Samsung Engineering announces $1.05b rights issue

Korea’s leading engineering company hopes the highly dilutive rights issue will help it to recover its profitability after a failed merger.

Samsung Engineering's battered shares were slammed again on Thursday after the industry heavyweight announced a highly dilutive W1.2 trillion ($1.05 billion) rights issue to help it turn its struggling business around.

As Korea’s leading engineering, procurement and construction company, Samsung Engineering has relied on oil and gas engineering projects, particularly from the Middle East. But such orders have dried up of late as oil prices have sunk.

Samsung Engineering's share price ended the day down 18.8% at W25,900 as investors dumped the stock after news broke of the dilutive equity raise – the third-biggest rights issue in Asia this year. 

The cash call on shareholders threatens to dilute their holdings by 49% based on the company's market capitalisation of W1.25 trillion ($1.1 billion) prior to the announcement, which is already a long way down from where it used to be.

Having hit an all-time high of W264,000 in 2011, giving it a market capitalisation of more than $10 billion, Samsung Engineering's share price has tumbled by more than 90% in the last four and a half years due to worsening business conditions and falling profitability.

In its earnings report for the quarter ended September 30, Samsung Engineering reported a 45.3% decline in new orders compared with the same period of last year. That resulted in a loss of W1.48 billion compared with a profit of W139 million in the same quarter of 2014.

Its order backlog also decreased by 21.4% year-on-year to W11.6 billion, equivalent to only 1.5 times its 2014 revenue. 

"Falling oil prices have cast a cloud over overseas order prospects," Shinhan Investment analyst Park Sang-yeon said.

Failed merger

An attempt was made last year by the holding Samsung Group to strengthen the business by merging Samsung Engineering with Samsung Heavy Industries, Korea’s third largest shipbuilder.

Believed to have formed part of group chairman Lee Kun-hee’s succession plan, the merger would have created an industrial engineering powerhouse capable of providing both offshore and onshore solutions for clients, the companies said in a statement in September 2014.

However, the $2.5 billion deal was called off two months later because of opposition from key shareholders, including Korea Investment Trust Management and the National Pension Service.

As a result Samsung Engineering will have to rely on restructuring internally to turn things around, although Samsung Heavy Industries's chief executive officer Park Dae-young has said that the company might yet revisit a merger in the future.

Cash shortage

Samsung Engineering’s $1.05 billion rights issue is set to be the third-largest of its kind in Asia this year, according to data provider Dealogic. India's Tata Motors raised $1.2 billion in the biggest rights issue this year, followed by Haitong International Securities' $1.15 billion deal in Hong Kong.

The funds raised from the cash call will help Samsung Engineering to proceed with certain engineering projects that were halted because of funding issues. Last month, the company was forced to suspend a 1,320-megawatt coal-fired power plant project in Kazakhstan because it did not have sufficient funds to proceed, chief executive Park Jung-heum said.

As of the end of June, Samsung Engineering’s total holdings of cash and short-term investments were down 8.7% at W532 billion compared with six months earlier. Its debt ratio nonetheless improved slightly to 83.1% from 84.5% at the end of last year.

The company has also yet to announce the completion of a $2.95 billion natural gas project in Saudi Arabia. The project, which is Samsung Engineering’s largest single project by contract value, was originally expected to complete in June.

In spite of its sharp share price drop, Samsung Engineering's shares are still relatively pricey compared with those of its nearest peers, such has been decline in its earnings.

Based on its last close of W25,900, the company is valued at 46.7 times its latest reported annual earnings. By comparison, larger peers KEPCO Engineering and Hyundai Engineering are trading at 35.6 times and 10.2 times earnings, respectively.

In addition to the rights issue, Samsung Engineering has announced plans to sell its headquarters, which has a net asset value of $350 million, to strengthen its cash position. In the first six months of 2015 the company also reduced its workforce by 7.4% to cut costs. 

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