End-March 2008 Portfolio Summary and Review
The second-half of March 2008 saw more business activity with respect to the companies I own. The market continued to recover somewhat slightly, though I think that will be scant relief for those who probably bought at the height of the bull market. This evidently illustrates the importance of purchase with a margin of safety, and to also assess the potential investment rationally to see if it has prospects for top and bottom line growth in the years to come.
April 2008 will prove to be an interesting month, as I am expecting results announcements from FSL Trust, Suntec REIT and Ezra. Also, I am looking forward to attending the AGM and reading the Annual Reports for Swiber and China Fishery.
Below is the summary of my investments and related news as at March 31, 2008 (STI at 3,007.36 points).:-
1) Ezra (Vested since October 6, 2005) - Buy Price $0.645 (bonus adjusted), Market Price $2.07, Gain 221%, YTD Loss 37.7%. On March 27, 2008, Ezra announced the clinching of charter contracts totaling US$77.6 million; these include new and renewal charter contracts. I have details on this in my previous post. Ezra should be releasing their 1H FY 2008 results by mid-April 2008, and I will provide a review and analysis before my next portfolio review.
2) Boustead (Vested since September 13, 2006; averaged down November 13, 2006) - Buy Price $1.295 (average), Market Price $1.98, Gain 52.9%, YTD Loss 17.8%. On March 24, 2008, Salcon announced S$32 million worth of contracts from Toshiba and Samsung. Also, just this evening on March 31, 2008, Boustead Projects announced the award of a S$15 million contract to construct a warehouse and office facility for LuxAsia Pte Ltd. Contract flow has started again after a drought following the August 22, 2007 announcement of a record S$300 million Libyan township project. This is Boustead Project’s 9th Project for FY 2008.
3) Swiber (Vested since February 14, 2007) - Buy Price $1.01, Market Price $2.54, Gain 151.5%, YTD Loss 25.9%. Swiber announced on March 17, 2008 that it had been awarded a multi-year contract from CUEL Limited for installation of platforms and pipelines in the Gulf of Thailand. The project will commence in 1Q FY 2009 and is worth US$50 million per year for 5 years. Following this, on March 18, 2008, Swiber announced the appointment of Mr. John Payne as the CEO of Kreuz International Pte Ltd. This is seen as another sign of Swiber investing in human resource to beef up their Management team. On March 26, 2008, Swiber announced that Kreuz had successfully delivered two floating crane barges to their 30% associated company OBT Holdings Pte Ltd, which demonstrates Kreuz’s ability to deliver on time. Two days later, Swiber announced that they had raised S$100 million by issuing 3-year bonds at 4% interest rate, in fixed and floating rate tranches. Finally, on March 31, 2008, Swiber announced the formation of a joint venture company called Principia Asia-Pacific Engineering Pte Ltd.
4) Suntec REIT (Vested since December 9, 2004) - Buy Price $1.11, Market Price $1.45, Gain 30.6%, YTD Loss 15.2%. There was no news on Suntec REIT in the half-month ended March 31, 2008.
5) Pacific Andes (Vested since March 29, 2006; Rights Issue July 11, 2007 at S$0.52 per share; averaged down August 17, 2007) - Buy Price $0.655 (rights-adjusted), Market Price $0.515, Loss 21.4%, YTD Loss 18.3%. There was no news on Pacific Andes during the period ended March 31, 2008.
6) China Fishery Group (Vested since November 20, 2007) - Buy Price $1.50 (average), Market Price $1.51, Gain 0.7%, YTD Loss 18.4%. There was no news for CFG for the period ended March 31, 2008.
7) First Ship Lease Trust (Vested since January 14, 2008) - Buy Price (Averaged Down) $1.105, Market Price $1.11, Gain 0.5%. FSL Trust’s AGM will be held on April 2, 2008 (Wednesday) and they have also announced on March 31, 2008 that they had appointed a new Head of Sales Mr. Vijay Kamath for East of Suez. Hopefully, with his experience and expertise, this means that FSL Trust can embark on more acquisitions which can enhance yield for unit-holders.
Overall Portfolio
My overall portfolio has increased by 51% without taking into FSL Trust’s cost. If included, the gain is 37.0% from a cost of S$80.4K as at March 31, 2008. The market value of my portfolio without FSL Trust is S$88K, and if FSL Trust is included then the portfolio value is S$110.1K. Realized gains remain at about S$4.9K until the ex-dividend date for China Fishery comes along.
Comparison against STI
The FTSE STI had declined by 13.6% since the start of 2008. Without FSL Trust, my portfolio has declined 24.6%.To date in 2008, my portfolio has under-performed the new benchmark FTSE STI by 11 percentage points.
My next portfolio review will be on Tuesday, April 15, 2008 after market close.
Monday, March 31, 2008
Saturday, March 29, 2008
Ezra - US$77.6 Million Charter Contracts, Interview with Lionel Lee in Pulses
It's been awhile since newsflow from Ezra came out, what with the steady stream of announcements and press releases by Swiber. But on March 27, 2008, the company announced that they had clinched charter contracts worth US$77.6 for 7 of their vessels. These consist of new as well as renewal charters and these charters are expected to impact earnings in the current financial year (i.e FY 2008 ending August 31, 2008).
According to a news report update from Energy Current website, the charters will cover 5 AHTS, namely 18,000 bhp Lewek Toucan, 12,240 bhp Lewek Swift, 10,000 bhp Lewek Emerald, 7,200 bhp Lewek Mallard and 5,000 bhp Lewek Ebony. The charters will also cover one AHT, 4,900 bhp Lewek Robin as well as Ezra’s heavy-lift accommodation barge Lewek Chancellor. Lewek Swift and Lewek Emerald are granted extensions on their current charters with Shell in Australia, Lewek Mallard is working for Newfield and Nippon Oil in offshore Malaysia while Lewek Toucan is believed to be contracted to Shell supporting semi-submersible Atwood Falcon.
The award of these contracts again reaffirms the fact that Ezra’s vessel fleet is still very much in demand. Of course, one could argue that it is more likely the case of the daily charter rate which they are getting which determines their revenues and margins. But Mr. Lionel Lee mentioned that there was “no let-up in the enquiries” and that Ezra’s future focus will be more on deepwater support vessels for E&P activities in Malaysia and Australia. There is still currently a worldwide shortage of vessels for younger, medium and large-sized offshore vessels. Ezra is due to take delivery of 11 more vessels from now till FY 2010, and these include Multi-Functional Support Vessels (MFSV), a Floating Production Storage Offloading vessel (FPSO) and a well service and maintenance vessel.
In the recent issue of Pulses, there was an exclusive interview conducted with the Managing Director of Ezra, Mr. Lionel Lee. I have read through the interview and summarized the main points he brought up about growing Ezra’s business to higher levels:-
1) Ezra has mitigated the risks that their vessels become “white elephants” by engaging good shipyards and good equipment. They have worked from the beginning with established names such as Pan-United Marine and Rolls-Royce in order to maintain high quality and ensure their vessels are in strong demand.
2) The company has set a new profit target for the future but he declined to give more details until the company actually managed to hit it. This shows that they have a long-term vision to grow their earnings steadily, which will benefit shareholders.
3) Ezra has focused on merging its assets with its services, so that they can offer the “full suite” instead of just partial service. It is akin to providing the doctor, surgeon as well as hospital in order to treat a patient, in an analogy provided by Mr. Lee. This helps to enhance their competitive edge and boosts their profile as a one-stop solution provider for the oil and gas industry.
4) Mr. Lee feels that deepwater will have stronger growth compared to shallow waters, but that the shallow water market still needs to be served as it accounts for 60-65% of the current reserves. He believes replacement of assets will take place for shallow water, but that “he doesn’t think there will be big growth”.
5) Ezra has a competitive edge in that they invest in people with expertise, which is critical because expertise is difficult to find. They have an R&D office in London with 30 staff and he believes this is what differentiates Ezra from other players.
6) Ezra continues to expand its geographical reach, and Mr. Lee intends to take it even more global, and to hone its expertise further. Steps have been taken to invest in people, such as providing scholarships (Mr. Tan mentioned this to me during AGM FY 2007), training facilities to train crew for technically complex new vessels, as well as a US$10 million annuity plan (announced by Ezra on Jan 15, 2008).
Wednesday, March 26, 2008
Pacific Andes - 3Q FY 2008 Results Analysis and Review (Part 2)
To continue my review, I will be touching on Cash Flow Statement and prospects and plans for PAH in this post.
Cash Flow Statement Review
Please note that for my cash flow review, I will be referring to numbers for 9 months ended Dec 31, 2007 (not the 3-month figures as these are more short-term by nature).
Cash generated from operating activities continues to remain healthy, as cash inflows before changes in working capital came up to HK$958 million for Dec 31, 2007 compared to just HK$542 million a year ago. Their cash generation ability from operations is not the worrying section, but I am keeping an eye on their interest paid and income taxes paid, which saw a significant rise from a year ago due to higher financing costs and expansion of their operations.
Most of the cash outflows were from investing activities, as PAH had already announced their intention to raise their stake in CFG. HK$558 million was spent on acquiring property, plant and equipment, while a whopping HK$2.37 billion was spent on raising their effective interest in CFG from 28.8% to 64.1% ! This culminated in a total cash outflow of HK$3.43 billion, a 203.5% rise over the cash outflow of HK$1.13 billion a year ago.
For financing, PAH raised cash through the issue of convertible bonds and rights shares (at $0.52 per share cum-rights). This amounted to a total of HK$ 2.49 billion, and was used to pay for the acquisition of CFG. More monies were also raised through finance leases and bank borrowings too. The result was a net cash inflow of HK$2.57 billion for 9M 2008.
