Last week, Sembcorp Marine announced another rights issue (raising equity), and this is the second time in around a year that the company has raised funds through the issuance of additional shares. These rights issue exercises have caused tremendous dilution to the shareholders’ holdings.
Just last June in 2020, Sembcorp Marine announced a 2.1 billion rights issue to strengthen its balance sheet and cash position. Now one year later, a new 1.5 billion is proposed again. As mentioned in its presentation, there are four reasons for the rights issue this time.
Let us look at them one at a time.
Strengthening Balance Sheet and Liquidity Position
With the downturn in the O&M industry in the past 6 years since 2014, it has affected the business of Sembcorp Marine drastically. Prior to the pandemic and oil crash in 2020, the company itself was already facing an uphill task in managing their business.
Of course, the pandemic and oil crush worsen the state of the company further. However, this reason of improving balance sheet is quite obvious. Increase equity and therefore, debt-to-equity ratio will improve with the increased equity position post-rights.
Another obvious was that the Net Tangible Assets will naturally increase from 3.4b to 4.9b after raising 1.5b in the exercise.
Fulfill Existing Commitments and Win New Projects
With the global emphasis on green energy, Sembcorp Marine has already started moving into that business segment years ago. There are a number of project delays since the onset of the pandemic which has affected the company’s cashflow. Currently, 40% of the total net order book comes from “green solution” segment.
With a stronger balance sheet, potential clients may be more comfortable doing business with the company. I am sure that their balance sheet has affected them in the past to secure contracts. The question that i will ask myself now is whether this additional 1.5b will improve their “status” in securing contracts. Another question is how long will this 1.5b last. Based on their cashburn, i will assume that this will tide them through for another 2-3 years, heavily dependent on the macro environment and the company’s ability to secure more contracts, especially those from the “Green Solutions” segment.
Augment Technological Capabilities and Maintain Competitive Edge
To stay in business, the company will need to invest in building capabilities, and therefore, money will have to be spend. So the above slide is another obvious but whether these capital expenditure will eventually will eventually strengthen the company’s competitive edge in securing contracts remains to be seen. Counterparties will still need to consider other factors before granting their contracts. Some of these factors include pricing, financial position, etc.
Accelerate Strategic Pivot into High-growth Renewable and Clean Energy Segments
As the global macro environment shift towards green energy, the company will need to realign their business strategy to stay competitive. This is one area that the company has already moved into years ago. I believe that the “Green Solutions” segment will replace Sembcorp Marine’s traditional projects in the past going forward and contributes significantly to the overall order book.
The Rights Issue Exercise
The Rights issue is still subjected to approval during the EGM (est. August 2021) and they will need to secure a more than 50% votes.
For every 2 existing shares, 3 rights shares will be allocated and these rights shares will be convertible at a price of 8 cents upon the end of the exercise.
Example, if i hold 100,000 shares of Sembcorp Marine, i will be given 150,000 rights shares. I can sell this allocation of 150,000 rights shares in the open market when the rights start trading if i do not want to subscribe to the rights and get some money back at least (sort of a compensation for the dilution after the exercise). But if i did not sell the rights shares and still hold them after the record date, then i will need to pay 150,000x$0.08 = $12,000 so that the rights shares will become Sembcorp Marine shares.
At the end of the exercise, after subscribing and paying $12,000, i will have a total of 250,000 shares of Sembcorp Marine.
DBS has indicated that they will be underwriting the remaining 33% of the rights issue. Startree Investment Pte Ltd which is a subsidiary of Temasek has committed to subscribe for its pro-rata 42.6% entitlement and excess rights such that its total subscription will be up to 67% of the rights issue.
From the above, we are pretty sure that the company will be able to raise their target of $1.5 billion.
My Opinion
There is still a lot of uncertainty in the industry due to the fluid covid situation and within the company itself. Even before the pandemic, the company was already making losses and the pandemic only worsen it’s balance sheet and capability in securing new contracts.
The two rights issues had diluted shareholders’ equity and I will question what is it for me even if the company does recover from its precarious state. Subscribing to the rights will mean further investment into the company and I will weigh my opportunity cost as there are tons of investment opportunities in the market.
The market has actually reacted to the news and the share price has dropped significantly with increased volume. From a price of $0.191 prior to the announcement to the closing price of $0.139 on the 25th of June which is about 27.2%. Refer to the chart below.
The pullback in price has left many investors with a daunting decision of whether to sell or to hold on to their holdings and invest more funds into Sembcorp Marine. There is just too much uncertainties going forward which didn’t make the decision making process easier.
I did hold a substantial amount of SembCorp Marine shares in 2020 and I subsequently sold off the shares after their rights issue in 2020. I did not subscribe to the rights then as i would have to fork out an additional close to a million dollars which was pretty ridiculous in my opinion. I made the difficult decision of cutting my heavy losses and I moved on. I proceed to remove the company from my watchlist.
I did not regret my decision as cutting losses is part and parcel of the investing journey. Just that this time round, the losses was pretty heavy. Sometimes, the challenge for investors is always to make that decision of cutting positions when macro or micro conditions deteriorate.
I will leave that difficult part to you as you may have a different view.
Have a great week ahead!