Seatrium’s involvement in a bribery scandal is back in the news, but that’s not its biggest problem

THE market may not react well in coming weeks to further news about the two former executives of Seatrium who have been charged with corruption offences related to a decade-old bribery scandal in Brazil.

Yet, the bigger risk for shareholders of the offshore engineering company might be their expectations of the company’s growth prospects; and the imminent 20-to-1 consolidation of its shares.

On Thursday (Mar 28), the Corrupt Practices Investigation Bureau (CPIB) and the Attorney-General’s Chambers (AGC) jointly announced that Wong Weng Sun and Lee Fook Kang have each been slapped with five charges of conspiring to “corruptly give gratification” worth millions of dollars to officials in Brazil from 2009 to 2014.

Lee was senior general manager of a unit within the group at the time of the offences.

Wong, who was CEO of the group at the time of the offences, was also charged with obstruction of justice for allegedly instructing two employees in 2014 to remove an e-mail containing evidence of the bribery.

CPIB and AGC went on to say that the public prosecutor is in discussions with Seatrium on a deferred prosecution agreement (DPA) that will require the company to pay a financial penalty of US$110 million.

Of this amount, Seatrium may be allowed to offset up to US$53 million against the R$670.7 million (about S$182.4 million) it is to pay the Brazilian authorities under an in-principle settlement agreement announced on Feb 26.

Seatrium said last week that it has made a provision in its 2023 financial statements for the balance of US$57 million due to the Singapore authorities under the proposed DPA.

On the face of it, this additional provision should not hurt Seatrium’s share price too much. It is negligible compared to the company’s net asset value of S$6.4 billion, and its current market capitalisation of S$5.4 billion.

In fact, one could argue that addressing the potential liability Seatrium faces in relation to the “Operation Car Wash” anti-corruption probe removes a key uncertainty that has been dogging its shares.

Unexciting financial targets

A less positive characterisation of the financial penalty the Singapore authorities plan to impose on Seatrium is that it will make the big loss the company reported for 2023 even bigger.

Seatrium enlarged itself significantly last year by issuing more than 36.8 billion new shares to acquire Keppel Offshore and Marine (KOM). The deal was completed on Feb 28, 2023.

Seatrium reported revenue of S$7.3 billion for 2023, sharply higher than the S$1.9 billion it reported for 2022.

However, the company’s earnings were hit by asset write-downs, provisions for onerous contracts, legal and corporate claims, and merger expenses that totalled more than S$2 billion.

Including the additional US$57 million provision for the penalty the Singapore authorities plan to impose, Seatrium reported a loss of more than S$2 billion for 2023 versus a loss of S$261.1 million for 2022.

Seatrium is expected to deliver stronger financial results in the years ahead, of course. However, the financial targets the company unveiled at its recent Investor Day on Mar 15 did not seem to impress the market – evident from the sell-off Seatrium suffered after the event.

Seatrium said during the Investor Day presentation that it has identified recurring synergies and cost savings worth S$300 million per annum, from standardised pricing for customers, reduced corporate overheads and asset rationalisation.

The company also plans to target procurement savings of S$200 million, through improved supply-chain management and greater efficiency.

Seatrium said it is projecting revenue of S$10 billion to S$12 billion by 2028. It is aiming for earnings before interest, tax, depreciation and amortisation (Ebitda) to reach S$1 billion the same year, and return on equity to hit 8 per cent.

DBS said in a report that the company’s Ebitda target of S$1 billion is “a given” as its 2023 Ebitda excluding non-recurring write-downs and provisions had already topped S$600 million.

DBS said Seatrium is also widely expected to achieve a return on equity of more than 8 per cent within the next two to three years.

The research house said in the report that it had lowered its forecasts for Seatrium’s 2024 and 2025 earnings by 13 to 16 per cent, on lower margin assumptions. Nevertheless, it maintained its price target for the stock at S$0.15 – which is 1.5 times its estimated 2024 book value for Seatrium.

Share consolidation

Another risk facing shareholders of Seatrium is the company’s proposed 20-for-1 share consolidation.

Since 2020, Seatrium’s number of shares has ballooned from less than 2.1 billion to more than 68.2 billion – as a result of two deeply discounted rights issues and the acquisition of KOM.

On Feb 26, Seatrium said the proposed share consolidation – which will shrink its share base to 3.4 billion – will reduce the volatility of its share price and lower the percentage cost of trading each board lot of its shares.

Seatrium also said the higher absolute value of its shares following the consolidation will make them more attractive to investors, and may facilitate corporate actions.

These are weak arguments, in my view. With Seatrium still in the process of establishing a track record of profitability, the volatility of its share price is precisely what is attracting investors.

Reducing that volatility may result in Seatrium’s market capitalisation shrinking further.

Furthermore, bringing up the possibility of more “corporate actions” after all that shareholders of Seatrium have endured since 2020 is unlikely to improve market sentiment towards the stock.

The way I see it, Seatrium should hold off on its share consolidation plan until it is solidly in the black and its involvement in the Brazilian bribery scandal is no longer making headlines.