Sunday 27 June 2021

Letter asking about Sembcorp Marine's pricing of rights- to SIAS

Reflecting on Sembcorp Marine's recent price action, I have sent a letter to SIAS as they are the only authority to help retail investors. 

Below is my letter to SIAS, for Sembcorp Marine Shareholders, please feel free to send it to SIAS as a form of collective action against Sembcorp Marine's Corporate Action

I will like to request your assistance to raise a query to Sembcorp Marine due to its recent Corporate Action.


Sembcorp Marine has announced a rights issue of 3 rights for every 2 shares at 8 cents. I find this share issue unfair to minority shareholders and would request your team to raise it.


Firstly, while we understand Sembcorp Marine is raising money for its business, I question the huge discount required for 2021’s right issue. In this round of rights, the discount to TERP for the last day (35.7%) and 5- day VWAP (36.2%) is much higher than 2020’s; in 2020, it was 35.1% and 21% respectively. This does not make sense because SembCorp Marine is (i) now in a stronger financial position than its pre-2020 rights issue, (ii) the industry has become better and (iii) Sembcorp Marine has a higher net cash balance. All these points to the fact that TERP could have been done at a 20+% discount value.


Secondly, while Sembcorp Marine may argue that 2021 rights issues had to be priced lower due to investor’s fatigue in the company’s frequent rights, it points to the question of the need to raise $1.5 billion. The cash burn rate for SCM in FY 2020 was not high (about $850 million) during a disastrous COVID year. With SCM, recently raising $500 mil in green bonds for its projects and a cash balance of $770 million, it is definitely plausible SCM could have raised $850 million and be able to last to end 2022. SCM could have staggered the cash raising to smaller tranches on an annual basis. This would allow minority shareholders (who do not have the financial backing of a country’s past reserve) to participate in SCM’s rehabilitation.


Based on these two pointers, I hope SIAS could flag them as a query to SembCorp Marine about (i) how its has priced the discount to TERP and (ii) on the amount raised.


Thank you.

Thursday 24 June 2021

Semb Marine Latest Rights- Bitter For Shareholders but Sweet Money Making Opportunity for Temasek

 Today, SCM announced an unexpected 3 rights for every 2 shares at the price of $0.08.

In my view, this rights exercise is an unnecessary corporate action and a maneuver by Temasek Holdings to profit off minority shareholders.

Why is it unnecessary

Sembcorp Marine has a strong balance sheet since its previous rounds of rights raising since balance sheet is not massively over levered and has a cash pile of hundreds of million.

Rights Exercise

Existing Shareholders are going to be fatigued by the amount of rights and be constrained by their own financial resources.

In 2020, SCM did a shares issue of 5 new shares at $0.20 for every one share held. In 2021, it is now proposing 3 new shares for every two shares held at $0.08. Let's break it down with an example. Assuming in April 2020, you bought 10,000 shares at $0.70 at a cash outlay of $7,000. After the first rights issue, you would have 60,000 shares and have to fork out an additional $10,000. 

With the upcoming round of rights, the 60,000 shares results in 90,000 more shares to be subscribed at the cost of $7,200. Therefore, for just a $7,000 initial outlay, you have to put an additional $17,200. That is throwing another 250% more cash into your initial SCM investment. It is very difficult for investors to fork out so much cash in just one year.

2021 rights issue is priced at a higher discount than 2020 Rights Issue which dilutes Shareholders

In this round of rights, the discount to TERP for the last day (35.7%) and 5- day VWAP (36.2%) is much higher than 2020’s; in 2020, it was 35.1% and 21% respectively. This does not make sense because SembCorp Marine is (i) now in a stronger financial position than its pre-2020 rights issue, (ii) the industry has become better and (iii) Sembcorp Marine has a higher net cash balance. All these points to the fact that TERP could have been done at a 20+% discount value.

 Many Ordinary Investors wont be able to keep putting in money unless you are....

Temasek. No doubt SCM is issuing new shares at a discount to the tangible book value; however, I don't think many small time investors will be able to benefit from it due to the limited cash they have

It will only benefit Temasek who has deep pockets and the reserves of Singapore. Temasek has the opportunity to subscribe to the excess cheap shares, up to 67.0% which tells you how willing they are to buy additional SCM shares on the cheap.

