Sunday, March 16, 2008

Swiber - FY 2007 Financial Results Review and Analysis (Part 3)

Part 3 of this analysis will discuss about Swiber's plans for expansion into the future, their prospects and the potential for the company to secure larger, more consistent contracts. Part 2 had already mentioned that the Group is moving into new territory by bagging an EPCIC contract in India (their first) for US$127 million, as well as expanding their business by taking on offshore drilling and shipbuilding and ship repairs (through Kreuz). All these activities are supposed to complement their existing focus which is to provide niche EPCIC services to the oil and gas industry. Next, I will give a brief summary and breakdown of the order book for Swiber and attempt a simplistic valuation computation based on margin, EPS and PER. Do note that this is a very simple formula and that the investor should obtain much more pertinent information before making an investment decision.

Plans, Prospects and Potential

Swiber's plans can be focused on three key aspects which has been highlighted in their presentation slides for FY 2007 Page 13. They will be using FY 2008 and FY 2009 to expand their resources and building up their fleet in order to extend their capabilities for EPCIC contracts. In addition, new designs and technologies should also help to augment their market position within this industry, after their joint venture with Principia. The idea is to stay ahead of the competition by offering the latest technologies to their customers, thus ensuring costs are properly controlled and work is completed in a timely manner.

Another strategy which the company plans to use is to expand into new markets. Of course, this is easier said than done but thus far the Group has, to date, managed to break into Thailand for an offshore drilling contract and also snared their first EPCIC project in India. Their joint ventures set up in FY 2007 should serve them well to capture more value in these countries and hopefully break into the market there. One intangible factor which investors should consider is the "brand equity" of the company, as they now have 3 international oil majors signed up with them for contracts and have thus far proven their ability to execute (note the contract extension given by Brunei Shell of US$53.4 million). Expanding capabilities is the last leg of their strategy for growth, as they will be taking delivery of vessels with subsea and deepwater capability from FY 2009 onward, and hopefully also enlarging their order book for shipbuilding and engineering services using Kreuz as a catalyst. While costs will inevitably rise as a result of this increase in the flurry of activities, I trust Management should be competent enough to properly hedge against this and also to maintain a cost-focus to ensure economies of scale. This will become more apparent when they release their 1Q and 2Q FY 2008 results, where we can observe how the margins are doing.

Prospects for the company seem good at the moment, notwithstanding the steady weakening of the USD which will add to the Group's costs as their office rental and staff salaries are paid in SGD. Swiber has built up a strong reputation, a record order book and is expecting their vessel fleet to expand significantly in the coming months. Concerns are, as mentioned, on their cash flow statement and also their margins as these will come under pressure due to the additional business units the company is taking on (integration can come with costs as well).

The potential for the company is good if we consider the fact that an enlarged fleet equates to larger and more lucrative contracts being offered. To date, only 2 contracts above US$100 million have been offered and they are both by renowned oil majors. As Swiber gears up its fleet, we should see more substantially larger contracts flowing in. Cash flows from ship building and repair (essentially I perceive this as a cash cow business rather than a growth one) should help to finance their operations moving forward and provide some traction for their growth. Recall too that they signed joint venture agreements with Rahaman in Brunei and PetroVietnam in Vietnam. These have the potential to yield positive returns if Swiber can capitalize on its strengths and push for contracts.

Order Book Analysis

Please refer to the diagram below for a summary of Swiber's order book to date. Note that they have hit a new record high of US$506 million.


As can be seen from the above table, the amount to be recognized for FY 2008 is approximately US$342.9 million as at March 15, 2008. Assuming a conservative net margin of about 18% as a result of higher costs and NO economies of scale from enlarged operations, we get a rough net profit of US$61.7 million for FY 2008. Using a weaker exchange rate of 1.38 to the USD, net profit will be about S$85.2 million. EPS will be around S$0.20 (20 Singapore cents). At the current price of around S$2.03, this represents a price-earnings multiple of about 10 times for FY 2008. Considering that less than 3 full months of FY 2008 has passed, this is not demanding as Swiber still can potentially grow their FY 2008 and FY 2009 order book further with more contract wins, especially as more of their vessels come on-stream. What I need to find out, though, is when the oil majors usually dish out their contracts as there could be a timing issue here as well.
The estimated total bids submitted and to be submitted as at Feb 2008 is about US$1.8 billion for jobs targeting FY 2008 till FY 2013 (page 12 of presentation slides). This could mean more earnings visiblity if the Group manages to clinch a large, long-term project which can stretch more than 2 financial years (e.g. Brunei Shell project which extends over 3 financial years).

