With the announcement on August 27, 2009 of Swiber’s issuance of a convertible bond (CB) of up to about US$78 million, with up-size option to raise a further US$22 million, I realized immediately that the Company’s cash position was in jeopardy and that my investment in the Company was becoming increasingly risky, which translated into an untenable situation of which I had to take action.
The terms of the CB are for a conversion price of S$1.20 per share, with the condition that the conversion price can be adjusted DOWN to S$1.08 if the average price falls below 90% of S$0.96 in the preceding 20 days prior to issue date. The conversion price reset can go as low as S$0.864, which means with each revision downwards in the conversion price, the potential dilution factor becomes ever larger. Total new shares converted without up-size option is 93.6 million, representing 18.5% of existing share capital of 507.76 million shares, and this can potentially increase with either the upside option being exercised or the revision in the conversion price. A dilution factor of 18.5% alone is already massive, but with the possibility of further dilution then I must say this is a bad deal for existing shareholders. Add to that the interest rate of 5% per annum payable semi-annually – this will increase their finance costs and reduce cash flows further for another 5 years. The worst part of the deal is that the funds are to be used for “working capital and general corporate requirements”, thus implying that there is no exact purpose for the fund raising (not for vessel fleet expansion, or for pre-emptive opportunities).
Considering that a share placement of about US$49 million was done (at 88 cents per share) just in June 2009, it is disappointing and highly suspicious as to why Management had decided to raise funds for a second time in less than 3 months. One of the immediate reasons which comes to mind is that the Company has cash flow problems and that their operating cash inflows are not enough to support both fleet expansion, working capital requirements and to pay interest on existing borrowings. This puts the situation in a whole new light and the issuance of this CB is (to me) an obvious sign of cash flow strain for Swiber, even though they had clearly and explicitly communicated just 6 months ago that they had enough cash raised from bank loans, internal funds and sale and leaseback transactions.
Other pertinent reasons relating to the divestment decision are as follows (in no particular order of significance):-
1) Depressed gross margins as reflected in the Income Statement. This had been going on for more than a few quarters and gross margin has been on a steady decline since 2007. The first few reasons given was that their vessel fleet was not ready and so many third-party subcontracting costs were incurred, thus bumping up their COGS and reducing gross margin. Then, the shocking announcement was made for 4Q 2008 financials that they had incurred a gross loss for that quarter, based on the same reasons as given and because their vessels (originally scheduled for delivery), had not been delivered in a timely fashion. Then, for 2Q 2009, they revealed that they had spent US$23.6 million on fabrication costs (relating to sub-contractors) compared to just US$10.6 million (a more than 100% increase) which pushed down gross margin; and this is even though their vessels had already been delivered in 1Q 2009. This persistent unpredictability of gross margin and rampant “shocks” do not reflect well on Swiber’s cost control, and my reason for investing is to ensure a certain level of predictability and stability; and not to see gross margins being subjected to a roller-coaster ride.
2) Increase in financing costs as a result of higher gearing will continue to impact both their profit and loss statement as well as their cash flow statement. In addition to new bank loans secured as well as their medium-tern notes, Swiber has now pulled off a CB and this will add to their debt significantly. Gearing is much too high for me to feel comfortable considering that their order book is not growing at a similarly fast pace.
3) US$71.2 million worth of bonds need to be repaid by 3Q 2010, and from their cash flow statement one can see that most of their cash is being generated from financing activities, and not operating activities (refer to my previous post on Swiber’s 1H 2009 financial analysis and review). This clearly shows that operating cash inflows are insufficient to sustain the business and provide working capital, so Management has had to constantly tap the capital markets for funds. With cash balance just hovering at US$59.4 million (as at June 30, 2009), there is sufficient concern that cash balances may be further strained to pay back the bonds, as well as any maturing bank loan facilities.
4) The dilution factor in the two most recent fund-raising activities cannot be simply ignored. The first fund raiser was back in June 2009 with 84 million new shares being issued at S$0.88 per share, diluting existing shareholders by about 20% of the then-issued capital base of 421,355,000 shares. Now, with the issuance of the CB, another potential minimum dilution factor of 18.5% will be applied to all existing shareholders, further reducing EPS ceteris paribus.
