Date: August 19, 2021
This is the original commentary by SIAS, unedited version from The Business Times publication on 18 August 2021
By Friday 20 Aug, Sembcorp Marine’s (SCM) shareholders have to lodge their proxy forms for voting on the company’s recently proposed rights issue to raise S$1.5b. Time is therefore of the essence.
In order to everyone to make an informed decision when casting their votes, it is imperative they familiarise themselves with the issues surrounding this capital raising exercise, one which it has to be said, is not without its critics, coming just over a year after SCM had already raised S$2.1b in order to demerge from its parent, Sembcorp Industries.
For that first rights issue in June 2020, the company said the money was needed to strengthen its liquidity position and balance sheet, and to help it forge its own destiny as “a global leader in innovative engineering solutions for the offshore, marine and energy industries, with an increasing focus on clean energy’’.
At the time it did not expect to have to undertake a second fund-raising but at a recent dialogue session organised by SIAS, it said that the impact of Covid-19 had created severe and unanticipated manpower shortages and because it took the decision to complete and deliver on its project obligations rather than cancel or terminate them, additional costs had to be incurred.
So, whilst the current rights issue is also to help SCM shift into the green sector, the money is also needed to “address the temporary working capital depletion and replenish liquidity to meet the projected operational funding requirements through to end 2022’’.
In short, SCM is saying the current rights issue worth S$1.5b is needed to keep it going for the next 16 months or so whilst it continues to transition from a company operating in the offshore oil and gas sector into one that will compete in the carbon-neutral, clean energy industry.
The crux of the issue therefore as far as SCM shareholders are concerned is this: after already pumping money into the company last year, is it worth pumping in more now, given the uncertainties created by Covid-19 and given that there is no absolute guarantee that come end-2022, SCM will not undertake a third rights issue in three years?
Much of course, would depend on what the future holds for SCM. If the company is successful in transforming itself from a loss-making offshore and marine firm into a profitable green energy provider, then shareholders should stand to benefit from superior share price performance, in which case giving the company the funds it is asking for now would be justified.
On this point, the company has pointed out that with 60 years of experience in shipping and oil & gas, its business model going forward is to harness its existing technology and expertise, and leverage in this in order to move into green energy provision.
At the dialogue session, SCM’s management said it could, for example, re-purpose its jackup rigs into wind turbine installation vessels whilst at the same time its fixed platform capabilities are now serving the renewable sector in the form of offshore wind converter platforms.
“Going forward, we are also able to use our gravifloat solutions to harness liquefied hydrogen into the future, and at the same time, to create a receiving terminal for hydrogen fuel in liquid form, so that this energy can be transported from one place to another through the ocean, through the sea…’’ said SCM’s president and chief executive officer Wong Weng Sun.
The company also highlighted that it already has three ongoing renewable energy projects and that it is currently tendering for more. It added that apart from Europe, opportunities abound all over the world such as in Japan, Korea, Southeast Asia, Australia and also the US and Latin America. The Group has a net order book of S$1.89 billion as at 31 March 2021, which includes 17 projects under execution. The majority of these projects are expected to be completed by end 2022 with cash collection to follow.
On the subject of whether a third rights might be needed, shareholders should note that during the dialogue, SCM said although much would depend on its liquidity needs at the time, by the end of 2022 where 14 of its existing 16 projects are completed, its working capital should normalise.
It also said its lending banks are supportive of the fact that the present rights would bring the company’s gearing down to 0.29x on a pro forma basis, that its balance sheet would be strengthened and that Temasek is supportive of the company’s efforts and strategy.
SCM’s strategy of diversifying into green energy solutions appears sound, and as countries around the world come under pressure to adopt carbon-free footprints, demand for such energy is bound to grow. It is, therefore, asking shareholders for funds now in order to position itself to capitalise on this demand. The request, therefore, appears reasonable.
Also on the minds of shareholders is the potential merger between SCM and Keppel O&M. With Keppel O&M having turned the corners into profit territory, how would this merger impact SCM? However, with Keppel’s announcement that it expects to receive shares in the combined entity as well as a cash consideration of up to S$500 million is certainly on the minds of SCM shareholder, but that should not put shareholders off from voting at the EMG for the proposed rights issue. Notwithstanding, oil prices have recovered from the lows and with increased economic activity and easing of border restrictions, would see demand return, for the combined entity to potentially take advantage.
Shareholders should note that the rights cannot proceed without their approval and that the company has no real “Plan B’’ should the exercise not be approved. They should also note the deadline mentioned earlier and as many as possible should cast their votes or file their proxy forms by then. In addition, the entire rights issue has been underwritten by Temasek and DBS, providing certainty to the financing needs in the near team. Shareholders need only approve the rights issue at the EGM. The future of Sembcorp Marine rests on the every shareholder voting at the EGM, although whether or not the shareholders decide to subscribe to the rights issue is independent of the vote for the future of the company.