These cash flows are not reflective of the usual business operating conditions for PAH as they involve a very large acquisition of CFG which is funded by pure debt, equity and convertible debt. Thus, I believe it will be more indicative to review PAH's cash flow for FY 2009 after the acquisition has gone through, in order to assess its effects on cash.
Prospects and Plans
According to PAH and CFG, the global demand for fish is on an uptrend and will rise steadily due to consumers' increasing awareness of healthy alternatives to red meat, as well as steadily rising income levels for consumers in China which means that they have the spending ability to purchase healthier products which are fish-related. This trend should see PAH and CFG improving their revenues for the forseeable future as the demand for fish is a constant and growing one which is unlikely to die down anytime soon.
PAH increased their transportation fleet from 2 to 4 reefer vessels to enhance competitiveness and efficiency. I believe the Management will be looking out for other attractive acquisition opportunities to build up their fleet in order to further enhance capacity and hence improve margins through economies of scale. Their plans to commence fishing operations in the South Pacific Ocean in FY 2009 should see new revenue flowing in, and they will deploy 3 upgraded super-trawlers there. The re-structuring of the 4th VOA is also in progress to ensure it is on a prepaid charter hire basis and not daily basis. If all this sounds uncannily familiar, it's because I had mentioned it on CFG's FY 2007 review as well ! The two companies are very closely tied and thus information may tend to get repeated.
For their fishmeal operations, Management plans to acquire more vessels and fishmeal plants in order to increase their capacity for catch and also enhance their efficiency in having more locations for unloading their fish catch. However, of late, the sub-prime crisis in USA has made financing more difficult, which may be the reason for the slowing down of their acquisition pipeline. Still, I am confident of Management's ability to negotiate for quality assets at an acceptable price to enhance value for shareholders.
Finally, shareholders should also be waiting for more news and information on PAH's proposed scrip dividend scheme. I believe this should accompany the FY 2008 financial results announcement as Management had mentioned paying dividend just once, instead of an interim and a final one.
To continue my review, I will be touching on Cash Flow Statement and prospects and plans for PAH in this post.
Cash Flow Statement Review
Please note that for my cash flow review, I will be referring to numbers for 9 months ended Dec 31, 2007 (not the 3-month figures as these are more short-term by nature).
Cash generated from operating activities continues to remain healthy, as cash inflows before changes in working capital came up to HK$958 million for Dec 31, 2007 compared to just HK$542 million a year ago. Their cash generation ability from operations is not the worrying section, but I am keeping an eye on their interest paid and income taxes paid, which saw a significant rise from a year ago due to higher financing costs and expansion of their operations.
Most of the cash outflows were from investing activities, as PAH had already announced their intention to raise their stake in CFG. HK$558 million was spent on acquiring property, plant and equipment, while a whopping HK$2.37 billion was spent on raising their effective interest in CFG from 28.8% to 64.1% ! This culminated in a total cash outflow of HK$3.43 billion, a 203.5% rise over the cash outflow of HK$1.13 billion a year ago.
For financing, PAH raised cash through the issue of convertible bonds and rights shares (at $0.52 per share cum-rights). This amounted to a total of HK$ 2.49 billion, and was used to pay for the acquisition of CFG. More monies were also raised through finance leases and bank borrowings too. The result was a net cash inflow of HK$2.57 billion for 9M 2008.
These cash flows are not reflective of the usual business operating conditions for PAH as they involve a very large acquisition of CFG which is funded by pure debt, equity and convertible debt. Thus, I believe it will be more indicative to review PAH's cash flow for FY 2009 after the acquisition has gone through, in order to assess its effects on cash.
Prospects and Plans
According to PAH and CFG, the global demand for fish is on an uptrend and will rise steadily due to consumers' increasing awareness of healthy alternatives to red meat, as well as steadily rising income levels for consumers in China which means that they have the spending ability to purchase healthier products which are fish-related. This trend should see PAH and CFG improving their revenues for the forseeable future as the demand for fish is a constant and growing one which is unlikely to die down anytime soon.
PAH increased their transportation fleet from 2 to 4 reefer vessels to enhance competitiveness and efficiency. I believe the Management will be looking out for other attractive acquisition opportunities to build up their fleet in order to further enhance capacity and hence improve margins through economies of scale. Their plans to commence fishing operations in the South Pacific Ocean in FY 2009 should see new revenue flowing in, and they will deploy 3 upgraded super-trawlers there. The re-structuring of the 4th VOA is also in progress to ensure it is on a prepaid charter hire basis and not daily basis. If all this sounds uncannily familiar, it's because I had mentioned it on CFG's FY 2007 review as well ! The two companies are very closely tied and thus information may tend to get repeated.
For their fishmeal operations, Management plans to acquire more vessels and fishmeal plants in order to increase their capacity for catch and also enhance their efficiency in having more locations for unloading their fish catch. However, of late, the sub-prime crisis in USA has made financing more difficult, which may be the reason for the slowing down of their acquisition pipeline. Still, I am confident of Management's ability to negotiate for quality assets at an acceptable price to enhance value for shareholders.
Finally, shareholders should also be waiting for more news and information on PAH's proposed scrip dividend scheme. I believe this should accompany the FY 2008 financial results announcement as Management had mentioned paying dividend just once, instead of an interim and a final one.
Monday, March 24, 2008
Pacific Andes - 3Q FY 2008 Results Analysis and Review (Part 1)
I know this review is long overdue, but I really haven't had time to get down to it till today. Anyhow, as my investments are long-term by nature, the fortunate thing is that it does not really matter if I analyzed it today, yesterday or even last month. The nature of Pacific Andes' business is not going to change overnight, or for the next 5 years for that matter ! As it is, they will probably be even more diversified (I hope !) in the next few years after announcing their intentions to expand their fishing activities to South American seas.
Anyhow, below is my quick and brief review for PAH's 3Q FY 2008 financials. Note that I will place more emphasis on the FY 2008 results once they are out by late May 2008.
Income Statement Analysis
For 3Q 2008, revenues were HK$1.11 billion, a 52% increase over the same period last year. However, economies of scale meant that COGS only increased by 40.3% over the same period, resulting in an increase in gross profit of 101%. GP Margins for 3Q 2008 stood at 24.6%, compared to inly 18.3% for 3Q 2007. For 9M 2008, gross margins were 20.7% against 9M 2007 gross margin of 17.1%. This clearly shows that economies of scale in PAH's fishing operations are beginning to bear fruit, as they are able to reap cost benefits from their enlarged fleet of purse seine vessels.
As a result of the issue of bonds to fund the increase in stake in CFG from 28.8% to 64.1%, interest expenses ballooned from just HK$57.7 million in 3Q 2007 to HK$111.3 million in 3Q 2008, an increase of 93%. For 9M 2008, the increase was 146.2% due to a low base for finance costs incurred in early FY 2007. As a result of this, profit before tax rose only 93.8%, less than the increase in gross profit but nevertheless still impressive. The fishing division (now bolstered) accounted for 55% of 3Q 2008 revenues, up from just 37.4% previously. China still made up the main bulk of sales (77.5% for 3Q 2008) and it remains to be seen if there will be pricing pressures for the Group due to the Government's announcements to combat inflation. Fish being a staple food item on Chinese menus may not make this effect too pervasive, but their next results update should mention something about their ASP (average selling prices) to hopefully be able to maintain their margins.
As explained in Note 8 (Page 10) of the result announcement, finance costs had risen due to interest attributable to US$93 million 4% convertible bonds, US$225 million 9.25% senior notes as well as increased short-term borrowings. The Group seems to have taken on a lot of debt in order to increase the contribution provided by the fishing division, and the effects of this additional debt are going to follow the company for some time into the future. I view this as part of PAH (and CFG's) expansion plan to increase their reach into the South American seas, and CY 2008 should be the year in which they manage to extend their footprint to these regions and also to add a new revenue stream to their business. As it is, it will be prudent to watch for their gearing, cash flows and financing costs in subsequent quarters.
Balance Sheet Review
The most notable increase within the Balance Sheet under "Non-Current Assets" belongs to PPE, and this increase is 77.4% from HK$863 million to HK$1,533 million. This reflects the Group's purchase of their additional stake in CFG and shows up CFG's related assets. Goodwill has also increased due to their acquisition of CFG.
Inventories have dipped slightly as this is the "low" season for PAH (4Q 2008 will be the peak season). Bills receivable has increased to HK$177 million in line with the increase in scale of operations and revenues. Current and Quick ratios are 1.56 and 1.27 respectively for 3Q 2008, and are 1.90 and 1.51 for 3Q 2007. The dip is due to the higher bank advances drawn on bills and also higher current portion of interest-bearing borrowings. As the ratios are still above 1, the company is not in any immediate danger of insolvency.
For non-current liabilities, it is worth noting that there is an amount of HK$615 million now appearing for convertible bonds. There is also an amount of HK$416.5 million worth of deferred consideration payable which I believe is a one-off amount. Net assets had increased to HK$4.25 billion from HK$2.78 billion from March 31, 2007, representing an increase of 52.9%.
Stay tuned for Part 2 of this analysis, which I will try my best to keep short and succinct !
I know this review is long overdue, but I really haven't had time to get down to it till today. Anyhow, as my investments are long-term by nature, the fortunate thing is that it does not really matter if I analyzed it today, yesterday or even last month. The nature of Pacific Andes' business is not going to change overnight, or for the next 5 years for that matter ! As it is, they will probably be even more diversified (I hope !) in the next few years after announcing their intentions to expand their fishing activities to South American seas.
Anyhow, below is my quick and brief review for PAH's 3Q FY 2008 financials. Note that I will place more emphasis on the FY 2008 results once they are out by late May 2008.
