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Glad to receive such review again. This time a student from Croatia on Udemy for course on Read Financial Statements as a Stock Investor.

Keppel Corporation and Sembcorp Marine

  1. The memorandum of Understanding (MOUs)

As many have expected, Keppel Corporation (Keppel) and Sembcorp Marine (SMM) have finally decided to combine their resources and expertise that they have built up in the offshore and marine (O&M) space. The combined entity (temporarily names as Combined Entity (CE)) would have an enlarged pool of resources and facilities, to bid not just for O&M projects, but also other alternative energy projects in the clean and renewable energy sector. The Memorandum of Understanding (MOU) was signed last week. The final details will be worked out in the next few months. In principle, CE shall still be public-listed and SMM shareholders shall hold the shares of CE. In the meantime, with the injection of the on-going projects and resources, Keppel will be entitled to cash and shares of CE up to $500m. To fund for the ‘purchase’ of the facilities and expertise from Keppel for a price-tag of $500m, SMM will be raising a 3-for-2 rights issue of about $1.5b from existing SMM shareholders. The rest of the fund will be shall remain as working capital for future projects. According to Keppel, the shares of CE shall be eventually distributed to her shareholders as dividend in specie. (In the light of this development, I read it that after the whole exercise, SMM might evetually be removed and its shares be replaced by CE shares which I shall discuss in the text below.) As it is, if everything goes on as planned, the final scenario shall be existing Keppel and SMM shareholders, including Temasek Holdings (TH) holding the shares of CE shares.

 

Separately, Keppel also had an MOU with Kyanite (a subsidiary unit of TH) to look for external investor(s) to co-own a separate rig company (Rig Co), of which Keppel is expected to take a minority shareholding. Rig Co will hold the stranded assets and manage the receivables to be transferred from Keppel. The total assets, making up of about 15 completed ones and uncompleted rig as well as the receivables worth about $3.8b (comprising $2.9b of stranded assets and $0.9b of receivables). Short of a ready investor at this time and the funding to complete the uncompleted oil rigs, it is also likely to take another few months, to at least end 2021, before anything concrete can be cobbled out.

 

As mentioned by Keppel, the two MOUs are inter-conditional, and therefore have to be worked upon concurrently.

2. Keppel shareholders

While many details have not been worked out, the scenario for Keppel appear to be clearer. In the Keppel-Kyanite MOU, Keppel is the sponsor for the assets to be injected into Rig Co, of which Keppel is expected to take a minority shareholding. In the Keppel-SMM MOU, Keppel is sponsoring the fixed yards assets and O&M expectise into the joint-venture, CE, with SMM. In a simple analogy, it is akin to sponsoring its respective movable operating assets and fixed properties into two separate Real Estate Investment Trusts (REIT), and take a shareholding in both of them. Although the stranded rigs and receivables may worth $3.8b carried on Keppel’s books, it is not unexpected that a steep impairment on the assets have to be carried out during the negotiation with the potential buyer Reg Co investor. However, it is still too early to make any meaningful inference. It depends very much on the operational environment at that point of discussion. In this respect, it is hoped that  the oil price continue to rise or at least stay at this level. As to the estimated funding to complete the uncompleted oil rigs, it comes indirectly from SMM shareholders  through the coming $1.5b rights shares issue. In the way, it helps Keppel complete the projects without the need for additional funds, such as bank borrowing, or bond issues or rights shares issues..

In the MOU with SMM, a little headway seemed to have been cobbled out, enabling Keppel to earn a return of up to $500m in cash and CE shares. If everything goes according to plan, Keppel shall become the shareholder in Rig Co and CE. Overall, it should be positive for Keppel as it takes steps to reduce its exposure in the O&M space without much losses. It may even stand to recoup part of its past investments if oil prices continue to stay, at least, at this level.

3. Sembcorp Marine (SMM) shareholders

The impact on IMM appears to be more tricky. To begin with, SMM shareholders have to swallow a bitter pill for the coming 3-for-2 rights issue to raise a fund of $1.5b. In fact, this is a 2nd hit for SMM shareholders. Just 12 months ago, the company had to raise a 5-to-1 rights issue amounting to $2.1b. In both exercises, they were extremely dilutive and fell within the space of just one year apart.  In other words, SMM shareholders have been hit twice within a year.