As such, I will continue to monitor and observe the company's progress and also keep a close eye on their cost structure and cash flows. The Annual Report is expected some time around mid-April 2008 (of which I will analyze and post questions here) and the AGM should be close to end-April 2008.

6 comments:

Aspellian said...

Hi MW,

The encouraging fact about Swiber is the strong order book it currently has which brings certainty to FY2008's revenue.

I will like to add that there's 2chartering contracts for BG Exploration secured in Dec 06 and Jan 07 which will bring in additional revenue of USD9.2M (4.6X2). This will bring 2008 revenue to be recognise from current order book to USD350M.

I will like to add we should be conservative and take a discount of 10% for unexpected delay in revenue/timing difference (an example is the delay in completion/recognition of Shell Brunei's contract).

I obtained a PE of 13 with NPM of 16%, assuming only 90% of USD350M revenue recognised.

Aspellian said...

Hi MW,

Another discussion point - how do you think the finance cost will affect them in FY2008, do you expect the cost to double in 08 vs 07? based on ur knowledge of the co, is there an estimate for the finance cost?

Sale and leaseback- since $21M+ is recognised from this activity, is it conservative to expect another $7.5M in FY2008 (based on their announcements regarding the sale and leaseback which indicated expected profits to be $29.5M over the Net Value of the vessels)?

musicwhiz said...

Hi Aspellian,

Thanks for pointing it out. I shall be posting a revised order book for Swiber for FY 2008 which will also incorporate the latest news about it securing a major project in Thailand (though this will only be for FY 2009 onwards).

Yes, you are right to be conservative. 90% is a fair estimate, and to use 16% is also good in order to factor in higher costs arising from the stronger SGD and possible cost overruns. It's always better to be conservative rather than aggressive.

I got a value of about 12.1 PER if I used the assumptions which you stated, using 16% NPM; 90% order book recognition, 1.38 SGD to one USD and using the current price of S$2.00.

Regards,
Musicwhiz

musicwhiz said...

Hi again Aspellian,

I can do a rough estimate (a more detailed estimate would take more time and effort and I want to wait for their Annual Report to do that).

They had their bond issue of S$108.5 million on August 24, 2007. If you note, their 2Q and 3Q 2007 finance costs were about the same (around US$935K on average per quarter), while finance costs for 4Q 2007 rose to US$1,633K. Thus, I would assume that 4Q 2007 encompasses the costs from the bond issue (since it was done in August 2007, close to 4Q 2007) as well as any new bank loans the Group may have taken up.

Based on that assumption, I estimate that FY 2008 finance costs may be about US$6.5 million assuming no other bonds are issued or loans taken up. This will roughly be 75% higher than their FY 2007 total finance costs of US$3.74 million.

As for profits from sale and leaseback, these are harder to project as Management has told me that the profits are progressively recognized based on the % of completion of the vessels under the sale and leaseback. Thus, a lot has to do with the delivery schedule of the vessels in question and any delays or early deliveries may distort attempts to forecast this figure. Hence, I will not attempt it. Anyway, it does not affect valuation because it is an exceptional gain.

Regards,
Musicwhiz

Aspellian said...

Hi MW,

thanks for your reply. Let's continue to monitor Swiber's progress down the years, i am sure we have not seen anything yet. The management thus far has delivered what they have promise; and the management team is constantly being strengthened. What I like is that Raymond Goh is not the sole driver for this business, he has managed to convinced "top experts" such as Mr John Payne to join the Swiber Group and lead the various divisions.

musicwhiz said...

Hi Aspellian,

You're welcome. Yes, it will be interesting to monitor this company through the years. The Management is driven to build the business and to grow top and bottom line.

Regards,
Musicwhiz