Income Statement Analysis
For 3Q 2008, revenues were HK$1.11 billion, a 52% increase over the same period last year. However, economies of scale meant that COGS only increased by 40.3% over the same period, resulting in an increase in gross profit of 101%. GP Margins for 3Q 2008 stood at 24.6%, compared to inly 18.3% for 3Q 2007. For 9M 2008, gross margins were 20.7% against 9M 2007 gross margin of 17.1%. This clearly shows that economies of scale in PAH's fishing operations are beginning to bear fruit, as they are able to reap cost benefits from their enlarged fleet of purse seine vessels.
As a result of the issue of bonds to fund the increase in stake in CFG from 28.8% to 64.1%, interest expenses ballooned from just HK$57.7 million in 3Q 2007 to HK$111.3 million in 3Q 2008, an increase of 93%. For 9M 2008, the increase was 146.2% due to a low base for finance costs incurred in early FY 2007. As a result of this, profit before tax rose only 93.8%, less than the increase in gross profit but nevertheless still impressive. The fishing division (now bolstered) accounted for 55% of 3Q 2008 revenues, up from just 37.4% previously. China still made up the main bulk of sales (77.5% for 3Q 2008) and it remains to be seen if there will be pricing pressures for the Group due to the Government's announcements to combat inflation. Fish being a staple food item on Chinese menus may not make this effect too pervasive, but their next results update should mention something about their ASP (average selling prices) to hopefully be able to maintain their margins.
As explained in Note 8 (Page 10) of the result announcement, finance costs had risen due to interest attributable to US$93 million 4% convertible bonds, US$225 million 9.25% senior notes as well as increased short-term borrowings. The Group seems to have taken on a lot of debt in order to increase the contribution provided by the fishing division, and the effects of this additional debt are going to follow the company for some time into the future. I view this as part of PAH (and CFG's) expansion plan to increase their reach into the South American seas, and CY 2008 should be the year in which they manage to extend their footprint to these regions and also to add a new revenue stream to their business. As it is, it will be prudent to watch for their gearing, cash flows and financing costs in subsequent quarters.
Balance Sheet Review
The most notable increase within the Balance Sheet under "Non-Current Assets" belongs to PPE, and this increase is 77.4% from HK$863 million to HK$1,533 million. This reflects the Group's purchase of their additional stake in CFG and shows up CFG's related assets. Goodwill has also increased due to their acquisition of CFG.
Inventories have dipped slightly as this is the "low" season for PAH (4Q 2008 will be the peak season). Bills receivable has increased to HK$177 million in line with the increase in scale of operations and revenues. Current and Quick ratios are 1.56 and 1.27 respectively for 3Q 2008, and are 1.90 and 1.51 for 3Q 2007. The dip is due to the higher bank advances drawn on bills and also higher current portion of interest-bearing borrowings. As the ratios are still above 1, the company is not in any immediate danger of insolvency.
For non-current liabilities, it is worth noting that there is an amount of HK$615 million now appearing for convertible bonds. There is also an amount of HK$416.5 million worth of deferred consideration payable which I believe is a one-off amount. Net assets had increased to HK$4.25 billion from HK$2.78 billion from March 31, 2007, representing an increase of 52.9%.
Stay tuned for Part 2 of this analysis, which I will try my best to keep short and succinct !
Friday, March 21, 2008
Improving on Value Investing Techniques
After reading a few books on value investing, I realized that my framework, though sound, was not water-proof enough in the sense that I did not have a quantitativ framework for computing the intrinsic value of companies. Though it is good to get a rough idea of a company's intrinsic value in terms of its customers, market share, margins, competitors etc., it will be even better still to follow this up with a proper framework and template for assessing a company, so as to make appropriate comparisons with other companies within the same industry or companies which may share the same ratio comparisons (e.g. same store sales growth standards). Such quantitative methods may seem tedious at first but they do add a useful dimension when assessing the suitability of a company for long-term investment.
While reading "Value Investing for Dummies" by Peter J. Sander and Janet Haley, I came across templates which the book advocated that value investors make use of, in order to enhance understanding of a company and also to have a more systematic approach to valuation. Thus far, I have been assessing companies based on many qualitative aspects as well as simple metrics such as margins, earnings growth and earnings per share. In order to constantly improve and grow as a value investor, one must incorporate new models or knowledge which will enhance his assessment of companies suitable for investment; and these templates and spreadsheets really do assist in giving me a better picture of various aspects of a company. I will just briefly list the key areas I wish to look into to give myself an added dimension, as I have yet to design my own customized template. Once I have the templates ready, I will proceed to use them in future posts to evaluate companies which I deem suitable and worth investigating.
First of all, the book talks about "running the numbers" in order to arrive at an intrinsic value computation. Essentially, this estimates the number of years of growth of the company at a certain rate, discounted using an appropriate discount rate. Suffice to say the worksheet is comprehensive enough to cover most aspects of the assumptions but the growth and discount rate assumptions are the most important in order to arrive at a conservative value. It is this conservative value which value investors seek to establish a margin of safety against. I will go into more detail in subsequent posts when I design the spreadsheet for this.
The next section talks about "Strategic Financials", which seeks to examine three aspects of a company - profitability, productivity and capital structure. Again, a template is provided for assessing these three key traits of a company using a 5-year comparison (to look for trends and to see if things are improving). It is a pretty rigorous exercise and it is not easy to fill in the numbers, but it definitely provides a lot of useful information about a company. Finally, an ROE figure is computed based on these three aspects, and I will again provide more details of the ROE equation in a subsequent post.
The final section is the one without numbers, as it focuses on Strategic Intangibles. This area is the most difficult to ascertain and may be "grey" in certain instances due to subjective assessments of a company's brand power and management effectiveness. The characteristics given in the book which are evaluated include brand power, market share (and leadership), special competencies (if any), management effectiveness in terms of candour and independence, ownership, asset productivity and credit rating (less important factor). It will be extremely tedious to go through each and every one of these to obtain a "holistic" view of the company, thus even the book recommends skipping the less important and focusing on what makes the company worthwhile to consider. This is also the most interesting part of the analysis as it can provide insights into many qualitative aspects of a company which I frequently discuss on my blog.
Ultimately, these three aspects of analysis are just based on numbers and ratios. It is up to the astute value investors to MAKE SENSE of all the information and churn it into something useful and insightful. In a way, I have to admit that is the most difficult part of value investing - applying common sense and logic to a bunch of numbers and facts. But this is where the challenge comes in: if we do our homework properly and adopt a disciplined approach to investing, there is very little chance for failure and very little reason for losing money.
Purchase of Phil Fisher's "Common Stocks and Uncommon Profits"
Today, at the Times' Warehouse Sale Book Fair at the Expo, I managed to purchase this classic book from Phil Fisher which I had been eyeing for very long. Warren Buffett's style had evolved from being almost 100% Graham to being part Graham and part Fisher, which signifies the start of Buffett looking at businesses for the quality and intangibles instead of just plainly numbers. My investing style has long incorporated aspects of Phil Fisher's style in that he also enjoys talking to Management and also the company's stakeholders to get a more balanced view of the company outside of simply the numbers.
I managed to purchase this book for S$29, which is great value as the original price was S$38.50 ! Haha I guess value investors always love to seek value ! I had seen this book and eyed it for a long time but refused to buy till it was offered at a bargain price.....and now I finally own it. I shall be reading it thoroughly and posting valuable tidbits from it over time.
After reading a few books on value investing, I realized that my framework, though sound, was not water-proof enough in the sense that I did not have a quantitativ framework for computing the intrinsic value of companies. Though it is good to get a rough idea of a company's intrinsic value in terms of its customers, market share, margins, competitors etc., it will be even better still to follow this up with a proper framework and template for assessing a company, so as to make appropriate comparisons with other companies within the same industry or companies which may share the same ratio comparisons (e.g. same store sales growth standards). Such quantitative methods may seem tedious at first but they do add a useful dimension when assessing the suitability of a company for long-term investment.
While reading "Value Investing for Dummies" by Peter J. Sander and Janet Haley, I came across templates which the book advocated that value investors make use of, in order to enhance understanding of a company and also to have a more systematic approach to valuation. Thus far, I have been assessing companies based on many qualitative aspects as well as simple metrics such as margins, earnings growth and earnings per share. In order to constantly improve and grow as a value investor, one must incorporate new models or knowledge which will enhance his assessment of companies suitable for investment; and these templates and spreadsheets really do assist in giving me a better picture of various aspects of a company. I will just briefly list the key areas I wish to look into to give myself an added dimension, as I have yet to design my own customized template. Once I have the templates ready, I will proceed to use them in future posts to evaluate companies which I deem suitable and worth investigating.
First of all, the book talks about "running the numbers" in order to arrive at an intrinsic value computation. Essentially, this estimates the number of years of growth of the company at a certain rate, discounted using an appropriate discount rate. Suffice to say the worksheet is comprehensive enough to cover most aspects of the assumptions but the growth and discount rate assumptions are the most important in order to arrive at a conservative value. It is this conservative value which value investors seek to establish a margin of safety against. I will go into more detail in subsequent posts when I design the spreadsheet for this.
The next section talks about "Strategic Financials", which seeks to examine three aspects of a company - profitability, productivity and capital structure. Again, a template is provided for assessing these three key traits of a company using a 5-year comparison (to look for trends and to see if things are improving). It is a pretty rigorous exercise and it is not easy to fill in the numbers, but it definitely provides a lot of useful information about a company. Finally, an ROE figure is computed based on these three aspects, and I will again provide more details of the ROE equation in a subsequent post.
The final section is the one without numbers, as it focuses on Strategic Intangibles. This area is the most difficult to ascertain and may be "grey" in certain instances due to subjective assessments of a company's brand power and management effectiveness. The characteristics given in the book which are evaluated include brand power, market share (and leadership), special competencies (if any), management effectiveness in terms of candour and independence, ownership, asset productivity and credit rating (less important factor). It will be extremely tedious to go through each and every one of these to obtain a "holistic" view of the company, thus even the book recommends skipping the less important and focusing on what makes the company worthwhile to consider. This is also the most interesting part of the analysis as it can provide insights into many qualitative aspects of a company which I frequently discuss on my blog.
