Sembmarine's battered shares may look cheap now, but there are major risks ahead for investors
Positive news flow could trigger a bounce in the stock, but investors should wait until its merger with Keppel O&M is done and dusted
SEMBCORP Marine (Sembmarine)'s board and top executives probably heaved a sigh of relief after shareholders of the beleaguered offshore and marine (O&M) company voted on Aug 23 to approve its controversial rights issue.
Clearing this crucial hurdle removed any doubt that Sembmarine would receive the S$1.5 billion it needs to see it through the next year - thanks to the support of the company's largest shareholder Temasek Holdings and rights issue underwriter DBS.
It remains to be seen how Sembmarine's minority shareholders respond to the rights issue, though. They have until Tuesday, Sept 14, to accept and pay for their rights shares.
The rights shares are expected to be allotted, issued and credited on Sept 22. Trading is expected to begin the same day.
There appeared to be only modest participation by minority shareholders at the extraordinary general meeting (EGM) on Aug 23.
Fewer than 6.6 billion, or 52.4 per cent, of Sembmarine's total outstanding 12.6 billion shares were voted at the EGM. Assuming Temasek voted all the 5.4 billion shares it owns, that would mean only about 1.2 billion shares belonging to minority investors were voted.
Still, of the nearly 6.6 billion shares that were voted, some 6.5 billion - or 98.05 per cent - were in favour of the rights issue. Fewer than 128 million shares - or 1.95 per cent - were voted against the cash call.
While Temasek probably accounted for the bulk of votes in favour of the rights issue, most of the minority-owned shares that were voted at the EGM were likely to have been in favour of the equity raising too.
Assuming all of Temasek's shares were voted in favour of the rights issue, minority-owned shares that voted similarly would add up to 1.1 billion. This represents nearly 90 per cent of the minority-owned shares voted at the EGM.
Of course, whether minority investors bothered to vote at the EGM, and which way they voted, might not reflect their eventual demand for the rights shares.
Disappointed as many investors were with Sembmarine's latest rights issue, the deeply discounted price could push a significant proportion of them to grudgingly take up their entitlements in order to avoid being diluted.
The 3-for-2 rights issue of 18.8 billion new shares was priced at just S$0.08 per share - or at a more than 58 per cent discount to Sembmarine's last traded price before the rights issue announcement of S$0.191.
While the market price of Sembmarine's shares has since fallen to S$0.083, many investors may feel that S$0.08 represents a floor price of sorts for the stock.
Temasek has pledged to take up as much as 67 per cent of the rights issue - representing a total commitment of S$1 billion on its part - even though it only owned 42.6 per cent of Sembmarine prior to the rights issue.
DBS Bank agreed to underwrite the remaining 33 per cent of the rights issue.
Temasek has also not sought a waiver for having to make a mandatory general offer in the event its shareholding in Sembmarine increases by more than one percentage point.
The offer - which may not happen, and which may include acceptance conditions even if it does - would be at S$0.08 per share.
Ready to rally?
So, is this the moment to buy shares in Sembmarine? Will things just get better from this point on?
While the emergence of new Covid-19 variants has quickened the pace of new infections, rising vaccination rates appear to be keeping a lid on the number of people falling seriously ill and dying. So, it seems reasonable to expect that controls on the movement of people will gradually be lifted.
This could eventually ease the labour crunch Sembmarine has been facing, and enable faster execution of its projects.
The rights proceeds should, in the meantime, put Sembmarine in better shape to cope with market conditions over the next 12-18 months and even garner new orders, said UOB Kay Hian (UOBKH) in a research report last week.
The brokerage also flagged that Oslo-listed Borr Drilling, which is one of Sembmarine's largest debtors, has managed to secure work for its idle jack-up rigs.
UOBKH also noted that Borr Drilling reported a "decent" set of results for Q2 2021, with a 13 per cent q-o-q increase in operating revenue to US$55 million. Adjusted earnings before interest, taxes, depreciation and amortisation (Ebitda) was US$3.7 million versus an Ebitda loss in Q1 2021, the report said.
Borr Drilling's US-traded shares have fallen from more than US$12 at the beginning of 2019 to just 72 US cents currently.
Then there is Sembmarine's seemingly depressed share price. UOBKH said in the report that the stock is trading at 0.6 times its estimated 2022 book value, which is more than one standard deviation below its five-year average.
Sembmarine's trough price-to-book value ratio over the past 10 years was 0.32 times, it added.
UOBKH has a "buy" recommendation on Sembmarine, with a price target of S$0.11.
Risky bet
My own view is that Sembmarine could certainly bounce in the short term. Among the possible triggers are positive developments in the energy sector, and an earlier than expected end to the Covid-19 crisis.
Yet, Sembmarine seems a very risky investment.
In particular, the company does not appear to have done enough to right-size itself in the face of shrinking activity in the traditional offshore energy sector and refocus on the renewable energy field.
Before oil prices peaked in 2014, Sembmarine was easily chalking up more than S$500 million in net profit every year. But it was in the red in three out of the five years from 2014 to 2019 - before Covid-19 happened.
Even if Sembmarine's S$2.1 billion rights issue last year and its S$1.5 billion rights issue this year were necessary to cope with ballooning losses associated with the pandemic, they have resulted in a massive expansion in its share base.
Sembmarine had fewer than 2.1 billion shares in issue prior to its 5-for-1 rights issue at 20 cents per share last year. With the 18.8 billion shares related to its latest rights issue, it will soon end up with nearly 31.4 billion shares in issue.
Moreover, Sembmarine's possible merger with the O&M arm of Keppel Corp could result in further pressure on its share price.
While the full terms of the merger have not been determined, Keppel has said it expects to receive shares in the combined entity as well as a cash consideration of up to S$500 million. Keppel also said it intends to distribute to its shareholders all the combined entity shares it receives.
While Sembmarine is trading at a seemingly attractive price at this point, investors should probably wait until the merger with Keppel O&M is done and dusted before seriously looking at the stock. READ MORE:
