SembCorp Industries

[karlmarx]

Hi Karlmax,

That's exactly how I feel. Either SCI too low or SCM too high. There is a gap here. Highly likely is SCM too high

1) The market is very efficient where the potential dividends/coupons/rewards of a security can be easily calculated with some simple input. So if you're thinking that there might be some arbitrage opportunities concerning SCI, it might not be so straightforward. 

Assuming that an SCI investor wishes to dump the SMM shares upon receiving them, what will the value of the SMM shares be after SMM goes xr? It will probably be in the 20 cents region, given the large 5 for 1 issue at that price. But what if it goes lower than that after xr? The price of SCI will probably also move lower.

I don't see the restructuring surrounding SCI and SMM, and the potential merger between SMM and KOM, as good opportunities to make sure money.


2) Personally, I prefer to always return to first principles of investing; the evaluation of the company's business fundamentals vis-a-vis the share price. 

SCI looks like it will still be bogged down by low returns and high debt. Their existing assets are still weak, and even after the demerger, their leverage is still too high for them to develop higher-return projects which are big enough to move the needle. Unless they raise some equity. I'm not optimistic that SCI shareholders can expect more excitement in the future, than they have right now.

SMM and KOM looks like they will still struggle to win new orders in the years ahead. Unless SMM and KOM (whether merged or not) can significantly bring down the selling prices of their deepwater offshore platforms -- and still make a profit for themselves -- and thus reduce the break-even costs for production companies, it is not likely that oil majors will place orders for more rigs when there are still cheaper production projects (e.g. fracking). Or you can pray that oil prices will rise to $80 and stay there long enough for oil majors to be induced into higher-cost deepwater projects.

Their poor outlook aside, investors may still find SCI and SMM to offer value if their share price is sufficiently low against their fundamentals. Post demerger, SCI might have its dividends bumped up. And since the recapitalised SMM will have lower gearing, investors may also find SMM an acceptable means to punt on $80 oil. 


3) In the event of a merger between SMM and KOM, it is not necessarily the case that SMM will be bought for cash by KOM.  The insiders who bought up SMM before the trading halt might have believed that there will be a cash offer for SMM, but instead it was a debt-to-equity swap (of SCI's $1.5b loan) and rights issue. This is the second time that those punting on a cash offer for SMM were disappointed. The first time was back in 2016, when SMM's shares rose to more than $2.

A merger can take place through a share swap with no cash offer. It could be SMM being absorbed into KOM, or KOM being absorbed into SMM. Though it seem likely that SMM will be the surviving company, since it appears that Temasek's intent (as highlighted from the demerger) is to have more focused business units rather than conglomerates. 

Even so, the market may still cheer a share swap with no cash offer, since the expected result of a merger is often cost-cutting and higher efficiencies.

[Porkbelly]

Karlmarx, I appreciate your sharing of insights, opinions, and also
your clear writings, as always a joy to read. Thank you.
 

P.S.
I have 2,000 of SMM. and 2,000 of SCI... 

[Greenrookie]

Hi Karlmax,

Thanks for your insight. Regarding SCI, why would u think they cannot grow? My thoughts are 

1) India is turning around, and they still have excess capacity, wouldn't this be a potential growth area ( although we might wait for the pandemic to stablize)

2) SCI is a company has both "old and dirty" business like coal etc, but also transiting to new green renewables. Although still insignificant contribution now, with the shift of emphasis to ESG due to climate change, why would this not be a potential growth area as SCI dabble around both old and new energies.

3) to raise funds, or do capital recycling, SCI could set up a energy trust (although  not anytime soon) there should be enough mature assets and to mix the better ones with the less performing ones, just like what Keppel did. In fact, j am quite surprised that they didn't do this.

Given that SCI is almost 75% off the peak, the possibility of turnaround due to energy demand increase improving rates as economies reboot, and SCI picking up opportunities in the renewables, I do see this a promising company.

Look forward to your view and discussion. It has been a while, I am happy to hear opposite views as long as it is well thought of

vested

[mscheng13]

Hi Karlmax,

Thanks for your insight. Regarding SCI, why would u think they cannot grow? My thoughts are 

1) India is turning around, and they still have excess capacity, wouldn't this be a potential growth area ( although we might wait for the pandemic to stablize)

2) SCI is a company has both "old and dirty" business like coal etc, but also transiting to new green renewables. Although still insignificant contribution now, with the shift of emphasis to ESG due to climate change, why would this not be a potential growth area as SCI dabble around both old and new energies.

