Wednesday, August 26, 2009

Swiber – 1H 2009 Financial Review and Analysis

Swiber’s results were, frankly, not totally unexpected given the slump in the O&G segment since the spectacular fall in oil prices started to curtail spending on E&P by oil majors. However, since Swiber are responsible for the tail end work on most E&P projects, this means a lower chance of their contracts being cancelled (unlike what is happening at Cosco – a shipbuilder). The Company is also keeping a lower profile in terms of not overtly announcing new contract or LOI wins, even though it managed to chalk up new contracts of US$93 million in 2Q 2009, compared to just US$80 million in 1Q 2009. Instead, their IR Department seems to be going on overdrive in announcing details of tie-ups with regional partners, delivery of vessels and ongoing Management changes. While there is nothing overtly wrong with this, it does make one wonder – where are all the profits and cash going to come from eventually? I will address this and other issues in this analysis, but let me do the usual routine review and analysis of the three most important financial statement components first.

Profit and Loss Review and Analysis

Due to the fact that Swiber had completed just 4 projects instead of 6 last year, revenues dropped 11% from US$125 million for 2Q 2008 to US$111 million for 2Q 2009. Gross margin, however dipped from 25.9% in 2Q 2008 to 21.5% in 2Q 2009; while 1H 2009 gross margin also dipped from 25.9% to 20.9%. Contracts have been slow in getting secured due to the weakness in oil prices and also the fact that oil majors have begun holding back on their capex in light of the sharp downturn; and until clarity emerges on the horizon. Though at the time of writing, oil prices had risen sharply to a new 2009 high of US$74 per barrel, it remains to be seen if oil majors are willing to continue with their massive E&P spending plans.

Gross margins dropped mainly due to fabrication costs for an offshore project in India, as US$23.6 million was spent on sub-contractor costs in 2Q 2009 compared with just US$10.6 million for 2Q 2008. What I suspect is that they had to rely on third-parties most of the time to do their fabrication, instead of being able to rely on their own shipyard at Kreuz; hence incurring such high charges. This is possibly due to the distance of Kreuz from the site where the fabrication is supposed to take place.

Share of profit from associate and JV went up as a result of improved contributions from Swiwar Offshore Pte Ltd and Principia Asia Pacific Engineering Pte Ltd. Finance costs eased a little to US$2.9 million from US$3.2 million due to redemption of some of the bonds (US$11.7 million worth).

Net margins were also impacted by the higher sub-contracting costs and came in at 17.2% for 2Q 2009, against a slightly higher 17.8% for 2Q 2008. For 1H 2009, net margins were weaker at 15.7% against 16.7% a year back. Overall, net profit attributable to shareholders fell 18.7% for 2Q 2009, reflecting the weaker environment in the oil and gas industry. From Boustead’s analysis, they had mentioned that oil and gas contracts take longer to negotiate, so this fact will probably impact all players in the oil and gas sphere and Swiber will definitely not be left unscathed.

Balance Sheet Review

Swiber had managed to maintain a reasonably high cash balance of US$59.4 million, primarily through a share placement done in late May 2009 at 88 cents per share (placement of 84 million new shares).Of course, building up cash reserves through issuance of shares is dilutive to EPS and NOT a long-term solution to cash flow drainage. This will be elaborated on further in the Cash Flow Statement analysis, but I have to say right here that I was disappointed with Management’s cash management (or lack thereof). The reason given by Management was that there was a timing difference due to billing milestones being achieved, so presumably they will receive cash in the next quarter which will only be reflected in 3Q 2009’s report. The increase in Trade Receivables was significant (23%) from US$62 million to US$76.6 million.

Current ratio did improve somewhat from 1.36 as at Dec 31, 2008 to 1.44 as at June 30, 2009. This was primarily due to the increase in receivables as mentioned previously, offset by the decrease in cash and non-current assets held for sale (classified as current as they will be disposed of in the current financial period).

Non-current assets also increased by US$58.1 million as a result of Swiber’s fleet expansion program kicking in. Their operating fleet increased from 22 vessels as at Dec 31, 2008 to 27 vessels as at June 30, 2009. This would mean Swiber’s depreciation expense would increase over time; but since this is a non-cash expense, it does not worry me too much. I’ve learnt to concentrate more on cash flows rather than profits, lessons learnt from the harsh financial crisis of 2008.