Ultimately, these three aspects of analysis are just based on numbers and ratios. It is up to the astute value investors to MAKE SENSE of all the information and churn it into something useful and insightful. In a way, I have to admit that is the most difficult part of value investing - applying common sense and logic to a bunch of numbers and facts. But this is where the challenge comes in: if we do our homework properly and adopt a disciplined approach to investing, there is very little chance for failure and very little reason for losing money.
Purchase of Phil Fisher's "Common Stocks and Uncommon Profits"
Today, at the Times' Warehouse Sale Book Fair at the Expo, I managed to purchase this classic book from Phil Fisher which I had been eyeing for very long. Warren Buffett's style had evolved from being almost 100% Graham to being part Graham and part Fisher, which signifies the start of Buffett looking at businesses for the quality and intangibles instead of just plainly numbers. My investing style has long incorporated aspects of Phil Fisher's style in that he also enjoys talking to Management and also the company's stakeholders to get a more balanced view of the company outside of simply the numbers.
I managed to purchase this book for S$29, which is great value as the original price was S$38.50 ! Haha I guess value investors always love to seek value ! I had seen this book and eyed it for a long time but refused to buy till it was offered at a bargain price.....and now I finally own it. I shall be reading it thoroughly and posting valuable tidbits from it over time.
Monday, March 17, 2008
Swiber - Revised Order Book with Major Project Win in Thailand
Swiber today announced a major project win in Thailand. They have been awarded a conditional letter of intent (LOI) from CUEL Limited ("CUEL") for installation of platforms and pipelines in the Gulf of Thailand. The value of these services is estimated to be in the region of about US$50 million per year, and this will carry on for 5 years from FY 2009 till FY 2013.
The full announcement can be read from Swiber's press release, so I won't embellish with more details here. What's important about this contract is that it represents (thus far) the longest contract which Swiber has signed to date, for recurring revenue. Previous contracts had been signed previously with BG Exploration (back in Dec 2006 and Jan 2007) for 3-year charter contracts worth a total value of US$14 million, but this is a far cry from the most recent contract which has a combined total value of US$250 million (US$50 million x 5 years) and extends for 5 years. Apparently, the benefits of an enlarged fleet means that Swiber will be able to handle more contracts of higher value at the same time, without needing to charter vessels from third parties. This should increase the breadth and scope of the contracts won and gear the company for even higher-value contracts come FY 2009 and beyond.
Below is an updated order book table, after incorporating Aspellian's comments about including 2 contracts from Dec 2006 and Jan 2007 from BG Exploration, as well as the new Thai project:-
I will proceed to review Pacific Andes' 3Q FY 2008 results next, and also to comment on FSL Trust's Annual Report should I find anything interesting to speak up about.
Swiber today announced a major project win in Thailand. They have been awarded a conditional letter of intent (LOI) from CUEL Limited ("CUEL") for installation of platforms and pipelines in the Gulf of Thailand. The value of these services is estimated to be in the region of about US$50 million per year, and this will carry on for 5 years from FY 2009 till FY 2013.
The full announcement can be read from Swiber's press release, so I won't embellish with more details here. What's important about this contract is that it represents (thus far) the longest contract which Swiber has signed to date, for recurring revenue. Previous contracts had been signed previously with BG Exploration (back in Dec 2006 and Jan 2007) for 3-year charter contracts worth a total value of US$14 million, but this is a far cry from the most recent contract which has a combined total value of US$250 million (US$50 million x 5 years) and extends for 5 years. Apparently, the benefits of an enlarged fleet means that Swiber will be able to handle more contracts of higher value at the same time, without needing to charter vessels from third parties. This should increase the breadth and scope of the contracts won and gear the company for even higher-value contracts come FY 2009 and beyond.
Below is an updated order book table, after incorporating Aspellian's comments about including 2 contracts from Dec 2006 and Jan 2007 from BG Exploration, as well as the new Thai project:-
I will proceed to review Pacific Andes' 3Q FY 2008 results next, and also to comment on FSL Trust's Annual Report should I find anything interesting to speak up about.
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).
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.
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.
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.
Friday, March 14, 2008
Mid-March 2008 Portfolio Summary and Review
I suddenly realized, after the previous 2 weeks of March had passed fitfully, that valuations in the Singapore stock market are becoming attractive at last. Since the time I began value investing, it has been hard to see such valuations as for most of FY 2007, valuations were through the roof and one cannot find a smidgen of margin of safety anywhere in sight. Value could usually only be found in companies which had yet to demonstrate their market dominance and increased earnings and margins, which means one has to assume Mr. Market was manic on the “right” companies in order for one to buy from him cheaply. This had only happened twice in the last year, leading me to make two purchases: Swiber and China Fishery.
Interestingly, gold has managed to hit US$1,000 an ounce, the US$ has fallen to an all-time low against the SGD at below S$1.38 and oil prices have actually breached US$111 per barrel. World markets are in turmoil over the sub-prime crisis, the Fed is being pressured to cut interest rates by 75 basis points and also badgered to come up with a large enough “stimulus” plan to ensure the economy and banks get back on track. And I am not even mentioning about global inflation hitting food prices and China’s inflation rate rising past 8% ! My point is that it is all doom and gloom now when just 9 months ago, share prices were somehow hitting new highs in spite of the fact that these problems were already festering. It is akin to a wounded man who walks around seemingly not noticing the large bleeding wound on this leg. When someone points this out to him, suddenly he gets all weak and stumbles and can hardly walk. So is it simply a mental realization or merely “risk re-pricing” kicking in ?
My opinion is that human beings in general tend to under-estimate the bad news when all seems good, which is why bull runs can last for so long. However, when the crap really hits the fan (and there is no denying it), sentiment can turn sour faster than you can blink. The over-reaction bias inherent in our brains makes us go “manic” and over-estimate the impact of bad news; which is why bear markets are often so severe in terms of its impact (e.g. crashes, sharp price drops) but rarely last longer than 2 years. This is a very interesting piece of human psychology which I will attempt to talk more about in a subsequent posting under “Behavioural Finance Series”.
Below is the summary of my investments and related news as at March 14, 2008 (STI at 2,839.01 points).:-
1) Ezra (Vested since October 6, 2005) - Buy Price $0.645 (bonus adjusted), Market Price $1.90, Gain 195%, YTD Loss 42.8%. There was no news from Ezra during the half month ended March 14, 2008, except for some insider purchases which I will not put too much emphasis on, as well as a non-executive director Ms. Goh Gaik Choo resigning due to retirement. Incidentally, she is the wife of the Chairman Mr. Lee Kian Soo and the mother of the CEO Mr. Lionel Lee. I would expect Ezra to report their 1H FY 2008 results by mid-April 2008 (last year, it was April 9, 2007).
2) Boustead (Vested since September 13, 2006; averaged down November 13, 2006) - Buy Price $1.295 (average), Market Price $1.99, Gain 53.7%, YTD Loss 17.4%. On March 5, 2008, Boustead announced that they would be entering a joint venture with AP Strategic as well as Representations International for a series of projects in Vietnam. The nature of the projects was not specified but Boustead will take a 30% stake, while AP will take a 60% stake and Representations a 10% stake. On March 10, 2008, the Group announced that their energy-related business had snared S$24 million worth of contracts. Notice that their water and wastewater division has been conspicuously quiet for FY 2008, which is kind of a disappointment even though the CEO was already preparing shareholders for this division’s non-performance.
3) Swiber (Vested since February 14, 2007) - Buy Price $1.01, Market Price $2.03, Gain 101%, YTD Loss 40.8%. Swiber had, on March 7, 2008, announced their second-largest EPCIC contract from an existing customer BG Exploration from India. This would mark the Group’s first entry into India with an EPCIC project and it is worth US$127 million to be executed from 1Q 2008 to 2Q 2009. The Group also announced, on March 12, 2008, that they had secured their third Malaysian LOI worth US$29 million for an offshore installation project. This would commence in 2Q 2008 and be completed by 3Q 2008. These two contracts have boosted Swiber’s order book from US$350 million to a record US$506 million. Yesterday, the company also announced the incorporation of a new subsidiary company in Brunei called Swiber Offshore (B) Sdn Bhd, as well as the incorporation of a joint-venture company called Swiber Rahaman Sendirian Berhad in which the Group will hold a 51%-stake. I see these as positive signs of their foothold establishment in key territories where they plan to expand their presence.
4) Suntec REIT (Vested since December 9, 2004) - Buy Price $1.11, Market Price $1.40, Gain 26.1%, YTD Loss 18.1%. There was not much eventful news on Suntec REIT, other than the fact that the convertible bonds have been approved.
5) Pacific Andes (Vested since March 29, 2006; Rights Issue July 11, 2007 at S$0.52 per share; averaged down August 17, 2007) - Buy Price $0.655 (rights-adjusted), Market Price $0.51, Loss 22.1%, YTD Loss 19.0%. There was no news on Pacific Andes during the period ended March 14, 2008.
6) China Fishery Group (Vested since November 20, 2007) - Buy Price $1.50 (average), Market Price $1.69, Gain 12.7%, YTD Loss 8.6%. There was no news for CFG for the period ended March 14, 2008. However, CIMB did release a “China Plays” report which stated that CFG had gone into the fishmeal business to build up a presence in South America and Peru, even though fishmeal net margins are only 3.3%. According to the company, it is part of their long-term strategy to establish a firm base in South America and to increase net margins eventually to 10%. The negotiation of their 4th VOA should also be concluded by 1H 2008, according to the report; and this will significantly increase margins as the expense on this 4th VOA is on a daily operating basis currently.
