Update: 19 August 2021
Here is a list of the key dates in relation to the proposed rights issue.
An Extraordinary General Meeting (EGM) will be held on 23 August 2021 (Monday) at 2 p.m. to seek approval for the rights issue.
Shareholders who wish to vote at the upcoming EGM need to download this proxy form to appoint the chairman of the meeting to vote on their behalf.
The latest date and time for submission of the proxy form is 20 August at 2 p.m.
The group’s shares will trade ex-rights from 25 August onwards and the listing of the new rights shares will take place on 22 September.
It’s official: the oil and gas industry is looking to consolidate..
Sembcorp Marine Ltd (SGX: S51), or SMM, will be raising a total of S$1.5 billion through a rights issue to shore up its balance sheet.
If you think this news sounds familiar, it’s because the oil rig giant had announced a massive rights issue almost exactly a year ago.
Back then, SMM was going through a demerger with its then-parent, Sembcorp Industries Limited (SGX: U96), or SCI, in a complex exercise that was intended to separate the two companies into distinct entities.
As part of the move, SMM issued five rights shares for every one share that investors held, at an issue price of S$0.20.
The whole exercise was meant to raise S$2.1 billion but the group only received S$0.6 billion in net proceeds. The remaining S$1.5 billion involves the conversion of SMM’s debt into equity with no cash effect.
With this second rights issue, let’s delve into the implications for investors and try to figure out the fate of the group.
Details of the rights issue
The current rights issue is renounceable and involves the issuance of three rights shares for every two shares held, at a rights issue price of S$0.08.
Temasek Holdings has agreed to subscribe to two-thirds of the rights issue, with DBS Group (SGX: D05) underwriting the remaining one-third.
The money will be used to fund working capital and shore up SMM’s balance sheet.
Prolonged industry downturn
The oil and gas industry has been in an extended slump since 2015.
Just as the industry was on the road to recovery, the COVID-19 pandemic came along, resulting in a second sharp oil price crash last year.
SMM also faced a severe labour crunch due to restrictions put in place for foreign workers to control the spread of the disease.
This manpower shortage resulted in delays in project progress and completion, thereby exacerbating the cash flow situation faced by the group.
To make matters worse, supply chain disruptions also led to increased costs for project continuation and completion, further adding to SMM’s woes.
The good news is that the group still maintains an order book of around S$1.9 billion that will progressively be recognised as the downturn abates.
Improving its financial metrics
The rights issue will help to improve SMM’s financial metrics and give it some breathing room to carry out its contractual obligations.
Net gearing is expected to reduce from 0.75 times to 0.25 times, while the cash balance is projected to jump from S$800 million to S$2.3 billion post-rights.
With this cash infusion, SMM will meet all its operational funding needs till the end of 2022 while also soothing lenders’ nerves.
Pivoting to renewables and clean energy
As part of SMM’s business transformation efforts. the management intends to pivot the group towards renewables and clean energy.
The goal is to rely less on fossil fuels and position its portfolio for the future.
Already, the group has won contracts with wind farm operators and it intends to further diversify away from drilling-focused activities and into electrification, gas value chains and ocean living, to name a few.
SMM is following in the footsteps of its ex-parent SCI as the latter unveiled its new strategic direction early this month.
A potential white knight
To be sure, there’s good news in the form of a potential white knight rushing in to rescue the beleaguered SMM.
Along with its rights issue, SMM had also announced that it was exploring a potential combination with Keppel Corporation Limited’s (SGX: BN4) offshore and marine division.
The blue-chip conglomerate is well-capitalised and by stepping in, is offering a lifeline to help strengthen SMM’s market position and inject confidence into both lenders and customers.
Note, though, that there is no assurance that a deal can be hammered out, and the process to work out an agreement may take several months.
Get Smart: Severe dilution
An investor who was invested in SMM since last June would face severe dilution with two successive rounds of rights issues.
If we assume that an investor had owned 2,000 shares of SMM before the two rights issues, these shares would have been worth around S$600 at a share price of S$0.30 last June.
After the first round, he would have to cough up S$2,000 to subscribe for 10,000 rights shares priced at S$0.20 each.
Assuming this was paid in full, he would have ended up with 12,000 shares of SMM.
For this round of rights, he will be entitled to 18,000 rights shares and will have to fork out another S$1,440 to subscribe for them.
With an initial investment value of S$600, a total of S$3,440 needs to be paid to increase his shareholdings from 2,000 to 30,000 shares.
The amount is a hefty sum to pay as it’s nearly six times your original investment.
You do have an option not to accept your proportional entitlement of the rights, though.
By doing so, you will not have to cough up additional money but you will end up suffering severe dilution.
With recovery still some years away, SMM may not enjoy a respite from its troubles anytime soon.
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Disclaimer: Royston Yang owns shares of DBS Group.