However the past 5 years, declining earnings and dividends plagued Sembcorp Industries as it was dragged down by the decline in marine and offshore and plummeting oil prices inflicted on its marine arm, Sembcorp Marine (SCM), of which it owns a 61% stake.
After factoring in all the dividends collected over the past 5 years, my average holding cost is $3.30, suffering a more than 50% capital loss. There were plenty of chances to sell Sembcorp Industries to make decent profits but I chose to hold on due to faith in its essential global utilities business which has immense potential in the long term.
To be honest, I am tempted to cut my losses on several occasions to make my money work smarter and harder. I would get more dividend income and return on equity by investing in Reits or other growth stocks than waiting for the recovery of Sembcorp which seems too distant and improbable.
On 4 Jun 2020, the shares of Sembcorp Industries and Marine were halted from trading. On 8 Jun 2020, the plan for recapitalisation of Sembcorp Marine and demerger of Sembcorp Marine from Sembcorp Industries was announced.
SCM will raise $2.1 billion from rights issue. Parent SCI will subscribe to all its entitled rights for up to $1.5 billion by writing off the loan it provided to SCM in 2019. The other $0.6 billion will be raised from existing SCM shareholders or Temasek if SCM shareholders decided not to exercise their rights shares at a heavily dilutive ratio of 5 rights shares for every 1 existing SCM share.
After the rights issue, shares of SCM owned by SCI will be given away to existing SCI shareholders at a ratio of between 427 and 491 shares per 100 shares of SCI owned. SCI will not own any stakes of SCM anymore. Temasek which currently owns SCM indirectly through SCI, will own SCM directly together with SCI shareholders.
The financial position of SCI greatly improve after SCM is decoupled from its entity. 
The plan will be executed only if at least 50% of both SCI and SCM shareholders are in favour during the EGM.
What existing Sembcorp Industries shareholders can do?
1. Do nothing
Let the rights issue and demerger take place and receive the SCM shares converted from debts to equity. No further capital injection is required. There is a fairly high chance that SCI shares will still hover between $1.50 to $1.80 in the short term while SCM shares are traded in the $0.20 to $0.30 range after the rights issue. Decoupled from marine industry, SCI may start to do well in its energy and utilities business in the long term and the share price may converge closer to its post demerger NAV of around $1.90. Who knows the "free" SCM shares may be acquired by Temasek or Keppel Corp to be merged with Keppel O&M arm or rising oil prices may bring the marine and offshore back to life again?
2. Increase stakes of SCI
Purchase more SCI shares to average down their holding price or increase shareholdings to speculate on the possible increase in share price of SCI in the short term and also to leverage on the strengthening position of SCI and ride on the potential growth of renewable energy and utilities business in the years to come.
3. Sell off partial stakes
Reduce exposure to SCI by recycling partial capital back for other investment opportunities and keep a sizeable amount of SCI positioned for the long term recovery and growth.
4. Sell off everything
Get back all capital from SCI to avoid complications and invest in other businesses or contribute back to war chest for better opportunities.
What I will do?
As I only hold a small quantity of SCI and have already held it for more than 5 years, I can afford to do nothing if the share price stays below $1.90. I will consider selling off all my shares if its price hits above $2 in the short term because after the demerger, its new NAV is around $1.90 and $2 should be a fair value in the short term. If I think about why I invested in SCI in the first place, I particularly like its essential waste management and utilities business that I believe will has plenty of potential growth especially in developing countries such India and South East Asia and will be motivated to keep SCI for the long term.
I hope all SCI and SCM shareholders will make the wisest decisions for yourselves. Always think about why you bought the share in the first place. All the best! Thanks for reading.
Love & Peace,
Qiongster
After the demerger, NAV of SCI is around $1.90. This is after you get 4 lot of SCM Shares. Your short term TP should be 1.90+0.2x4= 2.70.NOT $2.i hope you did not sell today.because today is still pre- demerger.
ReplyDeleteWhen the NAV of SCI was $3.30, it can trade at up to 50% discount and even hit $1.36 after getting kicked out of MSCI. After XR, the share price of SCI will drop by approximately $0.80 assuming this is the worth of SMM shares which will undergo alot of selling pressure and can be worthless in the worst case. Hence I still use $1.36 as the value of SCI utilities and urban business and $0.64 as the value of "free" SMM shares. $2 is my conservatively ascertained fair value.
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