5) Contract flow has lessened considerably with the onset of the global financial crisis, and a weak point about Swiber (compared to Ezra’s business model) is that their contracts are of short duration and are not locked in for long periods (unlike Ezra with 3 to 5 year contracts with oil majors). This means that order book is constantly being depleted and has to be replenished quickly in order to keep the top-line healthy and to ensure cash inflows keep coming in. If one had noticed, tender book for Swiber had increased from US$2 billion to US$5 billion to a recently reported US$7 billion for jobs from 2010 to 2015. One must question how much of this tender book can actually translate into order book, as their “hit rate” has not been historically high. So far they only clinched US$80 million for 1Q 2009 and US$93 million for 2Q 2009, this implies that about US$340 million will be clinched for the FY 2009, by extrapolation. Comparing this to their more robust order book back in 2007 when they secured larger contracts of more than US$100 million per contract, this begs the question – if they have a larger fleet size and are able to bid for higher-value projects, then why are the current jobs secured in 1Q and 2Q 2009 smaller than the ones secured back in 2007 and 2008?
6) Many of the recent corporate actions undertaken by Swiber had also hinted to me of their urgent need for cash, as evidenced by the following:-
a. Swiber and ICON Capital to jointly own Swiber Victorious (announced in March 2009). If they had enough funds they would not sell part of their vessel to ICON and cede part of their ownership in this vessel;
b. Divestment of 30% share of OBT in April 2009 for US$3.9 million, at cost instead of at a premium. This had, to me, hinted that they needed cash or they would have negotiated for better terms relating to the divestment;
c. Sale of shares in Perfect Motive in June 2009 for RM 200,000, when the book value of Perfect Motive was RM 324,000. Another loss had been realized on this divestment. No motive or rationale for divestment was provided for both cases.
7) One aspect of Swiber’s business model which confused me was why they had to have so many alliances with regional partners, since they were prepared to grow their own fleet. Theoretically, with one’s own fleet, one should be able to bid for larger projects and contracts on one’s own merit, instead of having to share resources and rely on a partner’s help for their projects. Yet, it is the very nature of larger EPCIC contracts where more than one party is required; hence the total profits simply cannot accrue to one party. This makes me question the market dominance of Swiber, since there are other offshore players which are offering similar services in the region which act as competitors. Since Swiber had tied up with so many regional players since 2007, theoretically this should garner them more contracts, but it did not appear to be so. In fact, if we contrast Ezra’s business model, they are able to clinch contracts on their own with oil majors and national oil companies without relying on “synergistic” relationships as a catalyst. This in itself is an attestation to their brand name and reputation, of which I feel Swiber is lacking.
8) Swiber has also put several initiatives on hold, while others are mere talk or speculation. The first was the wildly hyped up Equatorial Driller, which was touted as an alternative to traditional drillers; but this plan and the entire project was shelved due to the onset of the global financial crisis, leaving the plan in limbo; and no more was said of this since then. The problem was that Swiber had hired a very experienced team of drillers headed by Mr. Glen Olivera, of which they had to pay monthly salaries, and in the end this team ended up with less work than originally intended, as Swiber only has a small drilling project with NuCoastal in Thailand. At the AGM, they clarified that they were selling services relating to drilling in lieu of the postponement of the Equatorial Driller plans, but does that justify the high cost of maintaining an entire drilling team?
9) The other initiative which was talked about in presentation slides was wind energy and wind farms, and how Swiber could technically deploy their vessels to service this new and growing industry. What made me uncomfortable was that Swiber seemed intent of moving out of their comfort zone without even having established a firm foothold in the EPCIC and drilling arena; and the plans sounded lofty and ambitious but without much substance. Ultimately, if something is being discussed and put into presentation slides, one would assume that Management has been working on something concrete but so far Management has not provided updates nor given a progress report on this planned initiative.
As a result of the above, and due to my nagging discomfort with the way the Company is being managed and issues with cash flow and dilution, I have decided to divest the shares of Swiber and have done so at a price of 95.5 cents, crystallizing a gain of 19% on my initial investment. With a holding period of about 2.5 years, this translates to a return of roughly 7% per annum (it will be lower if you factor in compounding). Please note that even though a gain was recognized on this transaction, it is still (and will be) classified as an “investment mistake”* because of the underlying principles behind the decision, which resulted in the move to divest much earlier than I had intended for. The proceeds will now be shifted to an opportunity fund to await deployment once I have identified another suitable investment opportunity. Proper care and due diligence will be exercised to prevent a mistake of a similar nature.
*Note: Every buy and sell decision which I make must be supported by justifications based on factual data and a complete and objective analysis of the facts at hand. There is no room for “falling in love” with a company and hugging its shares for dear life, even when something fundamental has occurred which frustrates my original intention for investing in the Company. This is in line with my investment philosophy of keeping a close watch on the companies which I own, to assess if they begin to diverge from my fundamental investment objective(s).
Disclaimer: The above are merely personal opinions and observations relating to my decision to divest the shares of Swiber Holdings Limited. It is NOT to be taken as an inducement to buy or sell shares in the Company, and I shall not be held responsible for any losses relating to said decisions. Please consult your lawyer, accountant or other qualified professional before undertaking important financial decisions which could have an adverse impact on your wealth.
