SembCorp Industries (SCI) investment larger now.

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."

AA REIT, IREIT and Ascott REIT-BT.

In a blog dated 4 April 2020, I talked about my three largest REIT investments.

I blogged about how I viewed them in the past and what I thought of them as the COVID-19 pandemic struck.

AIMS APAC REIT
(formerly AIMS AMP Capital Industrial REIT)

This is, of course, an old timer in my investment portfolio.

My original investment in the REIT has most probably been free of cost for some time by now.

Slightly more than a month after my blog in early April, I added to my investment in the REIT.

I explained why I did that in a blog in early May:

AIMS APAC REIT investment is larger now.

Industrial properties are probably less negatively impacted by the COVID-19 crisis.

Of course, there would still be challenges in a softer economy which would logically lead to negative rental reversions but the demand for industrial space should stay relatively strong.

So, I expect AIMS APAC REIT to continue to generate reasonably meaningful and sustainable income for me.







IREIT Global

I was confident enough to increase my investment in IREIT when I did because I thought a large part of the REIT's income should be ironclad with Deutsche Telekom and Europe’s largest pension fund, Deutsche Rentenversicherung, accounting for more than half of total rental income.

Of course, the question now is whether many more office workers who have been working from home due to lockdowns imposed by the COVID-19 crisis would continue to work from home?

This is a question that might be keeping many office properties landlords awake at night.

If it becomes the norm for office workers to work from home, then, what use are office buildings?

See this article, for example:

Twitter tells employees they can work from home forever.

COVID-19 has forced many changes upon us.

Some changes are new while some changes have been merely accelerated.

I do not know how many more companies out there are going to be like Twitter.

I hope I am right when I say that I do know that IREIT Global's WALE is about 4 years and that the REIT should be a relatively dependable income generator for me in the meantime.






ASCOTT REIT-BT

Amongst my three largest REIT investments, Ascott REIT-BT has to be the least favored now.

It was quite obvious the way I talked about it in the blog of early April I was less sanguine about it than I was about the other two.

Ascott REIT-BT is the only one of the three REITs that I did not increase exposure to.

Logically, businesses in the hospitality sector would be amongst the slowest to recover from the recession caused by the COVID-19 pandemic.

Like PM Lee said in his address to the nation on 7 June 2020,

"We will not be returning to the open and connected global economy we had before anytime soon.

"Movement of people will be more restricted.

"International travel will be much less frequent.

"Health checks and quarantines will become the norm.

"Industries that depend on travel like aviation, hotels and tourism will take a long time to get back on their feet and may never recover fully."






Will there be further reductions in the REIT's DPU due to lower income in future?

Given the very difficult circumstances, it should not surprise investors if it happens.

So, if we are investing for income, Ascott REIT-BT seems to be less attractive and less reliable compared to AA REIT and IREIT, for examples.

Still, Ascott REIT-BT's unit price spiked up in recent trading sessions, probably due to the heightened optimism surrounding the re-opening of economies around the world.

The RSI, a momentum oscillator, shows that Ascott REIT-BT is heavily overbought and that its unit price is testing resistance provided by the declining 100 days EMA which is approximating $1.13.

Taking everything into consideration, I decided to  reduce my exposure to Ascott REIT-BT, selling a big portion of my investment at resistance.

Although my investment in the REIT has reduced in size, I would still benefit if the REIT's unit price continues to move much higher which might prompt me to further reduce exposure.

I hope that Ascott REIT-BT as an investment for income will do much better in the future but, to be realistic, I have prepared myself mentally for a relatively long wait.








Related posts:
1. Largest REIT investments updated (April 2020).
2. The most dangerous crisis and what should we do?