Sembcorp Marine falls 8% on ‘alleged irregularities’ probe. More uncertainty ahead?

What happened?

Sembcorp Marine’s share price fell by 8.0% to close at S$0.104 on Friday 24^th March. 

The share price decline came after the company announced that its subsidiary Estaleiro Jurong Aracruz (EJA) is under investigation for “alleged irregularities”.

Let’s take a further look at what this could mean for the company and its share price. 

What you need to know about Sembcorp Marine share price fall

#1 – Sembcorp Marine subsidiary under investigation

According to Sembcorp Marine, the Office of the Comptroller General of Brazil (CGU) has initiated a preliminary administrative liability proceeding against its subsidiary Estaleiro Jurong Aracruz (EJA). 

The CGU is Brazil’s anti-corruption agency “responsible for defending public assets” and “acts to prevent, detect and punish cases of corruption”

These relate to investigations of alleged irregularities practiced by EJA, Sembcorp Marine’s shipyard in Brazil which started operations in 2014.

However, there were no further details provided for now. Sembcorp Marine is also unable to make an assessment on how this could potentially impact the company. 

#2 – Renewed concerns on Brazil operations

Sembcorp Marine has faced several brushes with Brazilian authorities previously. Here’s a quick recap of what happened in the past.

• 2012: Sembcorp Marine’s subsidiaries secured a number of rig construction contracts with the subsidiaries of Sete Brasil

• Feb 2015: Various media reports that Petrobras’ former engineering manager had made statements that illegal payments had been made in connection with contracts into by Petrobras and/or Sete Brasil

• July 2019: Brazilian authorities executed a search warrant on EJA in connection with the ongoing investigations

• Feb 2020: Martin Cheah, former president of EJA, charged in Brazil with money laundering and corruption. The charges are in his personal capacity and not against EJA. Martin Cheah’s employment with Sembcorp Marine had been terminated in 2015.

#3 – What happened at Keppel Offshore & Marine

Keppel Offshore & Marine (Keppel O&M) was previously investigated over bribes for contracts in Brazil. 

In December 2017, Keppel O&M announced a fine amounting to US$422 million as part of a global resolution with authorities in the United States, Brazil and Singapore. 

The resolution relates to US$55 million in corrupt payments made by a former Keppel agent, Mr Zwi Skornicki in Brazil.

Between 2001 and 2014, Mr Zwi Skornicki made “improper payments” to Brazilian government officials with regard to Keppel O&M projects with Petrobras and Sete Brasil. 

These payments were made with the knowledge or approval of former Keppel O&M executives. 

In January 2023, the Corrupt Practices Investigation Bureau (CPIB) issued stern warnings to six former senior management of Keppel Offshore & Marine (KOM) relating to the bribery payments. 

What would Beansprout do?

As recent as in October 2022, Sembcorp Marine won an order worth US$3.05 billion from Petrobras for the construction of an oil production unit.

This was seen as a sign by some investors that Sembcorp Marine was still able to secure new work in Brazil. 

However, this relief proved to be short-lived. Sembcorp Marine’s share price fell sharply following the completion of the merger with Keppel Offshore & Marine, with a selldown in the large number of shares issued to Keppel’s shareholders. 

Since its peak of S$0.152 in early December 2022, the share price of Sembcorp Marine has fallen by more than 30%.

The latest negative news flow appears to have led to renewed investor concerns about Sembcorp Marine’s operations in Brazil. 

The uncertainty could continue to drive weaker sentiment towards Sembcorp Marine until there is greater clarity on the investigations.