Showing posts with label Swiber. Show all posts
Showing posts with label Swiber. Show all posts
Friday, August 28, 2009
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
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.
Saturday, May 09, 2009
Swiber – AGM and EGM FY 2008 Highlights
I attended the AGM cum EGM of Swiber Holdings Limited held on April 30, 2009 at 9 a.m. Due to the fact that there was quite a heavy torrential shower in the morning and also the presence of an accident near the AGM venue (which was the Company’s headquarters), several directors as well as shareholders arrived late. Due also to the fact that there was a lack of signs pointing to the location of the AGM and also a lack of hourly parking lots (the carpark at Swiber’s HQ was all season-parking), this also caused quite a bit of disgruntlement and there were some accusations that the AGM was not organized well. Management acknowledged the issues and said that they would learn from the experience and that all feedback would be noted and that FY 2009’s AGM would be a better experience.
The entire AGM and EGM lasted about 3 hours in total, with Management candidly answering questions from several shareholders who took to the microphone. I also managed to clarify some doubts I had with regards to certain issues which had been nagging me since the late deliveries of Swiber Concorde and Swiber Supporter, as well as some recent corporate activites. I shall now proceed to give a point by point review of the queries which were raised, issues discussed and explanations given.
1) Late Deliveries of Swiber Supporter and Swiber Concorde – Management has explained that these delays were unfortunate and unforeseen as the yards were unable to cope with so much work and did not have the capacity to finish the vessels on time. This resulted in delays and deferred revenues while costs escalated due to commissioning and de-commissioning as well as third-party vessel charters. When quizzed if this would be a one-off scenario, Management mentioned that this was unlikely to happen in the near future as yards are now begging for business as the slowdown has meant that many customers are cancelling contracts. I also asked if there would be any penalties involved as the oil majors who had contracted Swiber would have suffered delays in the commencement of the contract. Management assured that they work very closely with the oil majors and have obtained their understanding that such delays were an inevitable part of business and oil majors accept this as part of the cost of doing business. Moreover, there are a lack of incumbent players in South-East Asia who can perform such EPCIC work, which also means Swiber has better bargaining power. To date, these vessels have been delivered and are being prepared for their respective jobs (see FY 2008 Annual Report Page 28).
2) Oil Prices – One shareholder did bring up the issue of a breakeven price level for oil which would make Swiber’s business viable. The reply was that should oil fall to an improbable US$20 per barrel, this would certainly curtail E&P activities and would trickle down to affect Swiber’s core business. However, Management mentioned that they think this to be unlikely as most analysts are of the consensus that oil prices would hit about US$70 to US$80 per barrel by end-2009. Even then, Management reiterated that Swiber was doing good business back in the late 1990’s (before listing) when oil prices were much lower, and had been profitable then as well.
3) Contract Wins and Sustainability of Order Book – I did bring up the fact that Swiber’s order book seems to be drying up as no recent contract wins were announced on SGXNet. Mr. Raymond Goh did mention that US$70 million worth of contracts had been won for Jan-Feb 2009 but these were all made up of smaller individual contracts and each by itself was not material enough to warrant a press release. Management also said that their current order book would last them for the next 2 years till end-2010 and that they were currently bidding for projects in 2010 as their new fleet arrives. Their order book was currently filled by Brunei Shell’s extension contract as well as CUEL’s 5-year US$50 million per annum contract. In addition, there are possible “spill-over” contracts from joint-venture partners which Swiber has established in Brunei and Saudi Arabia.
4) Offshore Drilling Services (ODS) Division Plans – I was enquiring on the future of ODS now that it was announced that the Equatorial Driller would be postponed till economic conditions improved. It would have been a heavy burden for Swiber to finance this vessel and there were also no shipyards at the time to take up this project which involved the design of a radically new type of drilling vessel (different from the normal semi-submersible). Management also made the wise choice of deferring the construction of this vessel as the recession would mean cheaper construction costs in the near future should they take up this task again. My question to them was about their plans for this division in the interim as Swiber had hired a full drilling team headed by Mr. Glen Olivera. They said that ODS was now providing drilling expertise services and moving forward, there were plans to restart the Equatorial Driller project once conditions improved. I suspect gross margins and prospects for drilling expertise services would not be as good as being able to own and charter out a cost-efficient drilling vessel, but that would be the best move which Swiber can make in the meantime while waiting out the recession.