7) First Ship Lease Trust (Vested since January 14, 2008) - Buy Price (Averaged Down) $1.105, Market Price $1.10, Loss 0.5%. There was no significant news from this shipping trust during the period.
Overall Portfolio
My overall portfolio has increased by 43.1% without taking into FSL Trust’s cost. If included, the gain is 31.0% from a cost of S$80.4K as at March 14, 2008. The market value of my portfolio without FSL Trust is S$83.4K, and if FSL Trust is included then the portfolio value is S$105.3K. Realized gains remain at about S$4.9K until the ex-dividend date for China Fishery comes along.
Comparison against STI
The FTSE STI had declined by 18.5% since the start of 2008. Without FSL Trust, my portfolio has declined 28.5%.To date in 2008, my portfolio has under-performed the new benchmark FTSE STI by 10 percentage points. Hardly impressive but considering the "Super-Investors of Graham and Doddsville" experienced rather volatile returns as well over certain years, I think this is acceptable as part of the value investing mantra. Of course, if some of my investments turn out to be "duds", then I would have failed to capitalize on the compounding effect of my gains and hence would have lost out to time itself. Although there is no way to reverse this, at least it will make me learn from my mistakes better and become a better investor.
My next portfolio review will be on Monday, March 31, 2008 after market close.
I suddenly realized, after the previous 2 weeks of March had passed fitfully, that valuations in the Singapore stock market are becoming attractive at last. Since the time I began value investing, it has been hard to see such valuations as for most of FY 2007, valuations were through the roof and one cannot find a smidgen of margin of safety anywhere in sight. Value could usually only be found in companies which had yet to demonstrate their market dominance and increased earnings and margins, which means one has to assume Mr. Market was manic on the “right” companies in order for one to buy from him cheaply. This had only happened twice in the last year, leading me to make two purchases: Swiber and China Fishery.
Interestingly, gold has managed to hit US$1,000 an ounce, the US$ has fallen to an all-time low against the SGD at below S$1.38 and oil prices have actually breached US$111 per barrel. World markets are in turmoil over the sub-prime crisis, the Fed is being pressured to cut interest rates by 75 basis points and also badgered to come up with a large enough “stimulus” plan to ensure the economy and banks get back on track. And I am not even mentioning about global inflation hitting food prices and China’s inflation rate rising past 8% ! My point is that it is all doom and gloom now when just 9 months ago, share prices were somehow hitting new highs in spite of the fact that these problems were already festering. It is akin to a wounded man who walks around seemingly not noticing the large bleeding wound on this leg. When someone points this out to him, suddenly he gets all weak and stumbles and can hardly walk. So is it simply a mental realization or merely “risk re-pricing” kicking in ?
My opinion is that human beings in general tend to under-estimate the bad news when all seems good, which is why bull runs can last for so long. However, when the crap really hits the fan (and there is no denying it), sentiment can turn sour faster than you can blink. The over-reaction bias inherent in our brains makes us go “manic” and over-estimate the impact of bad news; which is why bear markets are often so severe in terms of its impact (e.g. crashes, sharp price drops) but rarely last longer than 2 years. This is a very interesting piece of human psychology which I will attempt to talk more about in a subsequent posting under “Behavioural Finance Series”.
Below is the summary of my investments and related news as at March 14, 2008 (STI at 2,839.01 points).:-
1) Ezra (Vested since October 6, 2005) - Buy Price $0.645 (bonus adjusted), Market Price $1.90, Gain 195%, YTD Loss 42.8%. There was no news from Ezra during the half month ended March 14, 2008, except for some insider purchases which I will not put too much emphasis on, as well as a non-executive director Ms. Goh Gaik Choo resigning due to retirement. Incidentally, she is the wife of the Chairman Mr. Lee Kian Soo and the mother of the CEO Mr. Lionel Lee. I would expect Ezra to report their 1H FY 2008 results by mid-April 2008 (last year, it was April 9, 2007).
2) Boustead (Vested since September 13, 2006; averaged down November 13, 2006) - Buy Price $1.295 (average), Market Price $1.99, Gain 53.7%, YTD Loss 17.4%. On March 5, 2008, Boustead announced that they would be entering a joint venture with AP Strategic as well as Representations International for a series of projects in Vietnam. The nature of the projects was not specified but Boustead will take a 30% stake, while AP will take a 60% stake and Representations a 10% stake. On March 10, 2008, the Group announced that their energy-related business had snared S$24 million worth of contracts. Notice that their water and wastewater division has been conspicuously quiet for FY 2008, which is kind of a disappointment even though the CEO was already preparing shareholders for this division’s non-performance.
3) Swiber (Vested since February 14, 2007) - Buy Price $1.01, Market Price $2.03, Gain 101%, YTD Loss 40.8%. Swiber had, on March 7, 2008, announced their second-largest EPCIC contract from an existing customer BG Exploration from India. This would mark the Group’s first entry into India with an EPCIC project and it is worth US$127 million to be executed from 1Q 2008 to 2Q 2009. The Group also announced, on March 12, 2008, that they had secured their third Malaysian LOI worth US$29 million for an offshore installation project. This would commence in 2Q 2008 and be completed by 3Q 2008. These two contracts have boosted Swiber’s order book from US$350 million to a record US$506 million. Yesterday, the company also announced the incorporation of a new subsidiary company in Brunei called Swiber Offshore (B) Sdn Bhd, as well as the incorporation of a joint-venture company called Swiber Rahaman Sendirian Berhad in which the Group will hold a 51%-stake. I see these as positive signs of their foothold establishment in key territories where they plan to expand their presence.
4) Suntec REIT (Vested since December 9, 2004) - Buy Price $1.11, Market Price $1.40, Gain 26.1%, YTD Loss 18.1%. There was not much eventful news on Suntec REIT, other than the fact that the convertible bonds have been approved.
5) Pacific Andes (Vested since March 29, 2006; Rights Issue July 11, 2007 at S$0.52 per share; averaged down August 17, 2007) - Buy Price $0.655 (rights-adjusted), Market Price $0.51, Loss 22.1%, YTD Loss 19.0%. There was no news on Pacific Andes during the period ended March 14, 2008.
6) China Fishery Group (Vested since November 20, 2007) - Buy Price $1.50 (average), Market Price $1.69, Gain 12.7%, YTD Loss 8.6%. There was no news for CFG for the period ended March 14, 2008. However, CIMB did release a “China Plays” report which stated that CFG had gone into the fishmeal business to build up a presence in South America and Peru, even though fishmeal net margins are only 3.3%. According to the company, it is part of their long-term strategy to establish a firm base in South America and to increase net margins eventually to 10%. The negotiation of their 4th VOA should also be concluded by 1H 2008, according to the report; and this will significantly increase margins as the expense on this 4th VOA is on a daily operating basis currently.
7) First Ship Lease Trust (Vested since January 14, 2008) - Buy Price (Averaged Down) $1.105, Market Price $1.10, Loss 0.5%. There was no significant news from this shipping trust during the period.
Overall Portfolio
My overall portfolio has increased by 43.1% without taking into FSL Trust’s cost. If included, the gain is 31.0% from a cost of S$80.4K as at March 14, 2008. The market value of my portfolio without FSL Trust is S$83.4K, and if FSL Trust is included then the portfolio value is S$105.3K. Realized gains remain at about S$4.9K until the ex-dividend date for China Fishery comes along.
Comparison against STI
The FTSE STI had declined by 18.5% since the start of 2008. Without FSL Trust, my portfolio has declined 28.5%.To date in 2008, my portfolio has under-performed the new benchmark FTSE STI by 10 percentage points. Hardly impressive but considering the "Super-Investors of Graham and Doddsville" experienced rather volatile returns as well over certain years, I think this is acceptable as part of the value investing mantra. Of course, if some of my investments turn out to be "duds", then I would have failed to capitalize on the compounding effect of my gains and hence would have lost out to time itself. Although there is no way to reverse this, at least it will make me learn from my mistakes better and become a better investor.
My next portfolio review will be on Monday, March 31, 2008 after market close.
Thursday, March 13, 2008
Global Voice - Is the CEO talking about Share Price ?
Interestingly, I have been keeping track of Global Voice's recent performance in terms of share price and also had a quick glance at its latest FY 2007 financial statements even though I had divested myself of this company some time back. It will always remain a lesson to learn for me as my original purchase of this company was not based on value investing principles, thus I use it as a benchmark as to how far WRONG I can be !
The CEO of Global Voice had, on March 10, 2008, issued a press release which specifically commented on the SHARE PRICE of the company. I will feature snippets (in quotation marks) of what was announced and my comments shall be in italics. Note that this is NOT a "whack-the-CEO" session, but merely to point out that Management should seriously consider building the business instead of worrying (to the point of being beleaguered !) about share price.
1) "confirmed that the board of the Company was unaware of any business, financial or operational reasons for last week’s decline in the share price " Erm, actually I did not realize that anyone had asked him to publicly comment on the sharp share price tumble. So why did he take it upon himself to comment publicly about the "sudden share price plunge" ?
2) "The board is therefore disappointed and surprised by the recent decline in the company’s share price " What I do not understand is why the Board has to care so much about share price ? It's as if they intend to raise funds through a secondary offering; that's the only time I can think of for Management to glance at the share price. Otherwise, please go about the business of creating shareholder value and concentrate on building the company.
3) "Measuring all business signed year-over-year to March 9th 2008, total number of agreements have grown 106% and total contracted monthly recurring revenues have grown 144% in value year-over-year." I did note that Management's focus is always perennially on revenues and order book flow. They have to realize that shareholders care about expenses and COGS as well and these are equally important in determining if the company can be profitable or if it can have enough cash to sustain its operational activities. I did note that capex requirements are high for a company like GV (which results in high depreciation and amortization expenses) and that they had raised funds through convertible bonds TWICE (which means very high financing costs and cash outflows).
