Tuesday, August 14, 2007

Swiber – 2Q and 1H 2007 Results Review

Swiber has released their 2Q and 1H 2007 results yesterday, and they were largely in line with expectations and there were no major surprises. As mentioned previously, I will be focusing more on the margins and cash flows for Swiber as I believe these are the more critical aspects of the business which should be examined. From the recent contract flow and the positive announcements, it is to be expected that Swiber have managed to grow their revenue and profit base. The question now is the future prospects of the company in terms of growing not just their revenue base, but also their geographical reach, customer base, size of contracts and margins. My analysis will be in sections as follows:-

Income Statement

Revenues for 2Q 2007 grew by 232% while net profits were up by 678%.Excluding exceptional items such as disposal of fixed assets and vessels held for sale, net profit for 2Q 2007 would have been up by about 305%. For 1H 2007, revenues were up 220% and gross profit improved by 235%. This was due in part to the recognition of income from the Indonesian and Brunei Shell projects which have already commenced. A quick glance at the margins shows substantial improvement: for 2Q 2007, GP margins stood at 29.4% as compared to 2Q 2006’s 18.9%; for 1H 2007, GP margin was 28.6% against 27.3% for 1H 2006. This improvement of 10.5 percentage points for 2Q year-on-year is a result of more vessels coming on stream in Swiber’s ambitious fleet expansion program. By utilizing their own vessels, Swiber reduced reliance on third-party vessel chartering and thus improved their margins on contracts as well. Note that net profit margins are not used as they have been distorted by the presence of exceptional items; gross margins measure the returns on contracts more effectively as it involves the full costs associated with providing the EPCIC services.

The glaring figure which stood out are the finance costs as a result of taking up more bank loans (their gearing increased from 22% to about 52%). Finance costs rose an astronomical 871% from only US$97K in 2Q 2006 to US$942K in 2Q 2007. This is one of the reasons why additional leverage can hurt the income statement, and fortunately Swiber has generated sufficient cash flows from their operating activities to cover this interest payment (see Cash Flow Statement section). Adminstrative expenses also increased much more rapidly than revenues (increase of 319% versus only 232% increase in revenues), which shows that Management should focus more efforts in cost-cutting to reduce unnecessary expenses. Most companies tend to chalk up higher expenses as they grow and expand but if expenses rise disproportionately to sales, then it is a cause for concern. A small note: the Group also suffered an exchange loss of US$206K as a result of the weakening of the US$ against most other currencies (Swiber’s reporting currency is in US$).

Balance Sheet

Swiber’s balance sheet is relatively uncluttered and I did work out some simple figures to get a feel of things. Working capital stands at US$29.3 million for 30 June, 2007 as compared to US$13.1 million for 31 December, 2006; this represents an increase of 124% and it can be attributed mainly to the increase in trade receivables (a natural thing to happen as revenue has also scaled up significantly) and assets held for sale (by this I assume they are vessels held for sale). This was partially offset by the increase in short-term bank loans of US$9.0 million (an increase of 205% over 2Q 2006) and other payables. The gearing has increased significantly from 22% to about 52% as a result of Swiber taking up more short and long-term loans (cumulative increase over 31 December, 2006 is US$19.7 million, a 182.9% increase) to finance their fleet expansion. With the introduction of their US$300 million multi-currency medium term note program, this gearing is expected to increase from the current 55%. All I can say is that Swiber should watch their gearing closely and see that it does not get too high, otherwise the interest expenses will eat into cash flow for which operating cash inflows may not be able to cover.

Current ratio stood at 1.51 for June 30, 2007 as compared to 1.38 for December 31, 2006. The increase was mainly due to the increases in trade receivables and assets held for sale as mentioned before, but since these are not liquid it would actually affect the quick ratio if I were to attempt to compute it. However, taking into account that Swiber is rapidly expanding for FY 2007, I find that this is acceptable though risky.

