Tuesday, August 07, 2007

Swiber – Acquisition of 100% of North Shipyard Pte Ltd

On August 6, 2007, Swiber announced the acquisition of a 100% interest in the share capital of a company North Shipyard Pte Ltd for a sum of S$10.3 million (to be confirmed contingent upon assessed tax payable for the acquiree company). The acquiree company is in the business of building and repairing ships, tankers and other ocean-going vessels. This acquisition is set to complement Swiber’s operations as it provides a base for the Company’s vessel fleet and also allows Swiber to grow their technical design capabilities for more specialized vessels.

Financial Effects and Comments

The consideration for the S&P agreement is S$10.3 million subject to the confirmation of adjustment for provision for tax in North Shipyard’s books. The entire sum will be paid in cash and will be funded from internal resources, thus there will be no additional debt burden or equity dilution. The acquisition will make North Shipyard a 100%-owned subsidiary of Swiber Holdings, which means that upon consolidation, all items in North Shipyard will be added on a line by line basis to obtain the consolidated financial statements for Swiber. I expect this to take effect from August 2007 onwards.

As stated in the announcement, the NTA of North Shipyard is S$6.26 million and the unaudited net profit is S$3.58 million. This means that at the purchase price of S$10.3 million, Swiber is paying for a price-to-book of 1.65 and price-earnings of 2.88 times. This would imply that Swiber can recoup their investment in North Shipyard within 2.88 years; and this is indeed a very attractive valuation at which they purchased this company. The profits will add to their bottom line and boost this for FY 2007, while the NTA may also possibly rise once Swiber begins pumping assets into its new subsidiary.

Operations Analysis and Comments

In terms of strategy, Swiber is trying to move up the value chain with this acquisition as they have found a complementary business in North Shipyard which can integrate with their existing business. Mr. Raymond Goh mentioned that Swiber is positioning itself to become a “top-notch offshore oil and gas specialist”; and it is doing this through improving its margins by moving into higher value-added vessels specially catered for Asian waters, expanding its vessel fleet and vertically integrating their operations. With the new shipyard, Swiber need not rely on outsourced third-party support for the repair and conversion of their vessels. This would mean lower costs and faster turnaround time as there may be time constraints imposed by third-party shipyards.

The importance of project co-ordination and control cannot be over-emphasized for a company such as Swiber. From the recent LOI wins, one can see that some of these contracts are to be executed within a period of 2-3 months on average; thus it is important for the Company to maintain control over its vessel deployment so that they can fulfill their contractual obligations. Thus far, the risk for Swiber is the ability to deliver on their contracts, as they are still a growing company which is in the midst of rapid expansion. I believe that Management is trying to mitigate this risk and reduce it by procuring a company which will allow them to have greater operational control over their vessel fleet. For a project-based company like Swiber, control over processes and costs is important to be able to allow them to fulfill contracts (thereby gaining the confidence of customers and encouraging repeat business) and improve their profit margins (by focusing on in-house conversion and repair activities instead of the more costly option of outsourcing).

Conclusion and Outlook

As detailed above, this acquisition is expected to bring tangible as well as intangible benefits for the Swiber Group of companies. The Management has a long-term vision for growing the company and I am pleased with the foundation that the Company is building in order to establish a foothold in other countries. The key risk is of course the rate of cash burn for the company and whether they can use cash efficiently enough to grow earnings and to ensure a ready cash inflow to cover operations. Thus, in the upcoming 1H 2007 results release, I will be focusing my attention more on their margins and their cash flow statement rather than the absolute profit figure (which should surely be higher as a result of so many new contracts for FY 2007 as compared to FY 2006).


DanielXX said...

On Swiber:
I actually think Swissco at 1.10 is a good bet now if you like Swiber. If you work out its holdings of Swiber shares, its next set of results coming right up will feature a highly-upgraded NTA based on its Swiber investment.

Shhh... don't tell anyone. Work out the numbers to convince yourself.

musicwhiz said...

Hi Danielxx,

A pleasure to have you visit my humble blog. Thanks for commenting on Swiber and Swissco, but I think I will probably hold back for now as I feel Swissco is not geared up for much expansion in the near future.

The reason I feel that way is cos I read an interview with the CEO of Swissco back in The Edge a few weeks back and apparently, he is quite contented to do things the way he has always done them. From the interview, I did not detect any drive or passion to expand and keep up with the times. Perhaps it is a good thing that he is laid-back as this means less risk of venturing into unfamiliar territory and losing focus, but sometimes resting too much on your laurels can mean that the competition may eventually overwhelm you.

From that angle, I don't think I am ready to invest in Swissco even though I acknowledge your point that their NTA (and income statement) will be boosted by a fair value gain for Swiber's share price at market value. I guess I tend to look more into the long-term prospects for the business and Swissco does not give me the comfort of having a wide moat and consistently high ROE and increasing EPS.

Thanks and cheers !

ziwen1 said...

Hi musicwhiz,

Many congrats to a really outstanding blog you've got here! Up-to-date information, regular updates, no-nonsense neutral, balanced analysis without any sniff of koyok-selling. I think the only short-coming is the limited number of companies covered! But then again, better to put your eggs in a few "sure" baskets.

Well back to Swiber, like yourself, I bought at a cost price of 90.5 cents at beginning of year. However, I panicked-sold in the last few days' turmoil at $3.04.

Actually considering now whether to buy back or not, given e apparent turnaround in mkt. But like u have mentioned on so many occasions, Swiber is trading at a high PE, even with the recent correction, and it depends on to what extent we trust the management to be able to deliver on the promise.

Any help u can render?

Thanks once again!

musicwhiz said...

Hello ziwen1,

Thanks for your compliments, it's like a hobby for me to keep track of my investments and to analyze the underlying business. I truly enjoy what I do even though my wife complains it takes up too much of my time !

Good to know you made more than 200% profit on Swiber when you sold it at $3.04. However, the problem with selling is that you will find it almost impossible to buy it back at the original price (i.e. 90.5 cents) which you paid for in early FY 2007. As mentioned, buying at a higher price increases your risk as it leaves you with little margin of safety should difficult business conditions "hit" the company. The most important thing to learn from this is to control emotions when investing and focus more on the business aspect rather than the price aspect.

Right now, I would suggest for you to wait till the 1H 2007 results are released. This would provide more clarity on the company's earnings growth, margins, cash flow usage and also Management's plans for the future. A lot of future growth and potential contract wins has already been factored into the current price. You may wish to review Management's promise of better margins and entrance into new markets to see if they really can deliver. Only time will tell. If you wish to re-invest in the company, the only choice you have is to wait for Mr. Market to be manic-depressive and sell you the business at a wonderfully low price. I feel that anything below S$2 is a very good buy as it gives adequate margin of safety.

Hope this helps !