Sembmarine' s larger-than-expected H1 2021 loss raises the question of whether it has done enough to consolidate its operations

 

REMEMBER the time one of Singapore' s leading offshore and marine (O& M) companies spewed so much red ink that Temasek Holdings backed out of plans to raise its stake in its public-listed parent?

 

No, I' m not referring to Sembcorp Marine (Sembmarine) that - barely a fortnight after announcing a S$1.5 billion rights issue supported by Temasek and DBS Bank - indicated on July 12 its loss for H1 2021 will be in the region of the S$583 million loss it incurred for the whole of FY2020.

 

I' m talking about the O& M division of Keppel Corp that reported a net loss of S$959 million in H1 2020 mainly due to S$890 million of impairments for contract assets, receivables, stocks and investments.

 

The O& M loss pushed Keppel into a net loss position of S$537 million for H1 2020, compared to a net profit of S$356 million for H1 2019. That, in turn, provided Temasek with the opportunity to back out of its partial offer for Keppel by invoking a " material adverse change" (MAC) pre-condition.

 

In October 2019, before Covid-19 emerged, Temasek had proposed to acquire 554.9 million shares in Keppel at S$7.35 each, to raise its direct stake in the company from 20.45 per cent to 51 per cent.

 

As concerns grew last year that Temasek would abandon the partial offer, shares in Keppel went into a tailspin.

 

Market watchers with keen memories will recall that the official announcement of Temasek invoking the MAC pre-condition and pulling out of its partial offer came on Aug 10 last year - just one day before Sembmarine' s S$2.1 billion rights issue at S$0.20 per share and demerger from Sembcorp Industries were approved by shareholders of the two companies.

 

The demerger ultimately led to Temasek holding a direct 42.6 per cent stake in Sembmarine, and committing to support its latest rights issue.

 

On June 24, Sembmarine unveiled a 3-for-2 rights issue of new shares at S$0.08 per share. Temasek has agreed to subscribe for up to 67 per cent of all the rights shares, including its 42.6 per cent entitlement, representing a total commitment of up to S$1 billion.

 

DBS Bank is underwriting the remaining 33 per cent of the rights issue.

 

Unlike the loss at Keppel' s O& M division in H1 2020, the loss that Sembmarine is expected to report for H1 2021 probably will not send Temasek running for the exit. Temasek did not pay cash for most of its stake in Sembmarine and the market value of its 49.5 per cent stake in Sembcorp has soared since the demerger.

 

Moreover, Temasek has committed to invest further in Sembmarine only at S$0.08 per share.

 

Shabby treatment

 

Minority investors who bought their Sembmarine shares in the market - and especially those among them who supported the S$2.1 billion rights issue last year - are likely to view the looming H1 2021 loss with more concern.

 

For one thing, the loss may provide justification for the shabby treatment they have suffered in the course of Sembmarine' s fundraising efforts.

 

Last week, the Securities Investors Association (Singapore) (Sias) pointedly asked Sembmarine what lessons it had learnt from the tepid response to its S$2.1 billion rights issue last year and what it is doing differently with the S$1.5 billion rights issue announced last month.

 

Sias also asked Sembmarine if it had explored other forms of fund-raising, noting that the company had previously raised S$500 million through sustainability-linked financial facilities.

 

More importantly, the larger-than-expected loss Sembmarine has apparently suffered in H1 2021 raises the question of whether it has done enough to consolidate its operations in the face of structural changes in the O& M sector as well as the disruption brought about by Covid-19.

 

Lessons from Keppel

 

When Keppel' s O& M division reported big losses in H1 2020, the group immediately promised " further rightsizing &hellip to ensure that its fixed overhead costs can be brought down in line with the realities for the industry" .

 

In January, in a statement accompanying its final results for FY2020, Keppel said a transformation initiative was underway to " create a more competitive, asset-light and people-light Keppel O& M focused on seizing higher value-adding opportunities as a developer and integrator of offshore energy and infrastructure assets" .

 

Keppel went on to say that the restructuring of its O& M business would not only enhance its competitiveness but also its attractiveness in the event of any " inorganic action" .

 

On June 24, the same day Sembmarine unveiled its right issue, Keppel and Sembmarine said they would enter exclusive negotiations to combine Keppel O& M and Sembmarine.

 

For now, Keppel does seem to have the upper hand in any likely deal. In particular, Keppel said in an announcement on June 24 that it expects to receive shares in the combined entity as well as a cash consideration of up to S$500 million.

 

What' s next?

 

Will Sembmarine take a leaf from Keppel' s book and shrink itself to unlock value? And, will it rethink its S$1.5 billion rights issue given the pressure from Sias?

 

Don' t bet on it. When asked under what circumstances Sembmarine might rescind its rights issue, or modify its terms, a spokesperson would only reiterate that a recapitalisation of the company is critical.

 

The spokesperson also said the board had considered various financing options, and believed the rights issue to be in the best interest of the company and its shareholders.

 

" Any decision to rescind or modify the terms of the rights issue would need to be seriously considered by the board, taking into consideration any new material circumstances that may arise," the spokesperson added.

 

On the other hand, the prospect of a merger between Keppel O& M and Sembmarine is not set in stone. But given that rumours of a combination have been circulating in the market for years, talk of a deal is unlikely to stop completely even if negotiations are called off.

 

And, having shown itself to be willing to consider a deal involving a cash payment of up to S$500 million to Keppel, such continued speculation is unlikely to be kind to Sembmarine' s stock.

 

All things considered, unless Sembmarine' s board becomes as proactive as Keppel' s in engaging the market, its shares may well continue drifting lower.

 

Sembmarine closed Friday at S$0.115, down 6.5 per cent since its profit guidance announcement. The Straits Times Index was up 0.67 per cent during the same period.