will receive its pro rata allotment of 8 billion as well as excess allotments of 1.2 billion shares, for a total of 9.3 billion shares.

Justin Tang, head of Asian research at United First Partners, said the MGO was generally expected given the poor investor sentiment for the rights issue.

But now that an offer has been triggered, many investors are wondering what the offer price will be. Some are speculating that Temasek may attempt to privatise the company altogether given the bearish outlook for the offshore and marine sector.

Analysts following the situation say nothing exciting is likely to happen in the short term.

Phillip Securities senior analyst Terence Chua believes that Temasek will set the offer at S$0.08. This, said Mr Chua, will effectively set a "near-term price floor" for the counter. "With the current market price trading above our expected offer price, we think investors are not likely to accept the offer," he added.

United First's Mr Tang said Temasek's offer will likely be "academic and carry a zero premium". Assuming Sembmarine's current share price of SS$0.083 holds, an offer price of S$0.08 will not be accepted by most investors, he said.

He also pointed out that Temasek already has "de-facto control" over Sembmarine, and does not need to acquire more shares especially given the "dour near-term consumption outlook".

Citi Research analyst Chang Kwok Wei in a Sunday report said the price which Temasek will be obliged to offer is equivalent to the house's target price for the counter. The price, which is 1.5 standard deviation points below the group's long term historical mean, are indicative of the company's challenging predicament.

"Losses are expected to persist over FY2021-22 due to current order book levels being insufficient to cover the large fixed overhead base (current backlog implies less than two years of revenue coverage)," said Mr Chang.

There are other uncertainties ahead too.

Sembmarine recently began talks with Keppel Corporation on the potential combination of offshore and marine (O&M) units of both companies. While the terms of this merger have not been determined, Keppel has said it expects to receive shares in the combined entity and a cash payment of up to S$500 million.

Keppel has further stated that it plans to distribute its shares in the combined entity to its shareholders.

Mr Chang said that this in-specie distribution of shares in the combined entity could weigh on its market price, increasing the risk for Sembmarine's shareholders.

Mr Chua of Phillip Securities is expecting Sembmarine to report a full-year loss for FY2021, and is expecting the market to be focused on the company's talks with Keppel, which are likely to be the key factor in shaping Sembmarine's long-term future.