All in all, this is a bad rights exercise where SCM is doing it from a position of strength. It is totally unnecessary. The latest corporate actions benefits Temasek tremendously and I will definitely vote against it.

Saturday 5 June 2021

Avarga, a Potential Gem?

One company that got me interested is Avarga (U09 stock code). The company has three business segments in (i) Building Construction in Canada/US, (ii) Paper Mill business in Malaysia and (iii) Power plant business in Myanmar. 

(ii) and (iii) are stable business which have seen little growth and a fall in profits during the last COVID hit year. 

Taiga Building Products- a 69% owned subsidiary listed on Canadian Exchange

This segment interests me. Due to the bumper year in Canada and US housing starts, Taiga's profit grew tremendously and the company is trading at 3 time PE on the stock exchange. Analysts in Canada are predicting that Taiga Building products profit was only a one-off event. In the past, Taiga traded at a band of 6-8 times Price Earnings in the Canada Exchange. Its current market cap is valued at C$313 million.

However, I think Taiga is due for a re-rating soon because the housing market in Canada and USA is still booming and Taiga's latest quarter results showed no sign of slowing down with profits higher than the corresponding quarter of last year. This might mean that Taiga's elevated profits will remain for a period of time.

Avarga Share buyback

In the month of May 2021, Avarga had conducted share buybacks at s$0.305-0.315 in the open market. This is a signal that the company thinks its shares are cheap. This has been ongoing since the start of this year and despite the share price having doubled over the year.

In addition, Avarga's dividends has increased as well and it now stands at 1.9 cents based on the past 4 quarters of dividends. At a share price of 30.5 cents, this gives a dividend yield of 6.2%. While Avarga has a sustainable dividend policy where it pays only 40% of its earnings as dividends, it shows that earnings is a function of the dividend yield. Avarga had increased its dividends a lot due to the growth in earnings at Taiga Building.


I am bullish on Taiga's Building Products due to the housing boom in the US and Canada. I did not invest directly because I do not have access to the Canadian Market; hence my interest in Avarga. With Avarga's dividend policy and frequent share buybacks this year, it is a sign that the company is undervalued.

I have not invested in it but am likely to start investing capital due to its high dividend yield and share buybacks.

It is difficult to ascribe a valuation to Avarga because it depends on the North America housing market which has just started to expand. But assuming the housing market is as hot as it is now, this means Taiga can be re-rated to 6-7x PE, a doubling in share price. To avarga, it means an addition of SGD$220 million in value. This represents a 77% upside to Avarga's current market cap of SGD$285 million.

Wednesday 2 June 2021

Are China Banks that Cheap?

One industry that intrigues me is China's Banking Sector. China banks are currently priced at dividend yields of above 6% with price earnings ratio of less than 8 times. In comparison, the Singapore banks, are priced at dividend yields of 3-4% and price earnings ratio of 14-17 times.  

Based on these metrics, if China banks are to be of the same valuation as Singapore banks, their share price has to double.

Reasons why China Banks have such low valuations

A quick review online shows many analysts are skeptical about China banks' assets and their "earnings". They point to the lending bubble in China with claims that the Chinese banks are financially engineering their loan portfolio to report a low "non performing loans (NPL)" ratio of 1+%; this ratio is similar to what Singapore banks report. This allows China banks not to report a large credit provisions which will affect their P&L annually.

Online sources claim that the NPL of China loans are in the region of 10%, as opposed to the 1+% reported.

The skepticism of China's banks financial reports are the main reason why these banks valuations are that low.

Do I believe the online sources? Financial Ratios vs Credibility

This is something I have to think: whether to trust China banks' financial reports while weighing against the attractive valuations of these banks at annual dividends of 6 to 8% (Bank of China is providing 8% yield, while the rest are giving 6% yields). In addition, I notice that the Chinese banks earnings are stable with slight growth in earnings year on year. My evaluation is that there is a 50% upside when more individuals start to believe the financials of the banks or are attracted to these bank stocks.

Therefore, I plan to position a maximum of 2% of my overall portfolio in the Chinese banking sector. Above this, it might be too much of a risk.

I have started investing in the largest two banks in China - ICBC and CCB from today. Currently I have about 0.5% of my portfolio in the Chinese Banking sector. It will serve as my dividend stocks with some upside to be gained.