Tuesday, June 03, 2008

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.


Mr.Boring said...

Hi MW,

Not related to Swiber.I wonder if you are studying pac andes AR. What are your views on the high gearing and lower ROE?

Anonymous said...

Hmm... why Swiber drop so much today?

musicwhiz said...

Hi Mr. Boring,

PAH's high gearing is part of their expansion plan to purchase assets (VOA) and vessels in order to scale up the business and enter the fishmeal industry. The ROE is not low but is high due to boosting from debt (so in essence, not "good" ROE but is debt-assisted ROE). However, I look at it from a long-term perpsective and see value in PAH and CFG in 5-8 years time as the industry consolidates.


musicwhiz said...

Hi Anonymous,

I do not comment on price action. What Mr. Market wants to do is none of my concern. Thanks.


Brendan said...

Always appreciate your analysis.

Brendan said...

I like your analysis on Swiber.

But I always do not understand why do wise investors like to look at companies with no free cashflows, ie Pac Andes.

Eventually Pac Andes' cash reserves is going to run out, and they need to borrow more. Debt/equity ratio is already 94.61%, how much more you want them to raise?

musicwhiz said...

Hi brendan,


For Pac Andes, I understand that they are in the midst of expansion and acquisition; thus the reason for the lack of FCF and the high gearing.

Your statement that their cash reserves are going to run out is not totally accurate - they are still generating cash flows from their operations but the current borrowings are needed to expand operations and to grow the company. I do agree that the amount of debt is very high but the industry itself is capital intensive and is consolidating, so money is required to acquire all the fishing vessels and fishmeal plants.

I am also monitoring the situation; hopefully it will not turn out to be a bad mistake of judgement on my part.

Thanks for highlighting this.


Anonymous said...

Hi Musicwhiz,

I managed to buy 7 lots of Swiber at $1.93 today. Finally, I had bought something with a margin of safety unlike my previous purchases.

I believe I had learnt the art of not to be kiasu and waited 4 months before purchasing Swiber at the price ie below $2 as suggested by you.

This is not easy because last month I could not resist the temptation and bought 2 lots of Keppeland at $5.22. Almost immediately, Keppeland's price dropped to $4.54 and is still below my cost.

I hope I had made the right decision to use my bonus to buy shares instead of repaying my outstanding loan (3.88% pa) of $20,000 incurred on purchases of
25 lots of Ezra at $3.36 last year. The present prices of stocks are too attractive to resist.

Anyway, this will be my last purchase as I will be using my year end bonus to repay my loan.

The most valuable lesson I have learnt from this experience is "buy shares with a margin of safety". If not, forget about the shares. However, with patience, the market will sell the shares back to you at your price.

Thank you for your kind advice.



musicwhiz said...


Congrats, I think it was a good buy, though of course in this current climate it could probably fall some more. Still, it's a fair enough purchase price and definitely much better than buying it around S$2+.

My advice to you would still be to concentrate on clearing the loan first before you decide to buy more shares. It is not advisable to leverage yourself then purchase shares because you may need the cash for finance costs and thus may be forced to liquidate when the market is weak. In future, my suggestion is to use spare cash to invest and keep some emergency fund handy.

By the way, margin of safety is a concept derived by assessing the value of a company's business from time to time. It's not a static thing and if I mentioned a certain margin of safety some time in the past, it will be good for you to review and see if there are any changes to the business which may affect intrinsic value. Businesses are dynamic and always changing, so it's more prudent to do an assessment every time you see an opportunity to purchase (that's what I do as well).

It's hard work but no one said investing was easy.

Good luck !