3) to raise funds, or do capital recycling, SCI could set up a energy trust (although  not anytime soon) there should be enough mature assets and to mix the better ones with the less performing ones, just like what Keppel did. In fact, j am quite surprised that they didn't do this.

Given that SCI is almost 75% off the peak, the possibility of turnaround due to energy demand increase improving rates as economies reboot, and SCI picking up opportunities in the renewables, I do see this a promising company.

Look forward to your view and discussion. It has been a while, I am happy to hear opposite views as long as it is well thought of

vested

SCI’s eps for 2019 was 20.1c (before exceptional items). Without the losses from marine the eps should be slightly higher.

Assuming conservatively the SMM shares to be given out as dividend is 4.5 x 20c = 90c. That means SCI xd price is ard $1.1-1.2which gives a PE ratio of around 5-6. Does that mean SCI is undervalued now?

[karlmarx]

Gencos provide electricity and will not be obselete. They can always expect to have customers.

A long time ago, gencos were allowed to monopolise the markets which they operate in, due to the large capital expenditure and economies of scale required for sustainable operation. And back then, capital was scarce, and hence, expensive. Of course, they are bounded by certain obligations and rules, such as regulated pricing, and ensuring high service levels. But generally, gencos of the past tended to be safe and stable money spinners. Ditto for telcos.

But for the past few decades, genco markets everywhere has been increasingly liberalised. Financing for new projects are getting cheaper, and if it is a renewable energy project, it is likely to enjoy some government subsidies. So you have more competition, and fiercer competition.

Energy is a commodity, and the business works just like other commodity producers/services; the largest-scale with the lowest per-unit cost wins. Since access of financing is no longer that big an issue, and the market is open to any able genco, it is difficult for any genco to have a strong and lasting advantage over the others.

When the times are good (positive future expectations, more market liberalisation, low financing cost), the energy industry will have more players and plants. But when the times are bad (overcapacity from overbuilding), it takes longer to work out the demand-supply imbalance because of the high sunk cost. And if you shut down some of your plants, it also means you're giving market share and revenue to the other gencos, while your idled assets are depreciating. In such a situation, the gencos can only wait for energy demand to catch-up, though some may be unable to hold out (like Tuaspring/Hyflux).

===

1) I'm not familiar with the Indian energy market, so I'm not sure if SCI's Indian assets will be able to make more money in the future. But given the not so auspicious start of its very expensive coal plants, I don't see reason to be optimistic about high growth rates. Maybe some growth.

2) It is not necessary the case that coal is bad business, while renewables are good business. Though it is certainly the case that the latter is more popularly accepted than the former. Between these two, I'm not sure which produces better profits, though I suspect it is the old and dirty plants. SCI doesn't disclose on this.

And although there is greater pressure to adopt renewable energy sources, energy is a commodity and consumers generally do not care about its source, so long as they are not significantly affected by them (e.g. living next to a coal plant). Growing popular demand for renewables doesn't mean that consumers are willing to pay the higher prices that comes with it. In affluent Singapore you might have some significant sections of the population which are willing and able to afford slightly higher renewable prices. But this is unlikely in India.

The good thing about SCI's renewables portfolio is that it is immune to fossil fuel prices, since it doesn't use fossil fuel. This means they will likely do better during times of high fossil fuel prices.

But the increase in renewable sources will reduce demand for fossil fuels, which means cheaper fossil fuels. This makes fossil fuel plants cheaper to run, which increases their longevity (and possibly profitability). So building more renewable sources may actually lengthen the lifespan of old fossil fuel plants. Unless, of course, there is some intervention from regulators like imposing prohibitively expensive carbon taxes, or not permitting the renewal of leases.

3) Clearly, SCI's management intends to recycle capital, and will likely attempt to do so when the operating performance and market sentiment improves. But whether SCI can dispose its assets at good prices, and whether the capital is being recycled into more promising assets, is something that is very uncertain. And it is because it doesn't have a very good track record of doing so.

===

I think SCI's operating assets are likely to remain profitable, and may even recover in the years to come. If so, SCI at present prices can be somewhat considered cheap. Especially if a demerged SCI pays out higher dividends.

But, for reasons mentioned, I'm not optimistic that there will be a lot of growth.

Financing expenses eat up a significant portion of operating profits. So if this could be reduced, perhaps from a rights issue, SCI shareholder could enjoy higher profits and dividends.

[karlmarx]

SCI’s eps for 2019 was 20.1c (before exceptional items). Without the losses from marine the eps should be slightly higher.

Assuming conservatively the SMM shares to be given out as dividend is 4.5 x 20c = 90c. That means SCI xd price is ard $1.1-1.2which gives a PE ratio of around 5-6. Does that mean SCI is undervalued now?