4) "This early indicative performance, alongside the largest ever sales pipeline the company has had, gives us strong confidence in achieving the goals we have set out for the company in 2008." I did note that their goals included achieving strong growth in revenues, profitability and shareholder value in FY 2008. But how do you grow profitability when the company is not even profitable in the first place ? It boggles the mind when they make such a statement. If Management had any candour at all, they would address the problem of high costs and talk about turning the company around. I also noted that for FY 2008, they will be making "a major investment in their recently secured London network", which may mean more fund raising and more debt being issued. Somehow, I feel that the Management have yet to address the critical issues of high costs, depreciation and financing costs clearly enough. They previously mention EBITDA rising which is not indicative of the TRUE performance of the company, as you cannot afford to ignore income taxes, depreciation and amortization.
The whole point of this post is to remind investors that Management should not fret over "share price plunges", but instead just work on building the business, reducing costs and ensuring they have enough cash on hand without resorting to the debt and equity markets too often. Sometimes, growth can come at a price but when this price is too high, it may yet collapse the company.
I will post updates on Global Voice as a matter of learning as and when I see fit.
Interestingly, I have been keeping track of Global Voice's recent performance in terms of share price and also had a quick glance at its latest FY 2007 financial statements even though I had divested myself of this company some time back. It will always remain a lesson to learn for me as my original purchase of this company was not based on value investing principles, thus I use it as a benchmark as to how far WRONG I can be !
The CEO of Global Voice had, on March 10, 2008, issued a press release which specifically commented on the SHARE PRICE of the company. I will feature snippets (in quotation marks) of what was announced and my comments shall be in italics. Note that this is NOT a "whack-the-CEO" session, but merely to point out that Management should seriously consider building the business instead of worrying (to the point of being beleaguered !) about share price.
1) "confirmed that the board of the Company was unaware of any business, financial or operational reasons for last week’s decline in the share price " Erm, actually I did not realize that anyone had asked him to publicly comment on the sharp share price tumble. So why did he take it upon himself to comment publicly about the "sudden share price plunge" ?
2) "The board is therefore disappointed and surprised by the recent decline in the company’s share price " What I do not understand is why the Board has to care so much about share price ? It's as if they intend to raise funds through a secondary offering; that's the only time I can think of for Management to glance at the share price. Otherwise, please go about the business of creating shareholder value and concentrate on building the company.
3) "Measuring all business signed year-over-year to March 9th 2008, total number of agreements have grown 106% and total contracted monthly recurring revenues have grown 144% in value year-over-year." I did note that Management's focus is always perennially on revenues and order book flow. They have to realize that shareholders care about expenses and COGS as well and these are equally important in determining if the company can be profitable or if it can have enough cash to sustain its operational activities. I did note that capex requirements are high for a company like GV (which results in high depreciation and amortization expenses) and that they had raised funds through convertible bonds TWICE (which means very high financing costs and cash outflows).
4) "This early indicative performance, alongside the largest ever sales pipeline the company has had, gives us strong confidence in achieving the goals we have set out for the company in 2008." I did note that their goals included achieving strong growth in revenues, profitability and shareholder value in FY 2008. But how do you grow profitability when the company is not even profitable in the first place ? It boggles the mind when they make such a statement. If Management had any candour at all, they would address the problem of high costs and talk about turning the company around. I also noted that for FY 2008, they will be making "a major investment in their recently secured London network", which may mean more fund raising and more debt being issued. Somehow, I feel that the Management have yet to address the critical issues of high costs, depreciation and financing costs clearly enough. They previously mention EBITDA rising which is not indicative of the TRUE performance of the company, as you cannot afford to ignore income taxes, depreciation and amortization.
The whole point of this post is to remind investors that Management should not fret over "share price plunges", but instead just work on building the business, reducing costs and ensuring they have enough cash on hand without resorting to the debt and equity markets too often. Sometimes, growth can come at a price but when this price is too high, it may yet collapse the company.
I will post updates on Global Voice as a matter of learning as and when I see fit.
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.
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.
Thursday, March 06, 2008
Swiber - FY 2007 Financial Results Review and Analysis (Part 1)
Ok, I've been procrastinating on doing my analysis for Swiber due to personal commitments, but it was on the back of my mind all this time and I was interested to dig into their numbers and facts. Apparently, some reports have been written by various broking houses which made mention of certain facts and assumptions about the company which I felt was not entirely accurate, and this post will seek to address those issues and clarify them. This is of course, notwithstanding the fact that these same brokerage houses give extremely ridiculous target prices for the company (one stated it at S$5.05 if I remember correctly). My advice for readers and interested investors would be to ignore such "noise" and evaluate the company on your own based on their press releases, numbers and industry profile.
This review will be unusually long and I should inform the reader that it will come in three separate parts which may not all be posted consecutively. Part 1 discusses the Income Statement and Balance Sheet and various aspects to look out for, including margins, debt levels, current ratios and earnings. Part 2 will touch on Cash Flow issues and also touch on various segmental reporting data which the company has so kindly provided. Part 3 will go in depth about the company's prospects and plans for FY 2008 and beyond, and also elaborate on their new business unit Kreuz Shipbuilding. It will also include a summary of their order book and other information gleaned from their presentation slides for FY 2007. So, readers, be patient and I will plough through the information to make sense of this company's prospects, which should promise to be an exciting time for shareholders, as I see FY 2007 and even FY 2008 as "foundation-laying" years for the company.
Income Statement Review
For 4Q 2007, Swiber chalked up US$61.1 million worth of sales, up 159.1% from 4Q 2006's US$23.6 million. Gross margins for 4Q came in at 23.9% for 2007 versus 19.9% for 2006, which the Management attributed to the increased use of their in-house vessel fleet. However, do note that finance costs have also ballooned by 817% quarter-on-quarter as a result of their increase in current and long-term liabilities such as bank loans and bonds (medium-term notes). This will be discussed further under the Balance Sheet review. Administrative expenses incfreased by 155% but is not a serious cause for concern as revenues had increased by roughly the same amount. Stripping away the exceptional gain from the disposal of vessels held for sale (in the sale and leaseback) of US$13.2 million, we get a net profit of US$6.98 milion for 4Q 2007, which is a respectable 78.1% increase over 4Q 2006's net profit of US$3.9 million. Net margins stand at 11.4% for 4Q 2007 and 16.6% for 4Q 2006, so it can be seen that Swiber's net margins were actually negative impacted in the 4Q due to the large increase in finance costs. Moving forward, Swiber has to increase its revenue stream and margins in order to offset the interest effects of the debt it took up; but realistically speaking, this may take some time.
For FY 2007, revenues have increased by 126.4% fom US$66.8 million to US$151.1 million, largely due to a higher order book as a result of more contract wins and also contribution from their largest contract to date - the US$146.6 million project for Brunei Shell. I will touch on why I feel that this contract's value was not fully recognized in Part 2 of my review. Gross margins rose from 22.9% to 28.3% due to the same reasons given in the 4Q analysis. I would expect further gross margin improvement in time to come as Swiber moves into subsea and deepwater services as they are currently chartering a subsea vessel for use in one of their projects. Once their subsea vessels are ready by FY 2009, this would be another boost to gross margins.
Overall, for FY 2007, admin expenses jumped 251% due to higher costs. I would attribute this to the hiring of staff as operations expanded, training of these staff and also increased costs as a result of acquiring their new wholly-owned subsidiary, Kreuz Shipbuilding. As mentioned earlier, finance costs also shot up as a result of more debt which the company took up, thus the rise in finance costs came up to 579% year-on-year. Net profits for FY 2007 (excluding exceptional gain of US$21.7 million) came up to US$28 million, which is an increase of 130.8% over FY 2006's net profit of US$12.1 million. Adjusted net margin for FY 2007 was 18.5% against FY 2006's 18.2%, as the higher finance costs and higher operating expenses took a toll. Thus, even though gross margins improved by 5.4 percentage points, higher expenses eroded most of that improvement and this resulted in only a marginal 0.3 percentage point rise in net margins. Once costs stabilize and contract flows continue, the Group should be able to improve their overall net margins. I estimate that it will probably take the company 1 to 2 years to do this.
Balance Sheet Review
A quick glance at the Balance Sheet reveals that Swiber's net current asset position has strengthened considerably over the past financial year. They have bolstered their Balance Sheet with more fixed and current assets but have also balanced this with higher loans and mid-term debt. Cash balances increased to US$97.7 million as at Dec 31, 2007 and will be touched on in Part 2 during the Cash Flow Statement review. What's interesting are the significant increases in trade and other receivables forming about US$126.7 million worth of current assets. Because of this "spike" in receivables, it has caused the cash flow statement to report a net negative operating cash flow (i.e. operating cash outflow). While increased business activity may account for part of the increase, I would suspect that it cannot explain the entire large increase, which makes up a 288% increase in trade and other receivables over FY 2006. One plausible reason I can think of is that this balance consists of monies which are due to Swiber from their sale and leaseback; thus it may be a timing issue as they may not have received the monies as at year-end but have to account for it as the receivable has already crystallized. I will need to clarify this further with Management during the upcoming AGM. (Note that there is a further US$11.6 million of "Other Receivables" classified as non-current assets, and this could possibly be proceeds from the sale and leaseback of vessels to be delivered in FY 2009, which explains why the cash comes in at a much later stage).
