Date: July 15, 2021
To Sembcorp Marine Ltd
Attn: Mr Wong Weng Sun, President & CEO
There is great concern amongst Sembcorp Marine’s (SCM’s) minority shareholders. With the previous major S$2.1 billion rights issuance in 2020 barely reached its first-year mark, SCM is reaching out to its shareholders for funds again. This will come as a surprise to SCM’s shareholders, especially when the Group CEO has alluded to some optimism in his FY2020 speech, as it was mentioned that the completion of the Group’s rights issue in 2020 has strengthened its liquidity position and balance sheet.
Rationale for 2021 Rights Issuance
Some shareholders are perplexed by (i) the rationale given, where this proposed rights issue endeavours to again “strengthen balance sheet and liquidity position”, and (ii) the significant discount and dilution to their shareholdings – the rights issue price of S$0.08 per share represents a 35.7% discount to TERP, and 58.1% to last transacted price.
- Can the Group explain the necessity and criticality of this rights issue – especially when other O&M players are not doing so?
- In particular, can the Group explain the basis for (i) the rights issue price of S$0.08 per share, and (ii) the total rights proceeds and utilisation of S$1.5 billion?
We note that the proposed rights issuance is conceptualised with the Group’s projected operational funding needs to end-2022 in mind. Management has stated that the requirement for S$1.5 billion is “predicated on generally conservative assumptions”.
- Does this mean that shareholders may be subjected to further fund-raising exercises post-2022? Under what circumstances, would further capital calls be required? Given SMM’s sensitivity to oil prices, what would be the Group’s assumption for oil prices up to end-2022?
Strategy and Operations
Strengthening of the Group’s balance sheet and liquidity position is only one part of the equation – as the rights issuance also allows the Group to:
- fulfil existing commitments and win new projects;
- augment technological capabilities and maintain the Group’s competitive edge; and
- accelerate strategic pivot into high-growth renewable and clean energy segments.
All these are planned to benefit shareholders, as SCM looks on becoming “a global player in innovative engineering solutions for the offshore, marine and energy industries, with an increasing focus on renewable and other clean energy solutions”.
- Notwithstanding the importance of each of these pillars, are we right to say that the strengthening of SCM’s financials (through this rights issue) is of utmost importance and urgency at this juncture?
- When do you expect to actualise the reported order book size of S$1.89 billion to cash flows?
Subsequently, for the period ended 31st March 2021, it was disclosed that a total of S$0.2 billion of the S$0.6 billion net proceeds from the rights issue has been used for working capital. It can thus be reasoned that the Group’s liquidity position and balance sheet would have been strengthened post the 2020 rights issue. Furthermore, one may expect the performance to improve on the back of improving economic fundamentals, and the successful cost-cutting measures undertaken by SMM. Taken altogether, it does seem that the S$1.5 billion rights issuance is unwarranted at this point.
- Can the Group, therefore, provide an update on its current financial position and operating conditions?
- What risks are the Group currently facing and/or are expecting to face that might have given rise to this proposed rights issuance?
- Has the Group explored other fund-raising means – especially considering the Group’s net debt to equity at 0.74x; and having previously raised S$500 million through sustainability-linked financial facilities?
Protection of Minority Shareholders
The response to the rights issue exercise in 2020 was tepid, where 9.4 billion (or 90.2%) of the 10.5 billion rights shares were subscribed. That said, it was revealed upon further scrutiny that the lion share of the rights shares were undertaken by Sembcorp Industries – some 7.5 billion (or 72% of the total) rights issue – with the remainder 1.9 billion (or 18% of the total) rights issue taken up by minority shareholders.
- Has the Group evaluated reasons for such a tepid response by minority shareholders? What are the lessons learnt, and how has been done differently this time round?
- What are the steps taken/to be taken to ensure and protect the rights of the minority shareholders?
Subsequent Corporate Actions
The announcement for the proposed rights issuance coincides with that of another proposed corporate action, i.e. the potential combination of Keppel O&M and SCM.
For the avoidance of doubt, we are satisfied that these two announcements are independent of each other. In addition, the rights issue will address SCM’s current critical need, while a potential combination is envisaged to put SCM in a better position to compete on the global stage in the new energy sector. As reiterated by SCM, the net proceeds from the rights issue will not be used to fund the potential combination.
- What is the consequence if the rights issue was not approved by shareholders at the EGM? How would it impact the potential combination?
Regards
David Gerald
President and CEO
SIAS