5) Sale of 51% of Swiber Victorious to ICON Capital – I was asking about the rationale behind the sale of 51% of this vessel to ICON Capital for US$19.125 million. Management said that this helped to lighten their capital commitments, but it does not mean that only 49% of the contract value would be recognized for Swiber. The reason for ICON buying 51% of the vessel was to look for a fixed, steady return which Swiber would provide; but technically the vessel was still contracted under Swiber to carry out its contracts and so 100% of the earnings will still accrue to Swiber. In other words, Swiber was farming out some of the cost of the vessel while enjoying the full benefit of the contracts which the vessel was engaged in; thus it was a win-win solution for both ICON (which received a fixed return on its investment in the vessel) and Swiber (which could lower its ownership costs yet partake in the full benefits of each contract). It was also reported in Upstream Online that CUEL had agreed to buy Swiber Chai for an undisclosed sum, after which Swiber would probably lease it back from them for use in its contracts. Swiber’s partnership with CUEL meant that there was mutual sharing of assets and the synergy would continue to work for both parties as each benefited from vessels as well as co-operation on contracts.
6) Divestment of Swiber’s 30% stake in OBT – It was announced that Swiber had divested its entire 30% stake in OBT at cost, netting them a total of S$3.9 million. I questioned the rationale for this sale and Management replied that OBT was actually used for coal transhipments using coal and crane barges. Now that coal prices were coming down, this made owning OBT less attractive (I assume the margins would become much thinner) and Indonesia was also becoming more stringent on such barges. In view of these negative developments, Management made the decision to divest OBT and they viewed it as fortunate that they could divest it at cost instead of at a discount (i.e. loss).
7) Offshore Wind Power Potential – Swiber is exploring this business opportunity as it presents a very lucrative proposition for the Company should they be able to break into this growing market. Many countries are rooting for clean energy and wind power was a growing source of capex for companies which are keen to ride on this trend. Swiber would mainly be the contractor to provide barges and cranes to transport wind turbines, which could be very large and heavy indeed. Although it is too preliminary to talk of securing any contracts, Swiber is in discussion with several companies on the possibility of providing their vessels for such wind power projects. There was no mention of the gross margins, size of contracts or duration.
8) Joint Ventures with Strategic Partners – Swiber’s tie-ups with partners in Thailand (CUEL), Vietnam (Vietsopetro), Brunei (Rahaman) and Saudi Arabia (Rawabi) are ways for them to break into a new market. The aim is also to share assets (to lighten the debt burden as vessels are costly assets) as well as to partake in mutual contracts. It was mentioned that Rawabi was a very good partner as they had connections with Saudi Aramco and thus could garner good contracts which would probably flow through to Swiber. As to whether there will be any future JV, Management said this was a possibility but could not give further details.
While the above may not signify a rosy future for Swiber, at least it provides some comfort that the Company is not in danger of collapse due to over-leveraging, as their capital commitments of US$318 million have already been covered by existing cash, sale and leasebacks and bank loans. Management’s assertion of contracts stretching till late 2010 also gives some comfort on revenue visibility, while the non-deliveries of the 2 vessels can be construed as a one-off event; implying that margins will improve in the near future (they have been trending down for 3 consecutive financial years since FY 2006 and this is a worrying sign).
Still, I am waiting for 1Q 2009 results to see if there is any spillover effects from the late vessel deliveries, or if any more unforeseen issues haunt the company. As at this writing, the future is still murky and uncertain and even though oil and gas companies are still spending on capex as oil reserves are expected to run out in 50 years time, there is no confirmation that Swiber is able to snare contracts of sizeable value to boost its order book any time soon. I am hoping that Management remain prudent and conservative with regards to cash flow management, in order to see the Company through this difficult period.
The entire AGM and EGM lasted about 3 hours in total, with Management candidly answering questions from several shareholders who took to the microphone. I also managed to clarify some doubts I had with regards to certain issues which had been nagging me since the late deliveries of Swiber Concorde and Swiber Supporter, as well as some recent corporate activites. I shall now proceed to give a point by point review of the queries which were raised, issues discussed and explanations given.
1) Late Deliveries of Swiber Supporter and Swiber Concorde – Management has explained that these delays were unfortunate and unforeseen as the yards were unable to cope with so much work and did not have the capacity to finish the vessels on time. This resulted in delays and deferred revenues while costs escalated due to commissioning and de-commissioning as well as third-party vessel charters. When quizzed if this would be a one-off scenario, Management mentioned that this was unlikely to happen in the near future as yards are now begging for business as the slowdown has meant that many customers are cancelling contracts. I also asked if there would be any penalties involved as the oil majors who had contracted Swiber would have suffered delays in the commencement of the contract. Management assured that they work very closely with the oil majors and have obtained their understanding that such delays were an inevitable part of business and oil majors accept this as part of the cost of doing business. Moreover, there are a lack of incumbent players in South-East Asia who can perform such EPCIC work, which also means Swiber has better bargaining power. To date, these vessels have been delivered and are being prepared for their respective jobs (see FY 2008 Annual Report Page 28).