Of note to mention is an amount of US$1.8 million being derivative financial instruments. I linked this number to the statement of changes in equity where there is a similar balance booked under "Hedging Reserve". The description is "gain on cashflow hedges" which means this should form the hedging "gain" which the company has capitalized as a non-current asset in the Balance Sheet. It will be interesting to ask the Management regarding the hedging strategies they use, particularly after the amazing losses sustained by SembCorp Marine and Labroy Marine as a result of these "harmless" derivatives. I will make a note to ask during the AGM as well.
Moving on to liabilities, both trade and other payables have increased as a result of increased business activities. What's important to note is that bank loans have increased significantly from US$10.8 million (current + long-term portion) to US$24.6 million, which represents an almost 250% increase. These borrowings are intended to fund purchases of fixed assets to increase Swiber's vessel fleet. There is also an amount of US$71.1 million being medium-term notes issued during FY 2007 as part of their multi-currency medium-term note programme. The increase in gearing is an opportunity taken by Management to use leverage to grow their business. While Buffett speaks of "great" businesses which can use internally generated cash flows purely for growth, most "good" businesses have to rely on external financing in the form of debt or equity in order to grow. Swiber is such a business - good but not great ! Of course, the risk inherent in such borrowings is that if the company fails to achieve growth which exceeds the cost of borrowing, then leverage acts as a double-edged sword to "slice" the company apart and bleed it dry; not a pretty sight at all. So the key here is to have faith that Management can deliver the results in order for them to increase their gearing from 0.22 to 0.54.
Part 2 of my review will touch on the Cash Flow Statement and discuss how prudently the company is using and generating its cash, and I will also comment on the segmental reporting and tie it back to the regions which Swiber is targeting for growth through strategic alliances/joint ventures.
Ok, I've been procrastinating on doing my analysis for Swiber due to personal commitments, but it was on the back of my mind all this time and I was interested to dig into their numbers and facts. Apparently, some reports have been written by various broking houses which made mention of certain facts and assumptions about the company which I felt was not entirely accurate, and this post will seek to address those issues and clarify them. This is of course, notwithstanding the fact that these same brokerage houses give extremely ridiculous target prices for the company (one stated it at S$5.05 if I remember correctly). My advice for readers and interested investors would be to ignore such "noise" and evaluate the company on your own based on their press releases, numbers and industry profile.
This review will be unusually long and I should inform the reader that it will come in three separate parts which may not all be posted consecutively. Part 1 discusses the Income Statement and Balance Sheet and various aspects to look out for, including margins, debt levels, current ratios and earnings. Part 2 will touch on Cash Flow issues and also touch on various segmental reporting data which the company has so kindly provided. Part 3 will go in depth about the company's prospects and plans for FY 2008 and beyond, and also elaborate on their new business unit Kreuz Shipbuilding. It will also include a summary of their order book and other information gleaned from their presentation slides for FY 2007. So, readers, be patient and I will plough through the information to make sense of this company's prospects, which should promise to be an exciting time for shareholders, as I see FY 2007 and even FY 2008 as "foundation-laying" years for the company.
Income Statement Review
For 4Q 2007, Swiber chalked up US$61.1 million worth of sales, up 159.1% from 4Q 2006's US$23.6 million. Gross margins for 4Q came in at 23.9% for 2007 versus 19.9% for 2006, which the Management attributed to the increased use of their in-house vessel fleet. However, do note that finance costs have also ballooned by 817% quarter-on-quarter as a result of their increase in current and long-term liabilities such as bank loans and bonds (medium-term notes). This will be discussed further under the Balance Sheet review. Administrative expenses incfreased by 155% but is not a serious cause for concern as revenues had increased by roughly the same amount. Stripping away the exceptional gain from the disposal of vessels held for sale (in the sale and leaseback) of US$13.2 million, we get a net profit of US$6.98 milion for 4Q 2007, which is a respectable 78.1% increase over 4Q 2006's net profit of US$3.9 million. Net margins stand at 11.4% for 4Q 2007 and 16.6% for 4Q 2006, so it can be seen that Swiber's net margins were actually negative impacted in the 4Q due to the large increase in finance costs. Moving forward, Swiber has to increase its revenue stream and margins in order to offset the interest effects of the debt it took up; but realistically speaking, this may take some time.
For FY 2007, revenues have increased by 126.4% fom US$66.8 million to US$151.1 million, largely due to a higher order book as a result of more contract wins and also contribution from their largest contract to date - the US$146.6 million project for Brunei Shell. I will touch on why I feel that this contract's value was not fully recognized in Part 2 of my review. Gross margins rose from 22.9% to 28.3% due to the same reasons given in the 4Q analysis. I would expect further gross margin improvement in time to come as Swiber moves into subsea and deepwater services as they are currently chartering a subsea vessel for use in one of their projects. Once their subsea vessels are ready by FY 2009, this would be another boost to gross margins.
Overall, for FY 2007, admin expenses jumped 251% due to higher costs. I would attribute this to the hiring of staff as operations expanded, training of these staff and also increased costs as a result of acquiring their new wholly-owned subsidiary, Kreuz Shipbuilding. As mentioned earlier, finance costs also shot up as a result of more debt which the company took up, thus the rise in finance costs came up to 579% year-on-year. Net profits for FY 2007 (excluding exceptional gain of US$21.7 million) came up to US$28 million, which is an increase of 130.8% over FY 2006's net profit of US$12.1 million. Adjusted net margin for FY 2007 was 18.5% against FY 2006's 18.2%, as the higher finance costs and higher operating expenses took a toll. Thus, even though gross margins improved by 5.4 percentage points, higher expenses eroded most of that improvement and this resulted in only a marginal 0.3 percentage point rise in net margins. Once costs stabilize and contract flows continue, the Group should be able to improve their overall net margins. I estimate that it will probably take the company 1 to 2 years to do this.
Balance Sheet Review
A quick glance at the Balance Sheet reveals that Swiber's net current asset position has strengthened considerably over the past financial year. They have bolstered their Balance Sheet with more fixed and current assets but have also balanced this with higher loans and mid-term debt. Cash balances increased to US$97.7 million as at Dec 31, 2007 and will be touched on in Part 2 during the Cash Flow Statement review. What's interesting are the significant increases in trade and other receivables forming about US$126.7 million worth of current assets. Because of this "spike" in receivables, it has caused the cash flow statement to report a net negative operating cash flow (i.e. operating cash outflow). While increased business activity may account for part of the increase, I would suspect that it cannot explain the entire large increase, which makes up a 288% increase in trade and other receivables over FY 2006. One plausible reason I can think of is that this balance consists of monies which are due to Swiber from their sale and leaseback; thus it may be a timing issue as they may not have received the monies as at year-end but have to account for it as the receivable has already crystallized. I will need to clarify this further with Management during the upcoming AGM. (Note that there is a further US$11.6 million of "Other Receivables" classified as non-current assets, and this could possibly be proceeds from the sale and leaseback of vessels to be delivered in FY 2009, which explains why the cash comes in at a much later stage).
Of note to mention is an amount of US$1.8 million being derivative financial instruments. I linked this number to the statement of changes in equity where there is a similar balance booked under "Hedging Reserve". The description is "gain on cashflow hedges" which means this should form the hedging "gain" which the company has capitalized as a non-current asset in the Balance Sheet. It will be interesting to ask the Management regarding the hedging strategies they use, particularly after the amazing losses sustained by SembCorp Marine and Labroy Marine as a result of these "harmless" derivatives. I will make a note to ask during the AGM as well.
Moving on to liabilities, both trade and other payables have increased as a result of increased business activities. What's important to note is that bank loans have increased significantly from US$10.8 million (current + long-term portion) to US$24.6 million, which represents an almost 250% increase. These borrowings are intended to fund purchases of fixed assets to increase Swiber's vessel fleet. There is also an amount of US$71.1 million being medium-term notes issued during FY 2007 as part of their multi-currency medium-term note programme. The increase in gearing is an opportunity taken by Management to use leverage to grow their business. While Buffett speaks of "great" businesses which can use internally generated cash flows purely for growth, most "good" businesses have to rely on external financing in the form of debt or equity in order to grow. Swiber is such a business - good but not great ! Of course, the risk inherent in such borrowings is that if the company fails to achieve growth which exceeds the cost of borrowing, then leverage acts as a double-edged sword to "slice" the company apart and bleed it dry; not a pretty sight at all. So the key here is to have faith that Management can deliver the results in order for them to increase their gearing from 0.22 to 0.54.
Part 2 of my review will touch on the Cash Flow Statement and discuss how prudently the company is using and generating its cash, and I will also comment on the segmental reporting and tie it back to the regions which Swiber is targeting for growth through strategic alliances/joint ventures.
Monday, March 03, 2008
Personal Finance Part 7 - Car
Tha latest news in the almost never-ending series on "inflationary" price increases includes new adjusted pump prices from Caltex for all three classes of petrol. Regular 95 now costs S$2.046 per litre, Regular 98 at S$2.12 and Premium 98 at S$2.286 per litre. As Singaporeans may know by now, there is a worldwide commodities "boom" which had led to prices of everything from steel, oil, pork and flour rising quite a bit. This has inadvertently resulted in an inflation rate of 6.6% which was recently reported in the news. Yet, when I recently passed by a car road show at Suntec City atrium (open area near Carrefour), there were scores of people literally lining up to purchase cars !
Well, this post is about cars and the cost, benefits and disadvantages of owning one. Readers should be aware by now that I do NOT own a car and have no intention of owning one in the near future. It is in my interest to evaluate the real cost of owning a car, both in monetary terms and social terms; and today's Business Times has a good article on the approximate costs of owning a car which I shall proceed to list down. Singapore is basically one of the most expensive places to purchase a car (yeah, even a second-hand one !), yet it is a fact that more and more Singaporeans are owning cars as the total car population has actually increased about 6%, such that the government has to resort to measures to limit the car population by increasing ERP charges on road usage. Sounds like a pretty drastic measure to me.....as I do not see a big problem with our current public transport system (I take buses all over the place), except for the occasional long wait and over-crowded buses.
