Wednesday, September 05, 2007

Swiber – Acquisition of 4 Vessels for US$70.6 Million

On August 30, 2007, Swiber announced the acquisition of 4 vessels in order to bolster their current fleet. Their wholly-owned subsidiary Swiber Engineering will purchase 2 vessels each from Pacific Crest Pte Ltd and Pacific Ocean Engineering and Trading Pte Ltd for a total consideration of US$70.6 million, excluding certain owner-furnished equipment. These vessels include one 400 ft submersible barge and three accommodations barges measuring between 328 to 371 ft. The delivery dates for the barges are between 4Q FY 2007 (for the submersible barge) to 1Q FY 2009 (for the other 3 accommodation barges).

This is a very clear indication that Swiber is intending to build up their fleet and is “on the warpath”, ordering their first wave of vessels for FY 2008 through FY 2009. According to the company’s plans, they also intend to add a second wave of vessels to continue the company’s growth plans, and have so far raised a substantial sum of money in order to pursue this initiative. Below are the moves taken by the company so far in securing immediate cash for expansion:-

1) May 10, 2007 – Sale and Leaseback transaction for US$87.5 million (about S$133 million) for 4 AHTS and one pipe-lay barge to be delivered between August 2007 and December 2008.

2) June 26, 2007 – Private Placement by Swiber of 55.35 million new shares of the company to raise approximately US$79.2 million (S$120.4 million) for fleet expansion.

3) August 24, 2007 – Inaugural bond issue of US$71.4 million (S$108.5 million) to insurance companies, asset managers and banks under their S$300 million multi-currency term note programme to raise funds for expansion.

4) September 4, 2007 – Interim announcement made by the company on a second sale and leaseback transaction, this time involving 2 AHT, 2 AHTS and one pipe-lay barge. The value of this transaction was not disclosed as yet but it will probably rake in around US$80 million to US$90 million going by estimates from their first sale and leaseback.

From bullet points 1 through 3, it can be seen that a total of US$238.1 million (about S$362 million) has been raised in just 4 months alone in order to prepare Swiber for their fleet expansion exercise. Considering that the 4 new vessels ordered only cost US$70.6 million, that still leaves them with about US$167.5 million worth of cash to deploy. This is not counting in another potential US$80 million from the second sale and leaseback transaction which will probably be concluded around November 2007. Remember though, that Swiber will have to pay about S$2.4 million in interest expenses every year from FY 2008 onwards, but this should not put much of a strain on their cash flows assuming that they generate enough cash from operations.

The major catalysts for Swiber’s growth now will be in securing more contracts in their established regions, while at the same time continue to bid for larger contracts in areas which they intend to expand into. An expanded fleet will definitely enable Swiber to control their costs better and improve project co-ordination and completion, thus ensuring satisfied customers who will (hopefully) give repeat business. A key concern is whether the company has the ability to grow the business along with their fleet; otherwise they may be saddled with debts and operating expenses relating to their new fleet but with no corresponding income. That would be the worst-case scenario, of course. But a value investor should always be prepared for such scenarios, thus I insist on the margin of safety all the time.

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