 

While the rights issues are critical for the survival of SMM, they are really no joy for SMM shareholders. Imagine if an SMM shareholder had 1000 shares before the 1st right issue, the share quantity would have been blown to 15,000 shares if he subscribed to the rights share issues in both exercises. Assuming that he had bought 1000 shares several years ago at the cost of $$1.50 per share ($1.50 was considered to be relatively inexpensive compared to about $4-$5 during its peak period), the total investment and his average share price would have been $3.220 and $0.215 respectively (see table below), ignoring the time value of money over the last few years. The share price at yesterday’s close was $0.125, which is more than 40% lower his average cost price.

4. Going forward

Based on the share price movement of Keppel, the  euphoria seemed to have died down following Moday’s close at $5.60. In fact, by yesterday’s close price of $5.41, it landed almost the same close price after the trading halt was lifted on Friday, 25 June 2021. Short of information of the new Reg Co and the new developments in the CE, not much can be expected of its share price in the near term.

The share price of SMM seemed to be more interesting. One day after the trading halt, the price declined sharply from $0.191 to $0.139.For the next three days in the week that followed, it continued to slide, closing at $0.12 on Wednesday. On Thursday, it was up at $0.123. By Friday 3 July, the share price was $0.125, a premium of about 36% over the forthcoming rights share price. I believe by now,  buyers are buying on the dip in hope to pick up the rights issue. Any new buyers at this price would have an average cost of about $0.098 without excess rights. With a 36% premium over the rights price, there should be sufficient interest for the right shares. Unlike the 1st tranche of the rights shares issue, when the bulk of the funds ($1.5b) went to paying the debts owed to its ex-parent Sembcorp Industry, the coming rights exercise of $1.5b is expected to put into better use. It would be used to pay about $500m to Keppel for the purchase of Keppel yard assets and expertise, leaving about $1b for SMM’s  working capital. This should provide a broader leeway for more projects going forward.

Based on the closing price of SMM, its market capitalization is about $1.51b. It is grossly below the value of the mega yard that she is going to inherit. However, value does not translate to earnings. It is expected that in the next 2 quarters and maybe more that  SMM will still be suffering losses. If SMM is still not able to win sufficient projects, the share price may even fall below the rights share price at $0.08 cents. Ultimately, it is still very dependent on external factors, in particular, the crude oil price, which it has no control of.

 

With the current shares issue of about 12.56 billion shares, the coming SMM rights share issue shall see another 18.8 billion shares in the market, resulting in a total of 31.4 billion shares in the float. As a matter of opinion, it may be that SMM be removed and replaced by the CE (whose name is not known today) through shares consolidation and shares-swap. After all, SMM is no longer related to Sembcorp Industry like in the previous parent-subsidiary relationship.

 

In the light of this, I decide to make a small market purchase of the SMM shares. Should I take the rights issue, my average price for SMM shares should be slightly below 10 cents, given I do not have earlier exposure to SMM stock. It is not a bad price to start with. After all, I had made a small profit when I bought SMM when it fell from $0.20 after the 1st rights issue to slightly above $0.12 before creeping back to $0.20. However, nothing is guaranteed as the stock price can still fall below 8-cents after the 2nd rights issue if it does not thread carefully going forward.

 

After all, I will eventually have some CE shares as dividend in specie given that I am holding some Keppel stocks. In all likelihood, I will end up with small odd lots of CE stocks, which would make it extremely difficult to sell if things do not go right. While the market is still negative about SMM, it may be timely to pick up some SMM shares. If SMM shares were to be consolidated into CE shares according to my speculation, it is probably meaningful to pick up some SMM shares now. Unlike the earlier SMM shareholders, my losses going into the future should be quite contained. Certainly, it is not going to make me rich enough to present me a ticket to be with Jeff Bezos in the 1st space flight, but I think a few ‘hamcheepeng’ for Sunday breakfast may be possible. After all, buying stocks is not about all gains and no risk. It is how we take calculated risks and manage them according to our risk tolerance.

 

I hope I have fully answered to a member of InvestingNote.com why I went ahead to buy some SMM shares at this juncture when many members were still very negative about SMM stock.

