Wednesday, November 14, 2007

Swiber – 3Q 2007 Financial Review and Analysis (Part 1)

Swiber released their 3Q FY 2007 financial statements today, and I will proceed with Part 1 of the review and analysis. Part 1 shall focus on the Income Statement and Balance Sheet items while Part 2 will talk about the Cash Flow Statement, strategies and prospects for the Group.

Income Statement Review

Swiber reported an increase in revenue of 55.3% for 3Q 2007, up from US$29.2 million for 3Q 2006 to US$45.4 million. Recall that the Group had secured several LOI which were announced from May to July 2007 which pertained to the third quarter, and revenues were also positively impacted by the recognition of the Brunei Shell deal which is ongoing till FY 2008. An important thing to note is that gross margins had improved from 23.2% for 3Q 2006 to 34% for 3Q 2007, which is a very significant 10.8 percentage point increase. This is in line with Swiber’s assertion that using their own vessel fleet can help to reduce operational costs and help to streamline project delivery and scheduling. The results of Swiber’s lower reliance on third-party chartered vessels has pulled up their GP margins and their 9M 2007 GP margin stands at 31.3%, which is still a significant improvement over 9M 2006’s GP margin of 24.6%. Moving forward, as more of the newbuilds come on-stream, we should see gross margins improving further (or at least being maintained at current levels).

Profit after taxation stood at US$19.6 million for 3Q 2007, which was 249% higher than 3Q 2006’s net profit of US$5.6 million. However, part of the profits are made up of gains on disposal of assets held for sale of US$7.772 million. After removing this, core business profits stand at US$11.87 million, which is still a 111% increase over 3Q 2006. The strong profit surge can be attributed to contracts of higher value as well as better margins (margin expansion) as a result of utilization of Swiber’s own vessel fleet. For 9M 2007, net profit was US$21.0 million (net of exceptional gains), which was 193% higher than the net core earnings of US$7.16 million for 9M 2006. If we annualize Swiber’s core earnings of US$21 million, we will get US$28 million (or about S$40 million). Using a share capital base of 424.35 million shares, annualized EPS will be about 9.42 Singapore cents. At the current market price of S$3.36, historical PER will be about 35.6 times. I will be doing a projection for forward PER in my future postings.

Balance Sheet Review

Swiber’s balance sheet has undergone several key changes as a result of a share placement exercise and a debt (notes) issue. Most notably, cash and bank balances has surged from only US$11.5 million for Dec 31, 2006 to US$133.6 million, and this will be further explained in the Cash Flow Statement review. Trade receivables has increased nearly 2.4 times which is in line with the increase in the top line for the Group. Assets held for sale has increased nearly 9-fold as the Group has invested heavily in building up its vessel fleet over the last 9 months of FY 2007. For non-current assets, note that Swiber now has joint venture partners in Brunei and India, thus the US$4.4 million represents their portion of the capital injected into these JV. The current ratio stands at 2.83 for Sep 30, 2007 versus 1.38 for Dec 31, 2006; and this is mainly attributable to the large increase in cash reserves (a current asset) without a corresponding increase in current liabilities (the bonds are classified as long-term liabilities).

Trade and other payables has increased too in line with the increase in business activities, and this has caused current liabilities to rise more than 200% to US$86.4 million. Swiber has done a commendable job of keeping most of its new liabilities as long-term ones, thus deferring the principal repayment of the loans as well as bonds till their EPCIC business has got a more secure foothold. For non-current liabilities, bonds comprise US$71.1 million and this will be the main bulk of debt which will incur interest expenses (i.e. higher finance costs) for the Group moving forward. Note that finance costs in the Income Statement had only increased 364% for 3Q, which I feel has not fully captured the effects of the increase in bank borrowings and the interest on bonds. The Group’s debt-to-equity has increased to 0.61 from 0.23 as at Dec 31, 2006. Moving forward, it is imperative that the Group build their business sufficiently to ensure a good interest expense coverage from operating cash inflows.

Swiber – Clinching of Maiden US$25 Million Drilling Contract

Just yesterday, Swiber announced that they had clinched their maiden contract for offshore drilling works for a series of wells in the Gulf of Thailand. This comes just days after the company had announced the incorporation of a new 90%-owned subsidiary Swiber Offshore Drilling Pte Ltd and a new wholly-owned subsidiary Black Gold Drilling Pte Ltd. The client in question is called NuCoastal (Thailand) Limited and this is a 12-month contract which is supposed to commence in March 2008. The good news is that NuCoastal has an option to extend the contract by a further 12 months, but there is no mention of the additional potential revenue if they decide to extend.

The drilling unit Swiber Jack-up 1 and an accommodation barge will be deployed for this maiden drilling project; and also includes supplying support vessels to ensure everything goes smoothly. This project will be helmed by Mr. Glen Olivera, who was recently appointed to head Swiber’s drilling team. This news is very positive in that Swiber has managed to clinch a drilling contract even though it does not have prior experience in this area (as their core business is still EPCIC). The risks are execution and delivery and it is up to Mr. Olivera’s expertise and vast experience to ensure that the project goes smoothly, on schedule and without unnecessary cost overruns.

Another uncertainty is the gross margins which can be expected for drilling contracts. For EPCIC, the gross margin has been established to be around 30-34% but it is not known how lucrative offshore drilling is. Thus, this remains a mystery till FY 2008 when Swiber reports its 2Q 2008 results.

Swiber – LOI for US$31 Million EPCIC project in Indonesia

Just this evening, Swiber announced yet another back-to-back contract win, this time for EPCIC works to be carried out for an international oil conglomerate based in Indonesia. The contract value is US$31 million and the project is targeted to commence in April 2008 and be completed by August 2008. The nature of work is platform installation which the Group is very familiar with, and I would expect them to command the same high gross margin of at least 30% since they will be deploying their own vessels. Thus, gross profit to be recognized over 5 months is about US$9.3 million.

DBS Vickers (DBSV) had projected for Swiber to clinch another US$64 million worth of projects in 4Q 2007, and the 2 announcements over the last 2 days already adds another US$56 million worth of projects to the Group’s order books. If December 2007 is a good month, I am sure the Group will be able to surpass DBSV’s forecast.

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