Net debt to equity fell from 0.94 to 0.75 times as a result of the share placement, but at this level it is still too high for comfort. Swiber mentions that they have bonds worth US$200K payable in 3Q 2009, US$71.2 million payable by 3Q 2010 and another US$72 million payable by 1Q 2011. This would mean that they need to at least have cash of more than US$71 million by the time 3Q 2010 comes along, and this is only 1 year’s time! Considering they have the CUEL US$50 million recurring contract and new contracts of US$93 million for 2Q 2009, bringing their order book to US$509 million, how much of this will be translated into FREE cash flow is highly uncertain. Even though all the cash flows for their fleet expansion have been reserved and accounted for, the amount of cash retained from operating activities is currently not high enough to boost their cash balance; and Swiber, sadly, have yet to see sustained cash generation as a result of their aggressive expansion.

Cash Flow Statement Review

Cash flow from operating activities for 2Q 2009 was a negative US$34 million, and this was because of a net cash outflow of US$14 million from a timing difference in billing schedules and cash collection for Trade Receivables. At the same time, trade and other payables were also settled faster, resulting in a total net cash outflow of about US$30 million. This is in stark contrast to 2Q 2008 where there was an operating net cash inflow of US$18.5 million.

For investing activities, purchase of fixed assets continued and US$49 million was spent on this, resulting in a net cash outflow of US$37.7 million. Though this was lower than last year’s outflow of US$117.1 million, it is nevertheless a negative signal as operating cash flows are also negative for the period, and most of the cash is being generated through financing activities. This is in contrast to companies such as Swiber and China Fishery where a lot of cash is generated through operations, and thus it can sustain any fixed asset purchases or purchases of subsidiaries or associated companies.

Repayments of bonds and bank loans under Financing activities took up US$72 million, while a total of US$51 million was raised through the issuance of new shares and US$116.2 million through new bank loans. This is quite a frightening amount considering their revenues for 2Q 2009 amounted to about US$110 million, so it seems as if they are financing their entire 2Q through bank loans and equity instead of through recurring cash inflows.

This appears to be unsustainable in the medium-term and unless the company can start to generate positive free cash flows, I may decide to divest as the cash flow issue is viewed by me as pervasive and serious.

Prospects and Plans

One good thing about Swiber is that they always manage to churn up beautiful looking and well-prepared presentation slides, so at least shareholders are kept informed of Management’s plans and their strategies for long-term growth. The slides also provide a good overview of their fleet expansion status and their order and tender book, which I’ve read has grown to US$7 billion instead of US$5 billion as Swiber is now bidding for international contracts in Middle East which are larger than the traditional ones they have bidded for, due to their expanded fleet size. Management has said that their tender book reflects their hard work, but until a contract actually materializes and Swiber is able to execute it well, there can be no assurance that such efforts translate into top and bottom line, as well as the all-important cash inflows.

With the most recent announcement on August 20, 2009 that Swiber was partnering Alam Maritim in Malaysia where they will co-own vessels and bid for larger contracts, Swiber has effectively partnered many companies all over South-East Asia in the last 2 years, as follows:-

1) Rahaman in Brunei (Swiber 51%: Rahaman 49%)– September 2007
2) PetroVietnam and Vietsopetro in Vietnam – September 2007 (MOU in October 2008)
3) Rawabi of Saudi Arabia (50:50 JV) – August 2008
4) ICON Capital of USA (51% stake in Swiber Victorious) – March 2009
5) CUEL of Thailand (51% CUEL: 49% Swiber) – June 2009
6) Alam Maritim of Malaysia (50:50 JV) – August 2009

One can immediately see that Swiber has effectively established alliances with many South-East Asian companies which have strong ties and contacts to oil majors and also to state-owned oil companies (in Vietnam). These alliances took 2 years to forge and gives them an advantage in bidding for larger and more complex contracts which they themselves may not be able to handle alone. However, the more recent alliances have yet to manifest themselves in securing larger contracts, and seeing their cash burn rate causes some concern, even though news flow has been positive thus far.

The Company also mentioned venturing further afoot to seek more lucrative opportunities, but perhaps they should concentrate on building their business back here in South-East Asia first, and with their new vessels they would be able to secure better deals and open up more possibilities.

Although I remain cautiously optimistic, the prognosis for now is negative, and Swiber’s business will likely remain in the doldrums unless it pull a giant rabbit out of its hat.

Note: At the time of writing, Swiber has been under a trading halt for 2 days, with no news or details being available. I will be updating this blog for any breaking news (as well as provide my views and analysis) so check back again soon for updates.


simon said...

there u go with the rabbit. a convertible bond.
getting money from stakeholders again as usual.

Musicwhiz said...

Hi Simon,

You're absolutely right. It's disappointing and disastrous that they have to raise money again so soon.

I need to rethink my strategy on Swiber and similar companies in future.

Thanks for the comment.