Saturday, March 08, 2008

Swiber - FY 2007 Financial Results Review and Analysis (Part 2)

Continuing with my analysis, Part 2 will focus on the Cash Flow Statement (yes, cash is what really drives the business, not profits !) as well as aspects of the segmental reporting which Swiber has presented in Note 13 of their FY 2007 financial statement release on SGXNet. Please note that the segmental discussion is meant inform rather than predict about how the business will turn out, as much is still very preliminary at this point in time and will require more time and patience in order to achieve greater clarity.

Cash Flow Statement Analysis

Operating cash flows before movement in working captial was US$29.3 million, up about 120.8% from FY 2006's US$13.3 million. This was in view of Swiber's higher revenues which brought in more cash, assuming the nature of the cash collection cycle has not changed. However, the significant increase in trade and other receivables (mentioned in Part 1) has led to a large negative cash outflow; and this has resulted in a net cash outflow of US$16.8 million for FY 2007, as increases in trade and other payables could not offset this amount. As mentioned, it is suspected that part of these receivables constitutes monies which are supposed to be received as part of the sale and leaseback arrangement which Swiber had entered into (announced on Sep 4, 2007) for 4 vessels. In the follow-up announcement on Oct 1, 2007, Swiber stated that 3 of its vessels were to be delivered after FY 2007 (one by end July 2008 while another 2 by mid FY 2009); and that only 20% of the cash would be received as down-payment while the 80% will be paid only upon delivery of the said vessels. Thus, as the vessels near completion, Swiber may have used the % of completion method to account for these receivables. I will, of course, further clarify this during the AGM with Management.

Under Investing activities, cash flows have been coming in from the disposal of fixed assets as well as the vessels held for sale and leaseback, garnering an amount of US$123.4 million for the Group. On the other hand, purchases of new vessels and more fixed assets also depleted cash by a total US$176.7 million, for a net outflow of US$53.3 just from these 4 activities alone. Swiber had, on August 6, 2007, also paid cash of US$5.2 million to acquire 100% of the equity of North Offshore Pte Ltd (they later changed the name of the subsidiary to Kreuz Shipbuilding and Engineering Pte Ltd). All these activities drained cash and there was a net cash outflow of US$58.8 million for FY 2007. I view these purchases of new assets and the shipyard as essential for Swiber to enhance their vessel fleet in order to clinch projects of larger size from major oil companies in future. The company is in the growth phase where large amounts of money are used to purchase assets in order to generate a good rate of return for shareholders.

Moving on to Financing activities, the net effect of repayment of old bank loans and the taking up of new bank loans was US$13.8 million raised. This constituted additional capital raised to fund their purchases of new vessels to add to their expanding fleet. As mentioned in Part 1, shares were issued for US$78.6 million while bonds were sold for US$71.1 million as part of Swiber's aggressive plan to raise cash for fleet expansion. All these activities have raised gearing to 0.53 (debt issue + loans) and increased the issued share capital of the company to 424.3 million shares (note that all equity issues are dilutive to existing shareholders, though the EPS effects may be compensated if the company makes use of the proceeds to grow earnings more than the dilutive effect on EPS). Thus, a total of US$148.4 million was raised through financing, a whopping 542% increase over the amount raised in FY 2006 of US$23.1 (just after their IPO in November 2006).

Cash balances increased by US$73.2 million as a result of these activities. Moving forward, the company should still be spending cash on investing activities and possibly raise more debt to fund further additions to their fleet (their medium-term note programme is still not fully drawn down). I would expect to see positive operating cash flows once the impact of their contracts kick in sometime mid-way through FY 2008. If cash flows come in too slowly, this may represent a red flag which investors should be wary of. Expansion at the expense of cash is never a good thing for a company, as growing too fast may cause one to suffer from "burnout".

Analysis of Segmental Information

By Business Unit

By referring to the diagram above, which I compiled through Note 13 in Swiber's Financial Statements announcement, one should note that their EPCIC business has actually grown by 150% in revenues for FY 2007 over FY 2006; and takes up 77.5% of their revenue stream instead of the previous 70.1%. Since Swiber's decision to become a niche player in the oil and gas support services industry, they have been focusing on EPCIC as their main business, and the effects can be seen quite clearly from the table above. With the recent win of US$127 million LOI in India (I will write more on this in Part 3), EPCIC is set to grow its revenues even further as a proportion of Swiber's total business. The only question now which I have for them is: which business unit provides the most lucrative gross margins ? I would suspect its EPCIC but I need to confirm this.

Another point to note is that Swiber now has a new business unit called Shipbuilding and Ship Repair after acquiring Kreuz Shipbuilding Pte Ltd in FY 2007. This unit brought in US$11.7 million in revenues for FY 2007, which constituted 7.7% of the total revenue pie. It was also recently announced (on Feb 26, 2008) that Kreuz had been awarded two projects for the design, engineering and fabrication of 3 offshore oil and has marine assets worth a total of about US$20 million. These projects are all targeted to end by FY 2008, which means Kreuz will recognize at least an amount of about US$18 to US$20 million in revenues for FY 2008, surpassing FY 2007's US$11.7 million. With this segment growing too, the question will be the margins that this new unit can command. I will bring this issue up at the AGM.

Readers and investors should note that for FY 2008, there will be a new business segment called "Deepwater Drilling"which is headed by Swiber Offshore Drilling Pte Ltd, which has already been awarded its maiden contract worth US$25 million to drill for NuCoastal Thailand (in Thailand). This will commence in March 2008 and the Group is expected to begin recognizing revenue on this new revenue stream starting from 2Q FY 2008.

By Geographical Segment

The table above puts into perspective the geographical segments which Swiber covers and how well they have been doing thus far. Note that as a result of the Brunei Shell project, their revenues from Brunei form 33.6% of total revenue. But as mentioned in their announcement on Feb 13, 2007, they were supposed to recognize about US$70.5 million from this Brunei Shell contract, but the numbers reveal that only US$50.8 million was recognized for FY 2007. This may be due to delays in part of the project, which means that the remaining US$19.7 million will probably be deferred to FY 2008, making total revenue contribution from the Brunei Shell Project for FY 2008 equivalent to US$95.8 million. I will have to check with Management on whether the project is still on schedule and within costs during the AGM.

Revenues from Indonesia also rose 176.6% from FY 2006 to US$19.1 million for FY 2007, but still forms only 12.6% of revenues compared to Malaysia's US$50.9 million (33.7%). Moving forward, note that the Group has clinched two projects in Indonesia worth US$31 million (Nov 14, 2007) and US$35 million (Feb 14, 2008) so this segment should see much better revenue streams for FY 2008.

Swiber can also add two new geographical segments for its revenue streams in FY 2008: India and Thailand. Just recently on March 7, 2008, Swiber announced their maiden EPCIC contract worth US$127 million for BG India, while their deepwater drilling unit had secured a US$25 million project to drill for NuCoastal Thailand in Thailand. Their breaking into two new markets represents a significant step forward for the company.

As for assets, note that Swiber has increased their asset base for Singapore and Malaysia significantly and they now account for 39.6% and 49.5% of total assets respectively for FY 2007. Brunei is a new market where the Group has a growing presence, as evidenced by the US$34 million of assets parked there. As Swiber scales up its fleet, we should see more additions to assets in still more geographical regions as mentioned above.

Part 3 of my analysis shall be done about a week later (as I have commitments to manage in the meantime) and will focus on Swiber's prospects and plans for growing revenues, margins, earnings and key markets; as well as a discussion on their order book which has swelled to US$477 million as at March 7, 2008.

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