Commentary: Sembcorp Marine shareholders must now decide on rights takeup

Date: August 24, 2020

First published in Business Times on 24 August 2020

They have to consider 3 options: do nothing; sell their rights; or subscribe to the issue

THE experience of the Securities and Investor’s Association (Singapore) – or Sias – is that when companies announce complex deals, many small shareholders are often in the dark as to what they have to do and the timeline they have to follow.

This came to light recently during a capital raising exercise by Singapore Airlines (SIA) that involved an issue of new shares and mandatory convertible bonds.

Some shareholders thought that their responsibility ended once they had voted at the extraordinary general meeting (EGM). They were mistaken – if there is a rights issue involved, and if it has been approved at EGMs, shareholders must then decide whether to subscribe to the rights, or sell their rights, or let the offer lapse.

Sias also encountered instances of investors who bought the rights in the open market and then failed to complete the process by actually paying for the rights, ie they did not subscribe to the shares and therefore wasted money buying the rights in the first place.

Since the SIA issue in June, another relatively complicated corporate action has been proposed – the recapitalisation of Sembcorp Marine (SMM) and its demerger from parent Sembcorp Industries (SCI).

This deal has already been approved but as far as SMM shareholders are concerned, there is still more that needs to be done.

It is perhaps timely that Sias helps clarify as simply as possible what is at stake.

What do SMM shareholders need to think about now?

For each SCM share owned, shareholders are being asked to pay S$0.20 per share to receive five more, new shares. They have to consider three options:

a) Do nothing. There is no cash outlay but those who let their rights lapse will then see their stake diluted when the exercise is completed.

b) Sell their rights. For those that do not want to pay the total price of S$1 for five shares, they can sell their rights in the market, so this option results in cash inflow. This is possible because the deal is a “renounceable” rights issue, which means shareholders can renounce or surrender their rights as they are under no obligation to take up their entitlements.

The rights appear on the Singapore Exchange’s website as “Sembcorp Marine R” and last Friday, after three days of trading, ended the week at S$0.001. Note that SMM’s shares ended the week at S$0.205, which means the rights at most are worth S$0.005 (S$0.205-S$0.20).

In other words, the rights are currently trading at a very small discount because anyone buying them now would incur a total cost of S$0.201 per share versus the market price of S$0.205. Note that because of the size of the offer – five shares for every one – the volume done in the rights is very high every day. As the rights have an expiry date, the value of the rights will fall closer to the expiry date.

c) Subscribe to the issue. This involves cash outflow and would entail paying SMM S$1 to get five new shares for each share currently held.

This option would be suitable for a shareholder who has faith in SMM’s long-term future.

What is the outlook for SMM?

After the rights issue and the distribution of SMM shares to SCI shareholders is completed, Temasek Holdings (currently the single largest shareholder of SCI) will become a direct and significant shareholder of SMM with a stake of more than 30 per cent and up to 58 per cent. Temasek is sub-underwriting up to S$600 million of the rights issue, and SMM said it sees Temasek as a strong shareholder that will support SMM’s strategy and future growth. As at June 30, 2020, SMM had a net order book of about S$2.2 billion. It has had no cancellations since. The company has listed three strategies towards sustainable, long-term growth: diversification and expansion into new and existing markets; strengthening of its yard capabilities; and innovation development through investment in intellectual property, technology and solutions.

But all this hinges on a recovery in the offshore and marine sector. And no one knows how long the Covid-19 pandemic will last, or when the sector, which has been in the doldrums for several years, will recover.

The downturn, which stretches back five to six years, has hit many companies, and several have already been wound up.

For the sector’s fortunes to improve, a recovery in oil prices is needed. But increased global supply of oil and reduced demand because of the virus pandemic has helped keep a lid on oil prices for several years now. How soon or when it will turn around for the better is difficult to predict.

  • The writer is David Gerald, founder, president and CEO of the Securities Investors Association (Singapore)