Anyhow, let me break down the numbers according to BT and comment on them. According to the article, if you spend S$50K on a car with a 70% loan at 3% p.a interest for 7 years, then you will end up paying close to S$130K after 10 years. The breakdown is as follows:-
Cost of Car including COE - S$50K (assume a medium size car with average horsepower, though I think most families seem to like the MPV, while youngsters love the sports car variety with 2 doors)
Car Loan (70% of purchase price at 3% p.a. for 7 years) - S$7,350 >> I guess 3% per annum is a reasonable rate though I've never enquired.
Insurance (S$1,500 per year for 10 years) - S$15K >> This seems like a hefty cost to me because S$1,500 per year is S$125 per month which is quite a high fixed cost. Just to provide a comparison, my monthly transport bills come up to at most S$80 to S$100 using buses.
Road Tax (S$500 per yearfor 10 years) - S$5K >> This is basially the "cost" of using roads. It's something like a TV licence fee which you have to pay even if you don't watch the TV ! So take it that this is the tax you pay just to put your car on the road (not to use the road !).
Parking Charges for Home and Office (S$250 per month x 12 x 10 years) - S$30K >> Wow, another very hefty bill to pay just to park your car ! The problem with parking is that it can be a real nuisance when car parks are full, there are insufficient spaces or it's hard to maneouvre. I personally disliked parking when I took my driving test, though I never knew that season parking charges could be so high. The author assumes S$90 per month for HDB parking I guess, while the rest of the S$160 is to park at the season lots at your office block. If you don't drive to work (which sort of defeats the purpose in having a car eh ?), then you can just assume S$90 per month in car park charges, which means S$10.8K instead of S$30K after 10 years. Still a pretty large sum by any standards.
ERP Charges (S$3 per day x 240 working days x 10 years) - S$7.2K >> OK, maybe it's my imagination, but I think most people will spend more than S$3 per day to get to and from work, especially those using CTE tunnels and hitting MULTIPLE gantries. I think some people could end up paying as much as S$6 to S$9 per day if they are "unlucky". So this cost can balloon into something of a nightmare, especially since the government is considering implementing GPS-based ERP charging. This means that you can literally be charged per kilometre of travel instead of just passing through certain roads. A scary thought, and ERP will certainly be the bane of many drivers as time passes. This is the main reason why I do not own a car; the usage of the car per month (assuming S$5 per day in ERP) easily comes up to S$100 and that's not counting petrol costs yet.
Petrol Costs (S$200 per month x 12 x 10 years) - S$24K >> Now we come to the ultimate money-drainer, which is petrol costs. The author assumes a petrol cost of S$200 per month; but this cost may vary significantly depending on your frequency of use, model of car (whether it drinks petrol like you drink water) as well as, of course, oil prices. I would say that larger cars probably need about S$80 for a full tank and if the family/individual drives often, then he needs to pump once a week which comes up to about S$320 per month. Thus, using this figure, this expense may come up to S$38.4K in 10 years time using a pessimistic scenario.
Maintenance and Repairs (S$300 per annum x 10 years) - S$3K >> Somehow I find it hard to believe that one only spends S$300 per year servicing their car. I would think a regular spare parts check would cost at least S$50 to S$100 each time, and for the total to be much higher. But I shall leave the figure as it is for now.
The rest of the assumptions are for fines and accidents, which I assume one should and would not incur unless one was driving recklesly, or drink driving ! The BT article totals up the figures to give an approximate S$132,550, which boils down to about S$1,105 per month. If you take into account the "additional" potential extra costs, the cost per month is about S$1,360. Thus, for a person who takes home about S$3K (median income level per individual), this makes owning a car very challenging indeed !
To end off, all I can say is that if one forgoes a car, he can hope to achieve financial freedom sooner. But the material comforts and convenience of a car cannot be under-stated, and those who seek this or who require a car because of an infirmed member of the family or young children should ensure they work out the numbers as I had, to see if they have sufficient funds to sustain a car. As I always say, it's easy to own a car, but darn hard to maintain one !
P.S. - Comments are most welcome and I would like to hear from car owners as well as non car-owners to get more balanced views.
Note: Edited total for petrol costs to S$24K from S$12K as pointed out by Aspellian. Thanks !
Tha latest news in the almost never-ending series on "inflationary" price increases includes new adjusted pump prices from Caltex for all three classes of petrol. Regular 95 now costs S$2.046 per litre, Regular 98 at S$2.12 and Premium 98 at S$2.286 per litre. As Singaporeans may know by now, there is a worldwide commodities "boom" which had led to prices of everything from steel, oil, pork and flour rising quite a bit. This has inadvertently resulted in an inflation rate of 6.6% which was recently reported in the news. Yet, when I recently passed by a car road show at Suntec City atrium (open area near Carrefour), there were scores of people literally lining up to purchase cars !
Well, this post is about cars and the cost, benefits and disadvantages of owning one. Readers should be aware by now that I do NOT own a car and have no intention of owning one in the near future. It is in my interest to evaluate the real cost of owning a car, both in monetary terms and social terms; and today's Business Times has a good article on the approximate costs of owning a car which I shall proceed to list down. Singapore is basically one of the most expensive places to purchase a car (yeah, even a second-hand one !), yet it is a fact that more and more Singaporeans are owning cars as the total car population has actually increased about 6%, such that the government has to resort to measures to limit the car population by increasing ERP charges on road usage. Sounds like a pretty drastic measure to me.....as I do not see a big problem with our current public transport system (I take buses all over the place), except for the occasional long wait and over-crowded buses.
Anyhow, let me break down the numbers according to BT and comment on them. According to the article, if you spend S$50K on a car with a 70% loan at 3% p.a interest for 7 years, then you will end up paying close to S$130K after 10 years. The breakdown is as follows:-
Cost of Car including COE - S$50K (assume a medium size car with average horsepower, though I think most families seem to like the MPV, while youngsters love the sports car variety with 2 doors)
Car Loan (70% of purchase price at 3% p.a. for 7 years) - S$7,350 >> I guess 3% per annum is a reasonable rate though I've never enquired.
Insurance (S$1,500 per year for 10 years) - S$15K >> This seems like a hefty cost to me because S$1,500 per year is S$125 per month which is quite a high fixed cost. Just to provide a comparison, my monthly transport bills come up to at most S$80 to S$100 using buses.
Road Tax (S$500 per yearfor 10 years) - S$5K >> This is basially the "cost" of using roads. It's something like a TV licence fee which you have to pay even if you don't watch the TV ! So take it that this is the tax you pay just to put your car on the road (not to use the road !).
Parking Charges for Home and Office (S$250 per month x 12 x 10 years) - S$30K >> Wow, another very hefty bill to pay just to park your car ! The problem with parking is that it can be a real nuisance when car parks are full, there are insufficient spaces or it's hard to maneouvre. I personally disliked parking when I took my driving test, though I never knew that season parking charges could be so high. The author assumes S$90 per month for HDB parking I guess, while the rest of the S$160 is to park at the season lots at your office block. If you don't drive to work (which sort of defeats the purpose in having a car eh ?), then you can just assume S$90 per month in car park charges, which means S$10.8K instead of S$30K after 10 years. Still a pretty large sum by any standards.
ERP Charges (S$3 per day x 240 working days x 10 years) - S$7.2K >> OK, maybe it's my imagination, but I think most people will spend more than S$3 per day to get to and from work, especially those using CTE tunnels and hitting MULTIPLE gantries. I think some people could end up paying as much as S$6 to S$9 per day if they are "unlucky". So this cost can balloon into something of a nightmare, especially since the government is considering implementing GPS-based ERP charging. This means that you can literally be charged per kilometre of travel instead of just passing through certain roads. A scary thought, and ERP will certainly be the bane of many drivers as time passes. This is the main reason why I do not own a car; the usage of the car per month (assuming S$5 per day in ERP) easily comes up to S$100 and that's not counting petrol costs yet.
Petrol Costs (S$200 per month x 12 x 10 years) - S$24K >> Now we come to the ultimate money-drainer, which is petrol costs. The author assumes a petrol cost of S$200 per month; but this cost may vary significantly depending on your frequency of use, model of car (whether it drinks petrol like you drink water) as well as, of course, oil prices. I would say that larger cars probably need about S$80 for a full tank and if the family/individual drives often, then he needs to pump once a week which comes up to about S$320 per month. Thus, using this figure, this expense may come up to S$38.4K in 10 years time using a pessimistic scenario.
Maintenance and Repairs (S$300 per annum x 10 years) - S$3K >> Somehow I find it hard to believe that one only spends S$300 per year servicing their car. I would think a regular spare parts check would cost at least S$50 to S$100 each time, and for the total to be much higher. But I shall leave the figure as it is for now.
The rest of the assumptions are for fines and accidents, which I assume one should and would not incur unless one was driving recklesly, or drink driving ! The BT article totals up the figures to give an approximate S$132,550, which boils down to about S$1,105 per month. If you take into account the "additional" potential extra costs, the cost per month is about S$1,360. Thus, for a person who takes home about S$3K (median income level per individual), this makes owning a car very challenging indeed !
To end off, all I can say is that if one forgoes a car, he can hope to achieve financial freedom sooner. But the material comforts and convenience of a car cannot be under-stated, and those who seek this or who require a car because of an infirmed member of the family or young children should ensure they work out the numbers as I had, to see if they have sufficient funds to sustain a car. As I always say, it's easy to own a car, but darn hard to maintain one !
P.S. - Comments are most welcome and I would like to hear from car owners as well as non car-owners to get more balanced views.
Note: Edited total for petrol costs to S$24K from S$12K as pointed out by Aspellian. Thanks !
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