If all the assumptions you have used remain valid -- SMM is worth at least 20 cents upon SCI xd, and SCI's future eps is at least 20 cents -- then yes, SCI will have at least a p/e of 5.

A p/e of 5, for most stocks, can usually be considered cheap. But you might also want to also take into account the not insignificant amount of bank loans, bonds, and perpetuals SCI is liable for. If SCI's operating assets maintain or improve their performance, the debt can be largely ignored since there is a high probability that lenders will continue to rollover/extend loans, and SCI's borrowing costs will not increase significantly.

But if SCI's operating assets earn lesser and lesser, the reverse is likely to happen. Equity holders will take a massive haircut when loans are pulled and SCI is forced to liquidate their operating assets. Of course, papa T will come to the rescue way before something like that happens. But opmi will also have to take part in any fund raising exercise. The fact the papa T is not doing a rights for SCI right now when it is being restructured means that they probably think SCI is not yet close to being in danger. But things could change a year or more in the future.

Which is why the most important question for (prospective) SCI shareholders is whether SCI's operating assets can at least maintain their present level of income. To do so, you will need an understanding of the major energy markets which SCI operate in; Singapore, India, China, UK, etc. If anyone can offer some exposition on this, that will be useful.

[¯|_(ツ)_/¯]

17 July 2020 1H2020 ResultSembCorp Industry
https://links.sgx.com/FileOpen/SCI_1H202...eID=624037

As at 30 Jun 2020
Rev $3.5b down 27%
GP $0.16b down 70%
NP -$0.2b 

Page 32
KPMG Auditores Independentes (“KPMG AI”), the Independent Auditors for the SCM Group’s subsidiary Estaleiro Jurong Aracruz Ltda (“EJA”), have issued a disclaimer of opinion in their Independent Auditors' Report dated July 13, 2020 in relation to the financial statements of EJA for the financial year ended December 31, 2019 (“EJA FY 2019 Financial Statements”) (“Opinion”). 

In view of the current challenging environment, the Board has decided to defer the dividend consideration to the full year. There is no interim dividend declared for 1H2020. 

Oil prices have also seen a sharp decline. Singapore’s economy is now in recession. The Group expects to incur losses for the full year due to the expected continuing losses at Sembcorp Marine and exceptional items recorded in 1H2020. 
Notwithstanding the adverse business conditions, the Group expects to maintain positive operating cash flow in 2020 underpinned by its long-term contracts and the underlying performance of its Energy and Urban businesses. 

Wear mask and keep your social distance, everyone.

[weijian]

Some good questions asked by SIAS

Sembcorp, SMM proposal to bring 'tangible' benefits; public shareholders get deciding say

THE massive two-part proposal that will see Sembcorp Industries (SCI) and Sembcorp Marine (SMM) parting ways will meet the loss-making marine unit’s “critical” liquidity needs, strengthen both companies’ financial positions and is in the best interest of shareholders.

This is according to the boards and management teams of SCI and SMM on Wednesday, as they responded to questions from the Securities Investors Association (Singapore), or Sias.

https://www.businesstimes.com.sg/compani...t-deciding

Actual PR: https://links.sgx.com/FileOpen/ADDITIONA...eID=624479

[¯|_(ツ)_/¯]

There are definitely many reasons for the demerger.

However, I speculate that the strew that breaks the camel would be the thought of SMM drawing down the remaining $0.5b line of credit.

Simply this thought will cause a lot of sleepless nights.

Stay safe and stay healthy, everyone.

[¯|_(ツ)_/¯]

The Company thanks SCI Shareholders for their consideration and support for the Distribution Resolution at the SCI EGM today, and will make further announcements in due course on the Proposed Distribution, including, among others, the distribution ratio and the SCI Record Date.


Wong Kim Yin, Group President & CEO, said, “We are grateful for the support demonstrated by our shareholders today. Sembcorp Industries can now move forward as a focused Energy and Urban player. Sembcorp Industries has a strong portfolio, anchored in sectors providing essential solutions and in growing markets such as Asia. With increased strategic focus, we will be able to dedicate our resources and efforts to repositioning our businesses and capturing these growth opportunities. This includes opportunities in the renewable energy sector where Sembcorp Industries is already one of Singapore’s largest home-grown renewable energy players.”

“We are also encouraged that we can provide support to Sembcorp Marine for its Rights Issue that will enable it to better ride through the downturn and position itself for recovery. Our shareholders can now expect to receive shares in a stronger recapitalised Sembcorp Marine.” 

Stay home and stay healthy, valuebuddies.