2) Oil Prices – One shareholder did bring up the issue of a breakeven price level for oil which would make Swiber’s business viable. The reply was that should oil fall to an improbable US$20 per barrel, this would certainly curtail E&P activities and would trickle down to affect Swiber’s core business. However, Management mentioned that they think this to be unlikely as most analysts are of the consensus that oil prices would hit about US$70 to US$80 per barrel by end-2009. Even then, Management reiterated that Swiber was doing good business back in the late 1990’s (before listing) when oil prices were much lower, and had been profitable then as well.
3) Contract Wins and Sustainability of Order Book – I did bring up the fact that Swiber’s order book seems to be drying up as no recent contract wins were announced on SGXNet. Mr. Raymond Goh did mention that US$70 million worth of contracts had been won for Jan-Feb 2009 but these were all made up of smaller individual contracts and each by itself was not material enough to warrant a press release. Management also said that their current order book would last them for the next 2 years till end-2010 and that they were currently bidding for projects in 2010 as their new fleet arrives. Their order book was currently filled by Brunei Shell’s extension contract as well as CUEL’s 5-year US$50 million per annum contract. In addition, there are possible “spill-over” contracts from joint-venture partners which Swiber has established in Brunei and Saudi Arabia.
4) Offshore Drilling Services (ODS) Division Plans – I was enquiring on the future of ODS now that it was announced that the Equatorial Driller would be postponed till economic conditions improved. It would have been a heavy burden for Swiber to finance this vessel and there were also no shipyards at the time to take up this project which involved the design of a radically new type of drilling vessel (different from the normal semi-submersible). Management also made the wise choice of deferring the construction of this vessel as the recession would mean cheaper construction costs in the near future should they take up this task again. My question to them was about their plans for this division in the interim as Swiber had hired a full drilling team headed by Mr. Glen Olivera. They said that ODS was now providing drilling expertise services and moving forward, there were plans to restart the Equatorial Driller project once conditions improved. I suspect gross margins and prospects for drilling expertise services would not be as good as being able to own and charter out a cost-efficient drilling vessel, but that would be the best move which Swiber can make in the meantime while waiting out the recession.
5) Sale of 51% of Swiber Victorious to ICON Capital – I was asking about the rationale behind the sale of 51% of this vessel to ICON Capital for US$19.125 million. Management said that this helped to lighten their capital commitments, but it does not mean that only 49% of the contract value would be recognized for Swiber. The reason for ICON buying 51% of the vessel was to look for a fixed, steady return which Swiber would provide; but technically the vessel was still contracted under Swiber to carry out its contracts and so 100% of the earnings will still accrue to Swiber. In other words, Swiber was farming out some of the cost of the vessel while enjoying the full benefit of the contracts which the vessel was engaged in; thus it was a win-win solution for both ICON (which received a fixed return on its investment in the vessel) and Swiber (which could lower its ownership costs yet partake in the full benefits of each contract). It was also reported in Upstream Online that CUEL had agreed to buy Swiber Chai for an undisclosed sum, after which Swiber would probably lease it back from them for use in its contracts. Swiber’s partnership with CUEL meant that there was mutual sharing of assets and the synergy would continue to work for both parties as each benefited from vessels as well as co-operation on contracts.
6) Divestment of Swiber’s 30% stake in OBT – It was announced that Swiber had divested its entire 30% stake in OBT at cost, netting them a total of S$3.9 million. I questioned the rationale for this sale and Management replied that OBT was actually used for coal transhipments using coal and crane barges. Now that coal prices were coming down, this made owning OBT less attractive (I assume the margins would become much thinner) and Indonesia was also becoming more stringent on such barges. In view of these negative developments, Management made the decision to divest OBT and they viewed it as fortunate that they could divest it at cost instead of at a discount (i.e. loss).
7) Offshore Wind Power Potential – Swiber is exploring this business opportunity as it presents a very lucrative proposition for the Company should they be able to break into this growing market. Many countries are rooting for clean energy and wind power was a growing source of capex for companies which are keen to ride on this trend. Swiber would mainly be the contractor to provide barges and cranes to transport wind turbines, which could be very large and heavy indeed. Although it is too preliminary to talk of securing any contracts, Swiber is in discussion with several companies on the possibility of providing their vessels for such wind power projects. There was no mention of the gross margins, size of contracts or duration.
