Solitaire still haunts SembCorp

An old, disputed contract from more than a decade back is still haunting SembCorp. Excerpt from a Dow Jones Newswires interview with SembCorp deputy chairman and chief executive Wong Kok Siew last week:

In 1993, SembCorp won a S$230 million contract from Allseas Marine Contractors SA to convert the Swiss company's bulk carrier Solitaire into a pipe-laying vessel. When SembCorp allegedly failed to finish the job on time, Allseas sued.

After years of legal wrangling, SembCorp in 1998 set aside S$150 million in provisions for the contract. In late June, however, it warned that the provisions may not be sufficient, after a U.K. court ruled against the Singapore company. Hearings are underway to assess the amount awardable to Allseas; the court will hear SembCorp's counterclaims in 2005.

While saying that SembCorp's operating performance in 2004 should be better than in 2003, Wong cautioned during the group's results briefing Wednesday that this was "excluding any impact of the outcome of the Solitaire arbitration."

SembCorp's group financial officer, Lim Joke Mui, assured, however: "Our shareholders' funds is worth S$2 billion. I don't see why we can't bear the impact of Solitaire."

To maintain double-digit earnings growth, SembCorp is seeking to grow its overseas operations...

Acquisitions, however, will be "opportunistic buys" at the "right price" and SembCorp won't be raising funds in the market, Wong said.

No doubt, the company will try to project confidence in its ability to handle the fallout from the legal dispute. Others are not so sure.

In a recent research note, Citigroup Smith Barney's Lim Jit Soon estimated that if the company compensates Allseas with a payment of S$529 million, the group's gearing would rise to 1.1 times. At half time, its net gearing ratio was 0.6 times.

"While the rise in gearing is not expected to threaten the financial viability of the group, there will be questions surrounding a cash call to bolster its balance sheet for future growth," Lim wrote.

The Solitaire case could be seen as a reminder that with more business comes more risk. So, despite Wong's assurance, the company may have to seriously consider a cash call if it insists on a growth-oriented strategy.