Investing psychology : Averaging up

I had a very brief conversation over lunch with a friend just several weeks ago. After an exchange of pleasantries and knowing that he invests in stocks, it was natural that our talking conversation centred around stocks. I asked him if he had managed to pick up any good stock during last year when Covid-19 was its worst. He replied negative. His reason was he was trying to time to get the lowest price for a particular stock. (Frankly I do not know which stock he was eyeing.) He was then working from home and was a buyer for an electronic manufacturing company. It was possible that he missed out the purchase as it had been a relatively hectic period for corporate buyers due to the huge demand for electronic components caused by the pandemic. Despite the hectic period, he admitted that he had a little bit of time to look at the stock market.

In another instant, I came to realise a close friend of mine also invested in stocks as I was trying to what’s app to some of them to market a new online course at that time. He is working in a ‘relatively-safe’ corporate.  He divulged he had stocks in Sembcorp Industries, Keppel Corporation, SPH and maybe, one or two more. While I did not want to ask too much of his stock portfolio, it seemed that his stock investment has been quite narrow, limited to only government-linked or quasi-government type of listed companies. It might be  due to his working environment and his background. Nothing wrong with those. He told me he lost money overall, especially for SPH, which he had bought at a high average price. He asked me if SIA was a good buy, and I told him not to focus too much on bombed-out counters. We might get a very short-term gain, but fundamentally the stock price did not move very much even in the past 10 years before the pandemic. So, what made him thought that after rights issue, the bombed-out counter would rise in price going forward. The possible fund-raising exercises in the years ahead could be a black hole, which I cannot predict. Given that he was still in the red, focusing on SIA was probably not the best policy. As we know, SIA was having a bad time and SPH stock price was roiling in a downward sloping manner day-by-day in 2020. Naturally I would never even want to mention them, let alone to recommend them. I was not closely following Sembcorp Industries, but I believe it too was not exactly in a great position as well, post the de-merger with Sembcorp Marine. Of all, Keppel Corporation was probably worth a mention as he already had some shares but was still in the red as it was dropping gradually from about $9.00 following the oil price crash in 2016. At that time in the what’s app conversation, the share price was trading at around $4.50. Given his relatively ‘safe type of portfolio’ (‘safe’ from the perspective that they probably would not go bust, but certainly, ‘not safe’ given the magnitude of the losses), I told him perhaps he would consider to average down Keppel Corporation and buy new into ComfortDelgro (CDG) as there were trading below or near to their book value. I cannot say that they were trading at their lowest price, but they were trading at a ‘good price’ at that time. Just a few weeks after lockdown was lifted when stock prices were in a rage, I what’s app him again if he had bought any stocks. He told me that he did not pick up anything as he was busy at work.

In yet another conversation with a very close relative, she mentioned she wanted to have DBS shares. It was probably in September 2020 when DBS was trading just below $20 for a few days. While I was not able to give a definite answer (for I am not god) that it would not fall in the days ahead, my answer was that if she felt it was a good price, she should go ahead and buy it. If anything, manage it later. Think long-term. No need to consider too much. The fact that she called me (which she never ever did in the past) was that she believed that DBS was trading at a good price at that time. She just seemed to want to seek a second opinion that she was right. What was the situation after that?– No action on her part.

 

Nothing wrong or against any of them, but certainly, there was something common in them.  They procrastinated when they were making buy decisions on the stocks. They wanted the best price. As human beings, it is always natural that we want to buy stocks at their lowest price. We look at stocks as if we are going out shopping. Not only we want to get discounts, we want to get the best discounts (better still, a discount after a discount). Maybe, that could give us a good bragging right for our investing prowess. But this, by itself, is a limiting belief. Many may not have realised it. So what if we had bought a stock at its lowest price. If we had bought a stock at its lowest price, do we want to stop there? Assuming that one wanted to buy the stock again given its ‘great upside potential’, he definitely is not going to be able to buy at that ‘great price’ anymore. And because he is not able to buy at that great price, he waited, he procrastinated but the stock is not going to wait for him. In the end, at best, he only managed to have one good bite on the cherry. On the other hand, another person felt that he had bought at a relatively good price in the same circumstance, and bad luck, the stock price went down down further. His propensity to buy more is higher because he believed that he had already bought the stocks for a good price in the first place. And when the stock dropped further, he would have the tendency to buy more to take further advantage of a further discount unless he runs out of money. But when the stock did turn around convincingly, who actually has the last laugh?