Cash Flow Statement

In spite of the higher interest charges on bank loans, Swiber still managed to generate about US$2.9 million worth of operating cash inflows. However, it should be noted that their trade payables were lower for June 30, 2007 as compared to June 30, 2006; this may imply that they are paying off creditors faster than collecting from debtors, or it could simply be a timing difference. We will not be able to know unless we understand Swiber’s cash conversion cycle (in days), but this is just an area I am highlighting.

Most of the activity took place under investing activities. Cash of US$24.6 million was received from the disposal of vessels held for sale, while there were more purchases of fixed assets and vessels held for sale, presumably these relate to the scaling up of their operations, fleet expansion and opening of new offices in the Middle East (through the MOU) and India. The result is a net cash outflow of US$13 million.

For financing cash flows, most of the funds flowed in through the taking up of new bank loans with collaterals using cash (pledged deposits) and vessels. Some pledged deposits were also “freed up” on the sale of vessels and the net increase in financing cash flows amounted to S$13.7 million, which almost completely offsets the cash outflows from investing activities.

From this summary, it can be seen that Swiber has to generate strong operating cash flows in future periods in order to be able to service their bank loan interest and gradually reduce their leverage (by paying off bank loans). This is somewhat similar to the approach used by OSIM as they are generating lots of cash from operations (though not profits) which they are using to pay down most of their loans. A company’s cash flow situation may be very different from their profitability situation (as illustrated by OSIM) and thus far, Swiber has managed its cash well such that there was a net cash inflow of US$3.44 million. Hopefully, as the business scales up and more contracts are won, their operating cash inflows will boost their cash balances more strongly and ensure that they have enough cash to operate smoothly.

Outlook and Prospects

The CEO Mr. Raymond Goh has articulated Swiber’s three-prong growth strategy very clearly in the press release and subsequent analyst presentation. The first is to grow their fleet significantly (which they are doing) by owning 29 vessels by the end of FY 2007. In addition, they have three vessel orders planned for FY 2008 to FY 2009 in order to extend their EPCIC capabilities. The second is to extend Swiber’s network into regions which they previously did not have business, such as the Middle East, Bangladesh, China and Vietnam. Thus far, progress has been made for the Middle East and India but there has been no news of the Group trying their hand to capture a slice of the China or Vietnamese market. The final piece of strategy involves cost-cutting technology and innovative technological advancements to cater to the shallow-water oil and gas industry. This has been accelerated by the purchase of North Shipyard Pte Ltd as it helps Swiber to vertically integrate and acts as a research base for new technologies as well.

Moving forward, the future looks bright although there are things to watch out for along the way. As I have learnt in business, nothing is smooth sailing and it always pays to keep an eye on a business which you have purchased a piece of.

Next Post: My mid-August 2007 review will take place tomorrow. After that, I will be reviewing PAH's 1Q 2007 results and GV's 1H 2007 results; both of which were released today.


fishman said...

Nice! Your two recent posts are well researched and most rewarding for readers who are learning!

I have now understood why dividends are not necessary a good thing and like all if not most things in investing, everything needs to be analysed on it's own basis!

One thing I don't understand is how is it that revenue increase by 232% when net profit shot up by 678%? DOes it mean COGS went down by a lot??

musicwhiz said...

Hi fishman,

You're welcome. For Swiber, if you notice they had an exceptional item called gain on disposal of fixed assets and vessels held for sale. If you remove this then net profit increased by about 300+% only. Revenue increase was 232% so COGS did go down slightly to account for the higher profit increase. (GP margin for 2Q 2007 was 29%).

Anonymous said...

hi musicwhiz

is there a way to search for articles that you have previously written in your blog? I am looking for the pac Andes analysis that you have previously done.

thanks. CQ.

musicwhiz said...

Hello CQ,

I guess I haven't figured out a way to put a search box within my blog yet, so sorry ! Perhaps you can try clicking on the earlier posts for June and July 2007 on the right-hand sidebar, and scroll till you find it ?

I will attempt to add the search box if I can (but kind of an idiot with HTML).....:)

Thanks for visiting !