8) Joint Ventures with Strategic Partners – Swiber’s tie-ups with partners in Thailand (CUEL), Vietnam (Vietsopetro), Brunei (Rahaman) and Saudi Arabia (Rawabi) are ways for them to break into a new market. The aim is also to share assets (to lighten the debt burden as vessels are costly assets) as well as to partake in mutual contracts. It was mentioned that Rawabi was a very good partner as they had connections with Saudi Aramco and thus could garner good contracts which would probably flow through to Swiber. As to whether there will be any future JV, Management said this was a possibility but could not give further details.
While the above may not signify a rosy future for Swiber, at least it provides some comfort that the Company is not in danger of collapse due to over-leveraging, as their capital commitments of US$318 million have already been covered by existing cash, sale and leasebacks and bank loans. Management’s assertion of contracts stretching till late 2010 also gives some comfort on revenue visibility, while the non-deliveries of the 2 vessels can be construed as a one-off event; implying that margins will improve in the near future (they have been trending down for 3 consecutive financial years since FY 2006 and this is a worrying sign).
Still, I am waiting for 1Q 2009 results to see if there is any spillover effects from the late vessel deliveries, or if any more unforeseen issues haunt the company. As at this writing, the future is still murky and uncertain and even though oil and gas companies are still spending on capex as oil reserves are expected to run out in 50 years time, there is no confirmation that Swiber is able to snare contracts of sizeable value to boost its order book any time soon. I am hoping that Management remain prudent and conservative with regards to cash flow management, in order to see the Company through this difficult period.
Tuesday, March 03, 2009
Swiber – FY 2008 Analysis and Commentary
On February 28, 2009, Swiber released their FY 2008 financials, and basically dropped a bombshell on shareholders – there were delays in the deliveries of 2 vessels which ultimately meant that project work on some contracts could not be completed in time, resulting in higher costs recognized without associated revenues. The effect of this was a plunge from a net profit to a net loss for 4Q 2008, which dragged down the performance for the entire FY 2008.
After going through the numbers, facts and figures, below is my analysis of the situation and comments on whether the Company can steer through the difficulties it is currently facing, and also to determine if this surprise loss is a one-off incident, or may likely occur again in future. As shareholders and investors, we should be most concerned about what our asset (business) is doing and whether it can continue to give us steady returns over the long-term.
Profit and Loss Analysis
As mentioned, the 4Q 2008 numbers are not pretty mainly due to the late deliveries of 2 vessels – Swiber Concorde (pipelay barge) and Swiber Supporter (dive support work barge). This resulted in delays in completing work for pipeline installation and subsea tie-in and led to increased cost of goods sold without associated revenue being recognized. In addition, a confluence of other factors such as higher sub-contracting costs for an offshore fabrication project as well as costs associated with rapid mobilization and de-mobilization of vessels to handle projects in different locations resulted in a gross loss of US$12.3 million (gross loss margin of 12%). Net loss margin for 4Q 2008 stood at 10.9% as a result too of higher administrative costs associated with increased staff strength due to the expansion of the company, but part of the costs were defrayed by the higher share of profits from associates Principia Asia and Swiwar Offshore. Finance costs rose about 150% due to the increase in bank loans and bonds taken up by the company to finance its capex requirements. This will be dealt with under the Balance Sheet analysis.
For FY 2008, gross margin compression caused gross margin to fall from 28.3% in FY 2007 to just 15% for FY 2008, principally due to the performance of the 4Q 2008. Stripping out exceptional gains from sale and leaseback transactions (S&L), net margin would have been 6.35% for FY 2008 against 18.5% for FY 2007, a drastic drop no doubt.
To put things in perspective, one has to analyze the factors behind this occurrence and put forward a conjecture on whether it is reasonable to assume that it is likely to occur again in the near future. According to the Company’s press release, the vessels which were delayed are slated to be delivered in 1Q 2009 instead, where they will then presumably be able to finish up the job and complete the projects. What was not mentioned though was the probable loss in confidence from their customers as a result of this fiasco, which would hurt Swiber’s reputation for timely project execution. While it can be argued that clients should understand that this credit crunch is unprecedented and was the principal cause for the shipyard’s delay, I would think that Swiber’s reputation would still be somewhat tarnished after this unfortunate incident. This may affect their ability to clinch new contracts and also strain relations with existing customers. However, the Company did announce US$70 million worth of new contracts clinched in the first 2 months of FY 2009; so one can infer that the reputational damage should be fairly contained and customers may dismiss it as a mere one-off incident. Shipyard delays make it difficult to schedule project work and Swiber must have felt this very keenly in 4Q 2008 when global trade financing came to a near standstill and freight rates also plunged. This caused problems for companies such as Ezra as well as they had to cancel their MSFV orders with Keppel Singmarine and Karmsund.
