Temasek Takes Up Nearly Half of Sembmarine’s Rights Issue: What Are the Implications for Investors?

·5-min read
Oil Rig Vessel
Oil Rig Vessel

Sembcorp Marine Ltd (SGX: S51), or SMM, had just concluded and announced the results of its massive rights issue, the second in 12 months.

A total of around 18.8 billion rights shares were offered by the group this round.

Of this amount, valid acceptances amounted to around 15.86 billion rights shares or 84% of the rights shares available.

Excess applications of around 6.3 billion rights shares took the total subscription level to 22.17 billion, or 117% of the offer.

Last Friday, Startree investments, a unit of Temasek Holdings, announced that it will take up 49.3% of the total rights, boosting its stake in the beleaguered oil and gas firm from 42.6% to 46.6%.

As such, Temasek will have to make a general offer for the rest of the shares it does not own, and it will be the highest price that the investment firm paid for the shares — S$0.08.

This general offer is to be made as part of the exchange’s rules.

So, that’s what is happening. 

But what should you, the shareholder, do? 

Effective control

First off, you should note that Temasek already has effective control over SMM even before the rights issue was proposed.

The triggering of the general offer is one that’s predicated on a technicality, and that Temasek is unlikely to follow through to privatise the group, or it would have already done so earlier.

That said, investors should be aware that no one knows what the investment firm’s plans are for SMM.

The acceptance of Temasek’s rights entitlement and the subscription for excess rights can be seen as a vote of confidence in the group’s restructuring plans.

But what happens next will also hinge on the ability of SMM to execute its strategy well, cut costs, and pivot towards renewable energy to diversify its revenue sources.

A performance improvement plan

Right now, the group is targeting to expand into the fast-growing renewable and clean energy segment.

The rights issue will help SMM to fulfil its existing financial commitments and provide it with the working capital to bid for large-scale projects of higher value.

SMM has engaged external consultants to develop a well-rounded performance improvement plan (PIP) to help with operational improvements and suggest ways to reduce costs.

This PIP will cover aspects such as project execution and procurement processes, digitalisation, and the reduction of overhead costs.

Through this PIP initiative, SMM hopes to rationalise its cost base to deliver sustainable profitability and boost its competitiveness in the market.

Three pillars for continued growth

SMM has laid out three pillars that it believes will enable the group to stay relevant and strengthen its capabilities for future growth.

The first is to diversify and expand into new and existing markets that show good promise.

Some examples include wind farms, zero-emission batteries and hydrogen fuel cell-powered vessels.

The expansion is bearing fruit for the group, with 34% of its order book comprising green energy solutions as of 30 June 2021.

Next, SMM will strengthen its yard capabilities to better market it as a one-stop production centre that can fabricate, assemble and install larger and heavier integrated structures.

Finally, the group intends to invest in intellectual property, technology and solutions to allow it to keep abreast with new trends.

One example is its investment in LMG Marin, a naval architecture and ship design firm, that will enable SMM to compete for a wider range of customisable products and solutions.

Another move is to partner with A*STAR to explore digital design and advanced manufacturing.

Such collaborations will infuse the group with the technological know-how and expert knowledge to handle a wide range of client demands that can help it to capture new orders.

Potential combination with Keppel

Investors should not forget that Keppel Corporation Limited (SGX: BN4) had, back in June, signed a memorandum of understanding with SMM to explore a potential combination.

Although the announcement was short on details of how investors would benefit financially, what’s certain is that a combination will create a much larger and more well-capitalised entity that can weather the current oil and gas downturn more effectively.

Of course, since that June announcement, Keppel has been keeping busy.

The conglomerate announced the acquisition of Singapore Press Holdings Ltd (SGX: T39) and is pushing on with its renewable energy agenda.

Get Smart: Only time will tell

Business-wise, SMM looks to be in a stable position now after the success of both rights issues.

However, its share price has bore the brunt of the huge increase in share count, resulting in significant dilution. 

Only time will tell if the group can pull off an effective recovery.

Meanwhile, investors will have to be patient as the wait may be a fairly long one.

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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.

The post Temasek Takes Up Nearly Half of Sembmarine’s Rights Issue: What Are the Implications for Investors? appeared first on The Smart Investor.

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