Sembcorp Industries and Marine Demerger

Sembcorp Industries Demerger

Sembcorp Industries and Sembcorp Marine had proposed a S$2.1 billion recapitalisation and demerger. We all know that Sembcorp Marine has been hit badly by the COVID-19 pandemic and recent collapse in oil prices. The demerger will allow Sembcorp Marine to better address its urgent need to recapitalise, meet liquidity requirements, and strengthen its balance sheet to ride through the prolonged downturn in the offshore and marine industry.

What is the impact to shareholders? Let us take a look below.

Recapitalisation of Sembcorp Marine

As part of the recapitalisation for Sembcorp Marine, the company will issue S$2.1 billion renounceable rights to strengthen its cash position and balance sheet.

5 rights shares will be issued for every 1 Sembcorp Marine share held at an issue price of S$0.20 per share. The rights price represents a 31.0% discount to the TERP (“Theoretical ex rights price”) based on 5-day VWAP (“Volume weighted average price”) of S$0.74.

Sembcorp Industries has undertaken to subscribe for up to S$1.5 billion of rights shares by setting off the S$1.5 billion outstanding under its Subordinated Loan extended to Sembcorp Marine. Temasek has agreed to sub-underwrite the remaining S$0.6 billion.

Demerger of Sembcorp Industries and Sembcorp Marine

The demerger will be via a distribution in specie of Sembcorp Industries’ stake in the recapitalised Sembcorp Marine to Sembcorp Industries shareholders as dividends. Thus, Sembcorp Industries shareholders will receive between 427 and 491 Sembcorp Marine shares for every 100 Sembcorp Industries shares owned, with no cash outlay required.

Pro Forma Financial Effects for Semcorp Industries

As illustrated below, earnings per share of Sembcorp Industries will improve by 22% after the demerger. It will also remove constraints on Sembcorp Industries’ balance sheet which consolidates Sembcorp Marine’s debt. As you can see below post transaction, debt will decrease by S$2.9 billion.

Sembcorp Industries and Marine Demerger

Summary

The resolution will need to be approve at Sembcorp Industries and Sembcorp Marine’s EGM. The EGM is expected to be held in August or September. Below are some important dates for shareholder of Sembcorp Industries.

Sembcorp Industries Demerger Important Dates

Hin Leong Trading Financial Woes – How Does It Affect You?

Hin Leong Trading Financial Woes - How Does It Affect You?

You would probably read about Hin Leong Trading scandal whereby the company recently revealed US$800 million of undisclosed losses and the company is seeking US$3.85 billion in debt. It was mentioned that Hin Leong Trading owes US$3.85 billion to 20 lenders.

Thinking that it will not affect you? As the saying goes “One problem leads to another”, among the lenders are the local banks DBS (SGX:D05) , UOB (SGX:U11) and OCBC (SGX:O39). They have a combined exposure of at least US$600 million to Hin Leong Trading. OCBC Bank currently makes up 2.53% of my stock portfolio and I am looking at adding more during this COVID-19 crisis.

If you look into the financial statements of the 3 local banks, oil and gas bank loans are classified under “Transport, storage and communication” sector. DBS have the highest exposure. Below are the extracts from each bank’s financial statement where you can find from their respective website.

DBS FY19 Financial Statement

DBS have an exposure of 8.7% (S$31.6 billion) to the transport, storage and communication sector.

Hin Leong Trading Financial Woes - How Does It Affect You?

OCBC FY19 Financial Statement

OCBC have an exposure of 5.0% (S$13.3 billion) to the transport, storage and communication sector.

Hin Leong Trading Financial Woes - How Does It Affect You?

UOB FY19 Financial Statement

UOB have an exposure of 4.1% (S$11.0 billion) to the transport, storage and communication sector.

Hin Leong Trading Financial Woes - How Does It Affect You?

Taken from Hin Leong Trading company website, below are the services that Hin Leong Trading provides. They range from Petroleum Products, Marine Bunker Supply, Storage, Lubricant and Greases, Shipping and Trucking.

Hin Leong Trading Financial Woes - How Does It Affect You?

Impact To SembCorp Industries Ltd (SGX:U96)

Not only banks, SembCorp Industries Ltd was not spared. Sembcorp Cogen Pte. Ltd is a subsidiary of Sembcorp Industries Ltd. There was a gasoil supply and storage agreement between Sembcorp Cogen and Hin Leong Trading whereby Sembcorp Cogen purchased from Hin Leong Trading, and Hin Leong Trading stored and managed on behalf of Sembcorp Cogen, gasoil reserves to fulfil certain regulatory requirements under Sembcorp Cogen’s electricity generation licence.

Sembcorp Cogen had

  • Terminated the Gasoil Supply and Storage Agreement on 22nd April 2020.
  • Commenced legal proceedings in the High Court of the Republic of Singapore (the “Court”) to assert its ownership of the gasoil reserves which are stored in designated tanks at Hin Leong Trading’s affiliate, Universal Terminal (S) Pte Ltd (“Universal Terminal”).
  • Obtained an order from the Court to, amongst other things, restrain Universal Terminal from moving, removing or disposing any of the gasoil reserves claimed by Sembcorp Cogen, and to ensure that such gasoil reserves are stored separately from any other gasoil on 24th April 2020.

Summary

I am not sure how deep the impact of Hin Leong Trading financial woes will impact the local banks and SembCorp. As of today, all 4 stocks are still trading in green. The stock market can really be irrational. Or perhaps the banks are already used to lending money to oil traders and not getting their money back?

Just my few cents worth, trade with caution.