Swiber - 1Q 2008 Financial Statements Review and Analysis

Yep, this review was somewhat delayed but the past few weeks have been very busy and in addition, there was also Pac Andes and Boustead's FY 2008 results to contend with. Below is my brief analysis of Swiber's 1Q 2008 financial results; do note that quarterly results are not too significant on their own and it is better to see the overall trend in earnings and margins for any company rather than to focus solely on one quarter alone.

Income Statement Review

To compare 1Q 2008 with 1Q 2007, it is obvious that revenues and hence net profits have grown tremendously as a result of fleet addition and the presence of a new source of income (i.e. shipbuilding and ship repairs). However, one should also note that gross margins had fallen from 27.5% in 1Q 2007 to 25.9% in 1Q 2008. This can principally be attributed to the growth of Kreuz Shipbuilding and more revenues coming from the ship-building business unit, which traditionally commands lower margins compared to EPCIC. Moving forward, we should see more margin contraction as Swiber has yet to take delivery of its first drilling vessel (thus, it has to rely on third-party vessels which increase costs). The contraction should smoothen out once more of Swiber's fleet comes on-stream, but should still be below current levels as ship repairs/building takes a slightly larger chunk of revenues. That said, the gross margins for deepwater drilling should be very attractive and this unit should help to boost gross margins as the company heads on into FY 2010.

Net margin for 1Q 2008 was 14.6% against a net margin of 18.9% for 1Q 2007. This was mainly due to higher admin costs (up 185%) and much higher finance costs (increase of 896% on a low base). I would assume the higher admin costs are a result of more intensive hiring to fill up job vacancies for Swiber's new expanded operations and businesses; while the increase in finance costs are a necessary evil from the bond issue and the raising of additional monies through bank loans. Net margin should stabilize once Swiber stops relying on additional financing, and should even improve in future due to greater economies of scale between the various business units.

Balance Sheet Review

On to the Balance Sheet, the most noticeable items are trade receivables which have increased about 46% from US$100.7 million to US$146.5 million; and other receivables which have increased 81.2% from US$26.1 million to US$47.3 million. Presumably, these relate to monies which are yet to be received with regards to the sale-and-leaseback transactions (as Mr. Francis Wong had stated during the AGM). Another plausible explanation might be the 200+% increase in revenues which necessarily generates a greater receivables balance. It is precisely because of this receivables balance that the operating cash flows is negative.

Current ratio stands at 1.96 for 1Q 2008, against 2.15 for 1Q 2007. The ratio was lower due to the increase in trade payables and also the decrease in cash; but is otherwise still healthy. Quick ratio does not apply to Swiber as their inventories are negligible (they are a service provider, not a manufacturer or producer).

Also note that long-term liabilities had increased significantly due to the second bond issue of US$72.0 millio, as well as additional bank loans obtained. The additional gearing is to enable the firm to purchase new assets (vessels) in order to expand its fleet and garner more revenue.

Cash Flow Statement Review

There was negative operating cash flows mainly due to the aforementioned increases in trade and other receivables. The 1Q 2008 presentation slides presented this as "cash used to grow operations" and I would argue that this cannot continue for too long, otherwise the cash position of the company may be seriously compromised. A company can only rely on external funding for so many quarters before it MUST generate sufficient internal cash flows to operate on its own. As Swiber is currently in "rapid growth" stage, this is borderline acceptable though I am not comfortable with it should it shoot past 3Q 2008.

Cash outflows for investing activities was expected to be negative, as the company invested a lot of cash into purchasing assets for use in its EPCIC operations. In fact, cash inflows came mainly from financing activities, where US$70.2 million was raised via a bond issue and US$41.2 million was raised through new bank loans obtained (with collateral presumably on the vessels which were to be delivered to Swiber progressively).

Future Plans

As at March 31, 2008, Swiber's order book stood at US$476 million. According to Management, FY 2008 profit should be much better than FY 2007 due to the schedule for recognition of revenue from the projects. The order book does NOT include a 5-year US$50 million per annum recurring revenue stream from Swiber's tie-up with CUEL. With shipbuilding and EPCIC in full swing and the company about to take on a new business unit for offshore drilling in FY 2008, prospects look positive for the company. Risks would include delay in obtaining vessels, delay in completing projects and subsequent negative goodwill generated, slowdown in orderbook building and possible margin squeeze from rising costs.

I had also noted that most of the contracts and LOI seem to have been awarded in the Feb to April 2008 period, similar to last year's mega-project worth US$146.6 million awarded by Brunei Shell. Mr. Goh was quick to dismiss this idea and said that projects were clinched on an ongoing basis and that there was no specific timing to the award of projects. However, I personally suspect that smaller, lower value contracts are given out throughout the year while the larger ones have to be bidded for and are won close to certain periods of the financial year. Whether this is true or not remains to be seen, but it is hoped that Swiber can continue to build on their core competencies to grow the business, and to leverage on their networks, joint ventures and tie-ups thus far to secure more contracts of worthwhile size.