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SembCorp Industries (SCI) investment larger now.

Thursday, June 11, 2020

There were a few comments from readers regarding the rights issue by SembMarine (SMM) and also how SembCorp Industries (SCI) would distribute its stake in SMM as dividends to SCI shareholders.

Basically, SMM is issuing rights in a 5 for 1 rights issue priced at 20 cents per rights.

Depending on the response to the rights issue, each SCI shareholder will get between 427 to 491 SMM shares for every 100 SCI shares they hold.

The question some might ask is "how much is each SMM share going to go for after the exercise is over"?

Well, your guess is as good as mine.

If we use the rights issue price of 20c per rights share, getting 427 SMM shares means getting $85.40 worth of shares.

If we were to buy SCI at $1.95 per share today, the implication is that our cost for what is the new SCI is approximately $1.10 per share.






The biggest drag on SCI's performance for so long has been the loss making SMM.

Like I said in reply to a reader recently:

"Things have been bad for oil and gas for way longer than expected and that has impacted SembMarine really badly."

Full comment: HERE.

This exercise has been called a "demerger."

Basically, SCI will divorce SMM while SCI shareholders will become SMM shareholders if they are not already so.

It is like SCI saying to SMM:

"Take the money and get out of my life!"

And maybe SMM should say or sing:

"Do you think I will crumble?

"Do you think I will lay down and die?

"No, no, not I!

"I will survive!"







Anyway, some readers will remember that an important reason why I was attracted to SCI was its utilities business.

In a reply to another reader recently, I said:

"I have a smallish investment in SCI which I am holding onto with the belief that its energy and waste management businesses will remain resilient."

and also:

"With urban (development) being a small component, SCI is more of a utilities company after the whole exercise is over and should be seen as a defensive investment."

Full comment: HERE.

As an investor for income, I like reliable recurring income.

So, after not doing anything to my investment in SCI for a long time, I increased my investment in SCI today.

Upon completion of the exercise, SCI investors can choose to keep their investment in SCI's mainly utilities business and sell their new or enlarged investment in SMM if they so desire.

SMM is still loss making as the environment remains very challenging for oil and gas businesses.

However, those who believe that the oil and gas sector is simply in an extended down cycle should hold on to their investment in SMM while they wait for the cycle to turn back up.






Of course, this blog would not be complete without a comment on SCI as an investment for income.

With loss making SMM out of the way, SCI is likely to be more profitable in future, all else remaining equal.

A DPS of 5c might even be viewed as conservative then.

Even so, at $1.10 a share, a 5c DPS would translate to a dividend yield of about 4.55%.

Of course, depending on the assumptions we make, we would get different results.

However, to be realistic, we could first see a reduction in dividends with the COVID-19 pandemic's negative impact on the global economy.

"Utilities and marine group Sembcorp Industries expects the performance of its energy business to be markedly lower than last year due to reduced demand and falling prices.

"Sembcorp said on Monday (May 18) that while its energy operations continue to be supported by long-term contracts, the impact of the pandemic and the reduction in economic activity amid lockdowns have hit the business.

"Power demand in Singapore, India and Britain declined by about 10 to 25 per cent in April compared with the same month last year, the company noted."

Read full article at: The Straits Times.






I have doubled the size of my smallish investment in SCI today.

I am mindful that although there is an investing for income angle here, there is also a speculative element.

So, I will remain cautious and not throw in everything including the kitchen sink.

For a quick summary of the whole exercise, watch the short video by CNA below.

"Sembcorp Marine unveiled plans to raise S$2.1 billion through a rights issue backed by Sembcorp Industries and Temasek Holdings."


10 comments:

iwimsasl said...

Hi AK,

Thanks for sharing and talking to yourself.
May I know by saying that you double up on your initial investment on SCI.. does it mean you buy another 1x or 2x in terms of value or number of shares? can reveal the range of your average price per share?
Also can kindly share your plan to the SMM shares which you will be receiving post demerge(if it materialize) and its outlook if you would like to keep it for long term.

Thank you & Best regards.

garudadri said...

Hi Ak
Thanks for the crisp analysis
The issue to me is the price ! I feel SCI has been bid up quite a bit and that the froth will settle over the next several weeks
The deal will complete later this year hopefully though but will give plenty of time to plan an entry
I might buy if this falls 10-15% from now to add to my microscopic holding that has been an eyesore in my portfolio for Long

AK71 said...

Hi iwimsasl,

Double means what was 1 share is now 2 shares. ;)

As for the SMM shares, if you believe that the fortune of oil and gas businesses is cyclical in nature, you should hold and wait for the upturn.

If you believe that the world does not need oil and gas anymore (i.e. the decline is structural, then, you should sell.

You decide. ;)

AK71 said...

Hi garudadri,

Just sharing my quick back of the envelope scribbles.

Definitely an incomplete analysis.

So, take it with a pinch of salt.

The chart indicates that there could be some way for SCI's stock price to fall although it is hard to say if it would fall before or after the deal is executed.

Nd said...

Hi Ak,

Whats your thoughts on SCI results?

AK71 said...

Hi Nd,

Once SCI gets rid of SMM, numbers should improve.

I really like SCI for its energy businesses, especially its renewable energy businesses.

Nd said...

Hi Ak,

In the case of the demerger being a success, what will you be doing with the SM shares that you will have gotten from SCI?

Nd said...

Hi AK, in the event of a successful demerger, what will you be doing with the SM shares that you gotten from this exercise? =x

Nd said...

Hi AK, in the event of a successful demerger, what will you be doing with the SM shares that you gotten from this exercise? =x

AK71 said...

Hi Nd,

At the moment, I am leaning towards holding on to SMM.

This is because I believe that the shipyard business is still viable but it is cyclical in nature.

The down cycle in oil and gas has gone on for much longer than expected but it should turn up again one day.

In the longer term, however, renewable energy should replace oil and gas.

Having said this, SMM does not have to depend only on this sector to generate revenue.

With Temasek as the largest shareholder after the exercise is over, hopefully, we will see some positive transformation.

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