 

Let’s take an example. Stock X is now trading at $1.50. Both A and B felt that the stock price is sufficiently low. Mr A wanted to wait further for the lowest price. So he waited. Mr B thought it was a good price, and he bought 5,000 shares. But good for Mr A and bad for Mr B, the stock price indeed dropped further to say $1.20 a month later. Mr A and B decided to buy 5,000 shares each. The share positions of Mr A and Mr B are as follows:

Let’s say, in another 2 months down the road, the stock price of Stock X turned around to say $1.80. Who actually gained more? Let’s calculate. Mr A would have gained $3,000 [5,000x($1.80-$1.20)] and Mr B would have gained $4,500 [10,000 ($1.80-$1.35)]. Even though the average price of Mr A is lower than that of Mr B, Mr B is the ultimate winner. Of course, one may argue that Mr A could have invested a quantity of 10,000 shares instead of only 5,000. Indeed. But, the fact that Mr A procrastinated to look for the lowest possible price is quite telling that he is unlikely to go beyond his comfort level to buy more. (Of course, in the real world, some would but there are definitely many others who don’t.) While this is just one simple case out of the infinite possibilities and reactions of investors and traders out there in the real world, it speaks volumes about how our mind is conditioned to the type of setting and the environment that we have been brought up.

 

I, for one, have this limiting belief as well. I used to look at the directors’ purchase price of the stocks they own gleaned from The Business Times. When they purchased a stock at say, $1.60 per share and when I purchased the same share at a lower at $1.50., I felt victorious as they purchased at higher price than me. But, it was a different playing field.  I could only, at best, purchased one board lot (used to be 1000 shares) with my limited resources but they can purchase 100 lots (or 100,000 shares) of their company stocks. When the stock rose to say $1.80, my gain was only $300, but their gain was a whopping $20k even though they had purchased the stock at a higher average price. It’s really all in our mindset.

 

In the real trading, I had such experience many times in the past and is still happening today, consciously or unconsciously. When I managed to buy OSIM at $0.086, it was a great price. I had more than the share quantity I had initially wanted to invest. It had a good run, twenty-two quarters of growth pushing the stock price to nearly $3.00 per share since its huge loss in 2008. Twenty-two quarters of growth would have translated to 5½ years of upside. It is certainly long enough time to make multiple purchases. While I am proud to have enjoyed a multiple-bagger stock, I probably would have made more if I had let go of the mindset of clinking to maintain my average price. (In fact, some people around me were even asking me to to sell during those few years given that the stock price had gone up by multiple times.) My limited resources without an active income, the thought that the whole family’s expense depended on me, and certainly, the fear that the stock could make a U-turn downwards had also imposed a huge restraint to average up on this stock. In hindsight, should I have averaged up, of course, my average price would be higher, but the gain would have been more significant in the end.

 

In the meantime, I had bought into Venture Corporation during the Global Financial Crisis at an average price of $6.876. It was definitely not the best price at that time, but it was a good price in hindsight. For a long time in the next 6½ years,  I did not made a single purchase for fear of averaging up. Only to realise that I have missed quite a huge upside gain. After all, the price of Venture Corporation did not go up significantly hovering near to $10 per share during those years, until somewhere in 2017 when it headed up for the sky landing close to $20 today. My realisation came a little too late. My average price was much higher even though I am still on the positive side today.

 

Interestingly, I had a better luck in DBS. My average price was about $12.23 after the rights issue during the global finance crises. Realising that I am missing out the big picture, I decided to buy the stock in the open-market step-by-step. Today, it has been very much better off based on the quantity at a higher average price of $14.39 compare to the original holding quantity at the much lower average price at $12.23.

It’s all in our mindset. The use of some simple arithmetic could go a long way to help us formulate the investing roadmap. Generally, if a stock is in the upward direction, averaging up may not be so bad. The only fear is that when it slammed down and we sell the stocks in a panic.

Updated : July 2021

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