So it can be seen that the effects of the crunch have affected all companies; hence it can be concluded that the reputational damage is mitigated by this fact and also the fact that Swiber has established long-term relationships with customers prior to such an event occurring, which makes it unlikely for the relationship to strain further. I view this as a one-off unfortunate incident for the Company, but it pays to observe if things will go as planned for 1Q 2009 with the eventual delivery of the 2 vessels. Mr. Raymond Goh did mention in the Business Times today that he does NOT forsee any more delivery problems as “the situation has changed (from one of over-capacity in the yard) to one whereby the yards are more desperate for work now”.
Balance Sheet Review
To be honest, Swiber’s balance sheet has considerably worsened from FY 2007 to FY 2008, due mainly to the higher gearing (debt level) as well as the drop in the current ratio. Due to Swiber’s ambitious expansion plans, it had issued bonds and taken up more bank loans in FY 2008, with non-current bank loans increasing by 500%, non-current bonds increasing by 200% and trade and other payables nearly doubling as well. The result of this was a drop in the current ratio from 2.15 in FY 2007 to 1.37 in FY 2008. Most of the current assets for FY 2008 was made up of cash and work-in-progress, which are unbilled portions of completed projects. This will likely reverse itself in FY 2009 to bills or trade receivable and by observing the trade receivables balance for FY 2008 compared to FY 2007, the increase of just 38% compared to an increase of 183% in revenues shows that collections are not a problem. Understandably, this should be because of the nature of Swiber’s customers (mainly oil majors and state-owned oil companies).
Debt-Equity ratio hit 1.01 for FY 2008 as a result of higher gearing to fund their vessel expansion plans. This was a significant rise from FY 2007’s D/E of 0.53 and is a worrying sign amidst this credit crisis. The interest paid on their debt totals about US$11 million and can be comfortably managed by operating cash inflows, but they have a portion of debt due within a year amounting to about US$81 million. Comparing this with their cash balance of US$74.7 million as at Dec 31, 2008 and considering the fact that no other major capex requirements are un-funded, coupled with the steady contract flow for Swiber; I do not forsee the repayment of this debt to be a major problem and there is also a remote chance of a rights issue to shore up their Balance Sheet, heavily geared though it may be. This will be covered in detail under future plans and also the Cash Flow Statement analysis.
ROE (annualized) is 18.9% for FY 2008 but much of this can be attributed to the increase in debt, meaning the quality of the ROE is in question. ROA was pathetically low at just 5.6% for FY 2008 compared to a more robust 13.3% for FY 2007, mainly due to lower earnings for FY 2008 as a result of the aforementioned losses in 4Q 2008 and also the Group’s asset base increasing as it expands its fleet. In future periods, this ratio is likely to stay depressed as the Group grows its asset base further; but it is hoped that earnings can increase at a correspondingly healthy rate to be able to make up for this drop.
Cash Flow Statement Analysis
It is quite deceiving to just look at the Income Statement as the drop of about 20.6% in full year net profit might lead one to assume that cash flows are corresponding poor as well. But in fact, the cash flow for FY 2008 was more robust than FY 2007 mainly due to the previously mentioned 38% increase in trade receivables when revenues surged so much, as well as the fact that there was a net operating cash inflow of US$2.2 million compared to a net operating cash outflow of US$16.8 million for FY 2007. Though small, it shows that the Group can maintain positive cashflow even with decreased earnings, higher income taxes as well as higher interest payments. The main reason for the cash inflows not being higher than they could be can be attributed to the work-in-progress accumulation which has not been billed and collected from customers (a possible timing difference) which could result in more cash flowing in during 1Q 2009.
For investing activities, the capex is pretty apparent for both years as US$92 million was paid in FY 2007 and US$226.3 million paid in FY 2008 to purchase PPE. However, do note that cash also flowed in from disposals of PPE and assets held for sale, as Swiber attempts to replace their older fleet with a newer one. All in all, 10 vessels were acquired in FY 2008 while 6 vessels were disposed of. The details can be found in Swiber’s powerpoint presentation material which can be downloaded from the Company’s website. Net cash used for investing activites ballooned nearly 400% to US$206 million, and constituted a major drag on cash.
