Should You Buy Sembcorp Marine Rights Issue?

Published on June 9, 2020

COVID-19 has forced companies to beef up their balance sheet. Last month we had SIA offering rights issue. This month we have Sembcorp Marine.

I do not own any Sembcorp Marine (SCM), but I do own Sembcorp Industry (SCI), so naturally I am interested.

I also participated in SIA rights issue, which I gonna say is fun. As the sayings goes, you pay to learn the game. 😂

SCM presentation slides has the details. Or my friends at Seedly have written a summary. I will not cover the basics, instead I am gonna address some questions that small 🦐 retail investors like me have.

How they determine $0.2903 as the TERP?

Quote from investopedia:

A theoretical ex-rights price (TERP) is the market price that a stock will theoretically have following a new rights issue.

$0.2903 is a very important number since that’s gonna be the new share price, theoretically.

Before the rights issue, it was ~$0.70. How did it become so low? How is TERP calculated? This is the formula:

TERP = (Market Cap + Funding) / New number of shares

The TERP uses the last 5-days average (before the rights issue announcement, first week of Jun 2020), which is $0.74. With 2.09B shares, that gives a market cap of $1.55B.

Here’s how it looks after the rights issue:

  No. of shares Share Price Market Cap
BEFORE 2.09B $0.74 $1.55B
AFTER 12.54B $0.2903 $1.55B + $2.1B = $3.65B

TERP = ($1.55B + $2.1B) / 12.54B = $0.2903 (with minor rounding errors)

There you go. Turns out to be pretty simple, and I think it’s fair.

Is it fair?

  • $2.1B is the new funding injected, therefore increasing the market cap by that amount
  • Each rights issue has to pay $0.20 cash, therefore converting into the 5 x 2.09B = 10.45B new shares
  • It adds up right: 10.45B x $0.20 = $2.1B

Everyone (Temasek, SCI, retail investors) are paying $0.20 per rights, to raise the $2.1B.

While retail investors and Temasek are paying cash, SCI is not, because they lend SCM $1.5B in Jun 2019. SCI is converting that debt into equity. How smart.

What is renounceable rights issue?

Just like SIA rights issue, SCM rights can be traded.

Renounceable rights have a value and can be traded separately from the original shares held.

While I don’t hold SCM shares now, I can buy the rights (when it becomes tradable). For SIA, there is 1 week to trade the rights (I have a shorter duration as I use Standard Chartered’s custodian platform).

Why would I want to buy the rights?

I only have the experience of SIA rights issue to base on. But I believe retail investors are selling the rights if they don’t have the cash to pay for it later.

Remember: Every rights need to pay $0.20 to convert into share later.

Let’s look at a scenario.

Uncle Bob happens to hold 50k shares of SCM (worth $36k). That would give him 5 x 50k = 250k rights. If he is going to exercise all of his rights ($0.20 each), he needs to fork up $50k!

If he don’t have that money, he would rather sell the rights at a decent amount.

In fact Uncle Bob might even sell at any amount. Because if the rights expire, he gain nothing.

What price can you buy the rights?

The rights will be traded as if they are shares. The market will have 10.45B rights VS 2.09B shares.

If I am going to buy the rights, I will look at the current share price, since they will be the same share eventually. Except for the rights, I have to pay $0.20 later to convert it to share. Therefore:

Rights Price + $0.20 = Share Price

When the rights are tradable, the share price will be around the TERP – $0.29. Therefore the rights will trade at $0.29 - $0.20 = $0.09, theoretically.

It will probably trade lower, since there will be investors like Uncle Bob who is trying to sell away at any price, therefore lowering the price.

For 1 share he has now, his 5 rights could sell at $0.09 each = $0.45. Plus the existing share, which is worth $0.29, $0.45 + $0.29 = $0.74 – which is the pre-rights share price. It all adds up correctly.

Conclusion

And that means buying opportunity 😆

I bought SIA rights, plus got some over-subscribed rights for free. On average my new SIA shares average at $3.24. Now SIA is $4.32 (TERP $4.40), so that’s already a 30% profit! I will leave that story to perhaps another day.

Next story: How I got lucky with Sembcorp Industry 😂