Costly lesson for investors as SembMarine stock plunges
Goh Eng Yeow
Wed, Oct 24, 2007
The Straits Times
THE prospect of huge foreign exchange losses at SembCorp Marine (SembMarine) is not just an acute embarrassment to one of Singapore's elite blue-chip groups, but also a stark warning that it may not be all smooth sailing in the red-hot marine and offshore sector.
The debate is raging over how a respected top executive, Mr Wee Sing Guan, could have single-handedly racked up hundreds of millions of dollars in losses in unauthorised trades undetected.
SembMarine's stock dived 86 cents to $4.74 yesterday.
But investors should also be asking if shipyards have been handling the potential risks involved in executing complex contracts properly - first highlighted by The Straits Times in July.
One big challenge for firms like SembMarine can be stated simply: Its contracts are mostly priced in US dollars, yet the work is largely being carried out here.
As well as Singapore's high cost base, there are added complexities like the rising cost of steel, and exchange risk from the rapidly falling greenback as financial markets sink into turmoil this year.
That has spelt tremendous cost pressures for all rig builders in Singapore. They must not only master a demanding trade - building complicated structures for the offshore oil industry - but also be savvy enough to navigate an extremely complex financial world.
So while it is music to the ears of investors to learn that SembMarine has won more than $5 billion worth of orders this year, it also means the group faces an even more herculean task to manage an order book mostly priced in a weakening greenback.
True, the dollar has fallen only 4.4 per cent against the Singapore dollar over the past 10 months, but a firm caught on a wrong bet on its movements faces horrendous losses.
And adding to the heady brew is sky-high market expectations of SembMarine and other shipbuilders. They have found their way to the 'buy' lists of most research houses because of the stream of multimillion-dollar contracts they keep landing.
Early this month, one foreign analyst described SembMarine in such glowing terms as 'growing earnings, experienced and prudent management and attractive order book prospects'.
Indeed, some market observers are wondering if the sky-high expectations of investors drove Mr Wee, SembMarine's former director of group finance, to take unacceptable and unrealistic risks. He is certainly not another Nick Leeson, whose wild gambles in the futures market in Singapore caused the collapse of Britain's Barings Bank more than a decade ago.
Mr Wee has a proven 33-year track record with the group as he slowly worked his way up to top management.
A merchant banker, who worked with him on the listing of SembMarine's then-associate Jurong Technologies some years back, described him as being 'careful to a fault', double- checking every detail in the firm's listing prospectus.
At SembMarine media lunches, Mr Wee would eat, keep to himself and not utter a word unless he was spoken to.
Yet he is now at the centre of a forex fiasco that has become the talk of Raffles Place and beyond.
Some analysts have estimated that Mr Wee would need to rack up unauthorised trades worth billions of dollars to suffer unrealised losses of US$165 million (S$214.3 million). This does not include another US$83 million already paid before the transactions were discovered.
They ask if he was out of his depth, dealing in financial derivatives that only financial rocket scientists can understand.
But such eye-popping figures as these should have triggered alarm bells in the risk management system that presumably exists in a group of SembMarine's size.
SembMarine is not completely ignorant of the risks involved in forex trades, having devoted an entire section in its latest annual report to the subject.
It spoke of the need to manage the 'rapidly declining US dollar vs the Singapore dollar', where 'the forward net US dollar flow was closely monitored and the hedging proposal, approved by the board, was executed'.
In amassing billions of dollars of contracts, SembMarine may well have been the victim of its own success.
And its forex losses can also serve as a grim reminder of the warning by legendary investor Warren Buffett that derivatives are financial weapons of mass destruction.
Some market observers are wondering if the sky-high expectations of investors drove Mr Wee to take unacceptable and unrealistic risks in foreign exchange transactions. The challenges shipyards face in executing complex contracts had been highlighted by The Straits Times on July 30.
