Sembcorp Marine share price to rock in 2023?

Lifetime Membership  Is this really light at end of the tunnel for Sembcorp Marine share price? On 27 January 2023, SGX gave the green light for the acquisition of Keppel O& M by Sembcorp Marine through the issuance of 36.8 billion new Sembcorp Marines shares. The SGX nod was a major breakthrough for the merger between the oil-rig giants, heralding the end of a long running saga.

To be sure, the proposed merger is not a done deal yet as it is subjected to shareholders&rsquo voting in an extraordinary meeting to be held on  16 February 2023. Sembcorp Marine must obtain more than 50% votes from its shareholders (excluding Temasek Holdings) in order for the acquisition to go through. Against this backdrop, investors should expect plenty of volatility for Sembcorp Marine share price in the coming weeks.



In the EGM circular, the Sembcorp Marine warned shareholders that there is &ldquo no assurance that as a standalone entity, the SCM Group will continue to receive the necessary support from its banks, financiers and significant shareholder, Temasek Holdings (Private) Limited&rdquo .

In my opinion, the caution is not warranted as its almost a certainty that shareholders would vote in favor for the merger. And it&rsquo s not so much of the expectations of a business turnaround. After 5 long years of numerous false dawns that saw Sembcorp Marine share price collapsing to abysmal levels, shareholders must be disillusioned with the performances of the existing management. As such, many of them must be happy to see the back of the current management.

Under the helm of the current management, Sembcorp Marine recorded  5 straight consecutive years of losses, from $74 million losses in FY2018 to a whopping $1.1 billion losses in FY2021. For FY2022, the management guided that &ldquo 2H2022 losses to be similar to that for 1H2022&rdquo .  During this period, two mega rights issues caused Sembcorp Marine share price to plummet to record lows due to the dilutive effects of the rights, which were priced at a discount to its NAV. In addition, the past few years also saw Sembcorp Marine share price trading mostly at below its NAV per share.

What is even more galling for shareholders is that the recovery of the crude oil prices had led to  Keppel O& M to record  $95 million of profit in 1HFY2022 yet Sembcorp Marine somehow managed to chalk up losses amounting to $143 million during the same period.  The latest financial result simply made the tenure of the current management untenable. In this regard, shareholders should be rejoicing that the merger would result in a new management team, with Mr Chris Ong Leng Yeow, the current Chief Executive Officer of Keppel O& M, to be appointed as the new Chief Executive Officer. Apart from Mr Yap Chee Keong, who is an existing director of Sembcorp Marine, the rest of the board of directors would be replaced.Note that this is an opinion article and not meant to be a financial advice. Please do your due diligence or engage financial advisors before investing in the stock market. I am not vested in Sembcorp Marine at the moment. Whether Sembcorp Marine share price will surge or collapse has no impact on me. Thus, this article is not meant to induce readers to make any form of investment decisions.

Sembcorp Marine share price in new chapter

The new management that is going to be installed should bolster confidence in Sembcorp Marine share price. But in order for that to happen, shareholders  must vote in favor of the merger. Standing in the way could be two major concerns among shareholders. The first concern among shareholders must be the

There are much speculations on how much the price of KC will drop, after the acquisition of KOM by SCM is completed.. Some said one dollar, many said two dollars but the most popular was that it would fall by $2.33, the implied price per KOM share in the acquisition consideration of SCM . I want to put to rest once and for all this speculation., by giving this layman' s analysis that it will not be so. In fact if the price do not rise too much, in the days ahead approaching the EGM, it will not drop at all, by the time the acquisition deal is done Read first, and I' ll explain more later. But remember,   it' s a layman' s opinion, you can choose to ignore it...

1. Under the new terms SCM will make a direct purchase of KOM for acquisition consideration amounting to $4.5 billion.
2. This $4.5 billion is equivalent to KC' s percentage holding of 54% in SCM, but this amount will not be in cash, but an  issuance of new shares, therefore this is equivalent to about 36,848,072,739 new shares to KC
3. Now, because KC will be retaining 5% of these free shares, the other 49% (33,436,214,152 shares) will be distributed DIS to other KC shareholders, meaning, each KC shareholder (including TH) will get about 19.1 SCM shares with an implied value of S$2.331 for every KC share held.     
4. Each of the new SCM share that the KC people will get is priced at $0.122 per share (which eerily coincided with closing price of the day of the announcement). It is very important to note that this was based on the VWAP for the 10 trading days to April 26 2022 which was the day before the merger was officially announced.
5. Why? Because it is a theoretical price, and is not based on the NTA of KOM, which means it will not affect very much the intrinsic value of KC (come to that later).
6. While we know that this theoretical price incidentally also coincides roughly with the NTA of SCM ($0.123), it does not correspond to the NTA of KOM.
7. Now we don' t know what was the NTA of KOM because it is part of listed KC whose NTA is roughly $6.65 (do note this because we' ll come back to this later).
8. However, it was reported in the announcement of the merger in April that the restructured KOM' s NTA is approximately S$0.47 per share  for FY2021 (total $859 million). This restructured KOM is excluding legacy rigs, associated receivables and contracted assets which will be transferred to AssetsCo.
9. In other words, SCM will be making an acquisition  consideration of $4.5 billion for KOM for more than five times its NTA value.
10. What? Without KOM' s assets? So what exactly is SCM paying for? For air? Exactly, and I am not joking
11. For one, KOM will give SCM the oxygen it DESPERATELY needs. Immediately, its order book increases by 3 times. KOM' s order book at $11.8 billion is significantly larger than SCM' s at $6.8 billion. It is important to note that KOM has secured more orders and is able to secure more orders than SCM, not to mention it had been more profitable than SCM over the past decade or so.  SCM has been investing HEAVILY in new and expensive production infrastructure but its newly-build yards need business and FAST, but new business has not come fast enough. With KOM, newly built yards of SCM are ready to be productive IMMEDIATELY. Without KOM,  SCM will be a company with huge debt and a significant amount of underutilised assets.
12. SCM' s shareholders are upset about KOM being able to remove its assets from the deal, but they do not realise these are stranded rigs, uncollected receivables, unsold items, loss making entities, etc and therefore are more of liabilities than assets. So by not transferring these " incongruent assets" to SCM, KOM is not burdening SCM with its baggages of liabilities and debts. Therefore, the restructured KOM that is acquired will have significantly less debt (just $200 million) compared with more than $3.1 billion of gross debt for SCM. So in layman term, it will reduce SCM gearing significantly.
13. But perhaps the most significant benefit of this acquisition is that it effectively removes a fierce competitor and able to bring it in, and together with both sets of knowledge, technical resources, experienced workforce, skilled knowhow and management skills able to form a formidable force that can compete comfortably in the world arena, something that (as past history and records had shown) SCM has been struggling to do when standalone.
14. A well written article by ST associate editor Ven Sreenivasan (higher ranked than reporter Ben Paul) summed it up so well of the difficulties faced by SCM if it does not have KOM as its partner and I quote: " As a stand-alone company, it will be more challenging for Sembmarine to compete against global well-resourced players from South Korea, China and elsewhere. A merged entity will be a formidable, world-class O& M player capable of competing effectively on the global market, which is estimated to grow to US$260 billion (S$366.7 billion) by 2030."