Sembcorp Marine Board is Making a Terrible Decision to buy Keppel Offshore at Current Conditons.

Disclaimer: I do not own any Keppel or Sembcorp Marine shares. However, I do monitor the marine side. Below is my opinion which is unbiased given my declared interest.

From the latest Keppel Results, my sense is that Sembcorp Marine (SCM) shareholders are shortchanged in the current deal and I feel the Board of Directors of SCM are making a very bad corporate decision.

In Keppel's latest update on its discontinued business page 40-41, the spun off entity of Keppel O&M made about s$63 mil in profits for 6 months. Cashflow wise, it is not remarkable and is likely cashflow neutral in operations even though its report shows it is cashflow negative of 120 million. In terms of book value, Keppel declares the entity has a s$5.6 billion book value.

Valuation of Keppel O&M

If we are to extrapolate, it is likely Keppel OM will earn about 130 Million per year. Based on past earning ratios prior to the oil bust, rig builders tend to be valued at 12 -15 price earnings. Maintaining such ratio, this means Keppel OM value is now about s$1.9 Billion. Giving a premium for its high book value, let's round it up to a s$2 billion valuation

If we are optimistic in the turnaround in the oil sentiments, we can price it 0.7 times book value, similar to how I put a value to Sembcorp Marine. This prices Keppel OM at s$3.9 billion.

Scheme of Arrangement Between SCM and Keppel 

In the latest scheme of arrangement, Keppel will hold 56% of the combined entity while SCM holds 44%. At current market valuation, SCM is worth $3.4 billion. This means Keppel OM is sold off at a s$4.3 billion valuation.

To me, Sembcorp Marine is making a very bad deal to purchase Keppel OM at s$4.3 billion when it is only able to make s$100-200 million in profits

For a fair deal, it should be a ratio where Keppel holds about 37-53% of the combined entity, while SCM holds about 47-63%.

If Keppel is so confident in the value of Keppel OM, it should conduct a sale tender to global investors at $4.3 billion. However, I feel there will be few if not no takers with only Temasek the likely only bidder for pride.

Given the latest financial results produced by Keppel Corp, it shows the O&M business SCM wants to take over is definitely not worth $4.3 billion. The Board of Directors for SCM  has to review the deal, as it is not of good value to SCM. It makes me wonder if SCM's directors are doing a good job being independent directors.

In my view, a 50-50 ratio is the lowest level SCM board should agree to, anything more is a bad deal.

Why Sea Group will Survive Despite Competition from Alibaba and Tencent

In South East Asia, many of us are aware of "Sea" as it once held the title of the most valuable company in Singapore as well as its "Shopee" brand and jingles.

Competition from Alibab and Tencent

Sea is large in 2 aspects- it has a sprawling gaming, esports in Garena and e commerce brand in Shopee. Garena's games are one of the most downloaded in the world.

However in each segment it has a competitor in the form of Tencent (Gaming/Esports) and Alibaba (Lazada)

China Government's Blunder in Regulating Tech Companies will result in China Losing Out

While the giant 2 has deep financial pockets, the major obstacle is their own government that has been reducing their their profitability and cashflow generation ability. As a result, while Tencent and Alibaba has been fiercely competing with Sea in the respective segments in South East Asia, Sea has been standing its ground and retaining the market leader in both.

Truthfully, without the blundering China Government, Sea would have likely been taken out and tethering to bankruptcy due to its loss making ways. However, thanks to China, Sea's strong execution has enabled it to fight 2 giants who each have one hand tied behind their back in South East Asia market. That is quite commendable.

To Bet on South East Asia's Growth - Sea is the choice, not Alibaba or Tencent

Today, I came across a SeekingAlpha Article titled "Alibaba Is Making The Right Moves"

In it, it wrote Alibaba's international e commerce revenue is growing due to its presence in South East Asia, however, I disagree as Sea's growth in e commerce for this region is faster than Lazada's still. In short, the e commerce pie is growing but Alibaba is not capturing it as fast as Sea Group because it is distracted by its own government hindering it in Mainland China.

It is the same for Tencent as well where Huya, its e-sports subsidiary, is being obliterated by the communist government to the extent it is bleeding losses. This is why Sea Group is definitely the bet if an investor wishes to ride on the growth and not Tencent/Alibaba that I feel will flounder in their South East Asia expansion (similar to how they had failed in Europe)

Valuation of Sea Group is Rich

No doubt i have discounted Alibaba and Tencent's presence in South East Asia, however in some segments, Sea has local competitors such as Go-to and Grab. Given how Alibaba is being distracted by China, Go-To is likely going be a distant third. Grab is going to be Sea's main rival.

Sea's valuation is now close to fair value and as written in my previous article, i would prefer a higher margin of safety before investing. Long term wise, I feel Sea Group will survive because the giants in China are hindered by their blundering government. As long as China is not able to keep its house in order, Sea Group has a high probability of survival and being the market leader. 

The Second and Third Highest Paid CEOs in Singapore Comes from an Unexpected "Small" Company

Recently, I read an article from Dr Wealth about the highest paid CEOs among the listed SGX companies. The article is currently factually wrong. There are two entries he missed. 

Rank	CEO / Key Director	Company	Total Remuneration
#1	Piyush Gupta	DBS	$13.6m
#2	Dora Hoan Beng Mui	Best World Intl	$12.7m
#3	Doreen Tan Nee Moi	Best World Intl	$12.7m
#4	Kuok Khoon Hong	Wilmar Intl	$11.6m
#5	Wee Ee Cheong	UOB	$10.9m

Of course this article is not to point out the wrong facts of a fellow investment blogger, but instead point to the questionable corporate investor governance of Best World International. To me, it seems the company is cutting off the riches to minority shareholders by reducing the dividends to zero while the majority shareholder who are the above 2, earn a large amount of wealth increasing salary while dividends are eliminated from all shareholders despite a cashflow positive business which is increasingly profitable.

Relative Size of Best World to Peers

Compared to the other three listed companies mentioned, Best World's net profit or revenue is not even 10% of the other 3 listed companies. However, its two co-chairwomen earn the same region of pay, with only DBS CEO Piyush Gupta earning more than them.

Even in its peers in the same industry such as Herbalife who earns 10 times their profit or revenue. its CEO earns less than each of the co-chairwomen.

How were Their Remuneration Benchmarked?

This is a question I am intrigued. Comparable large companies in their industry (such as Herbalife) do not pay their CEOs/Chairman that high and if we were to benchmark against all the listed Singapore companies, they are the second and third highest despite the business only being 10% the size of their SGX peers.

I am curious to how the Independent Board of Directors came to this decision.

The two Best World co-chairs salary is 20% of the company's net profits, while the other CEOs in the top 5 earn less than 2% of their respective company's net profits. Herbalife pays its CEO less than 2% of their respective company's net profits as well. 

History of Remuneration

Best World International's increase in remuneration for its 2 co-chairwomen coincided when the company was suspended from trading by SGX. This is because the SGX regulators found its business model questionable. While it was suspended, the company decided to cut off its dividends to shareholders despite increasing profits; while at the same time increased the pay of the 2 co-chairs who were majority shareholders and would have received dividends if Best World International had continued to pay it.

Given the increasing profitability and continuous high pay of its key management, I am curious to how the Independent Board of Directors came to this decision of suspending the dividends.

Minority Shareholders have only One Low Price - $1.36 to Accept

Due to its suspension, minority shareholders are now only able to encash by an off market purchase exercise the company is offering at $1.36. This was the lowest share price traded in the prior 6 months, valuing the company at single digit price-earnings ratio and is about 20% lower than what could have offered according to its share buyback mandate.