The shortfall for this capex has to come from financing activities, of course. During FY 2008, US$235 million was raised from bank loans alone, and another US$92.2 million from the issuance of bonds. While hindsight would dictate that gearing up so quickly in one of the worst recessions in 70 years was a bad idea, it is at least a comfort to know that Swiber has already obtained its bank lines and successfully sold its bonds (which have a 3-year maturity by 2011). Interest costs of US$11 million per annum should be manageable only if the Group can secure sufficient contracts in the next 10 months of FY 2009, which I perceive as a key risk and uncertainty given this protracted downturn. On the other hand, also note that US$133.4 million worth of bank loans were repaid during FY 2008, about 64.7% more than the US$81 million due within one year. If you add in the interest, this comes up to about US$92 million worth of cash outflows for financing activities for FY 2009, which I am confident the Group can comfortably handle due to its order book of US$596 million as at end-FY 2008. Do not forget to factor in the additional US$70 million worth of new projects for 2M 2009, bringing the total order book for end-Feb 2009 to US$666 million, most of which will be recognized in FY 2009.
Prospects and Future Plans
After announcing the scrapping of their plans for the much talked about Equatorial Driller (a relief considering the huge capex burden it would have entailed), the Group now plans to focus its business efforts on managing costs and also on timely execution of projects. According to its press release, a total of 17 new vessels will be added to its fleet for FY 2009, most of which will be delivered in 2H 2009. Assuming Swiber Supporter and Concorde are delivered in 1Q 2009, this means that more of the revenue will be recognized in 2H 2009 due to most of the deliveries being timed for that period. It would also signal lumpy revenues and that quarterly results should not be relied upon too stringently (a case similar to Boustead).
As Mr. Raymond Goh had mentioned, Swiber has the manpower and the contracts awarded to it from Thailand (CUEL), India, Middle East, Indonesia and Malaysia. The only thing lacking are the vessels which are critical to perform the job well and free Swiber from the usage of third-party charters which are not only costly but also run the risk of problematic scheduling. I personally perceive that problems may continue into 1Q 2009 and the early part of 2Q 2009 before things stabilize, which means the Group may see more volatile earnings and margins ahead.
The good news (if it can be considered good) is that no further capex plans are underway, and that all planned capex is fully funded by S&L, bank loans and disposals. It’s akin to the Company just sitting back to wait for the vessels’ arrival, then to use these vessels to generate revenues and recurring cash flows. In order to remain asset-light, Swiber has made use of S&L as well as to jointly-share assets with their partners in the Middle East (Rawabi) and other regions too. They plan to target the shallow water domain in South-East Asia, where they have fewer competitors; as well as sub-sea opportunities in the Indian and Middle Eastern region. Though oil prices have come off a high if US$147 per barrel to currently about US$42 per barrel, Mr. Goh still sees a consistent demand for shallow water EPCIC work as projects which have already begun would not be terminated prematurely, and Swiber has the advantage of being involved in the end-stage of the oil and gas extraction process; so it is very unlikely for contracts to be cancelled. This is unlike Keppel’s business model where oil rigs can be cancelled or deferred as they represent the E&P (Exploration and Production) phase of the oil and gas cycle. This acts as a natural buffer to Swiber’s business and allows for more clarity of cash flows and contract revenues.
On a final note, the Group has also mentioned the possibility of moving their expertise to serve the offshore windpower industry. No additional capex is required and the skills set is apparently transferable as well, thus opening up a window of opportunity for the Group. Though this is just “talk” at the moment, it could be a possible avenue for Swiber to branch out into in future and may become a separate business unit if the potential is large enough.
For industry prospects, most of the presentation material features updated research and quotes from Feb 2009 which support the fact that investment in oil and gas E&P will continue, and the sharp drop in demand for fossil fuels would only exacerbate this under-investment scenario past FY 2010. As a result, most oil companies are continuing to inject monies for capex and oil field discoveries, and they are unlikely to taper off anytime soon.
Conclusion
Ultimately, the value of a company should be determined not just by the quality of its assets and its growth potential, but also the quality of the Management and their ability to allocate capital efficiently to achieve a high ROE without excessive use of leverage. With the credit crunch affecting companies such as Ferrochina, it pays to be prudent and Swiber should focus on generating more FCF once their fleet expansion is complete by end-FY 2010. While some may lament the lack of clarity in the Company’s growth moving forward, the key focus now should be to hunker down and build up vital cash to tide over the protracted downturn, so as to emerge into the sun in future with the necessary resources to take advantage of new opportunities.
In view of this analysis*, I have added to my position at S$0.375 yesterday. My new average cost for Swiber is now S$0.802 and will be updated in my March 2009 portfolio review.
*Disclaimer: This analysis is personal and is not an inducement to buy or sell shares of Swiber Holdings Limited. The author of this blog will NOT be held responsible for any losses incurred due to the reliance on this article for investment decisions or for speculation opportunities.
On February 28, 2009, Swiber released their FY 2008 financials, and basically dropped a bombshell on shareholders – there were delays in the deliveries of 2 vessels which ultimately meant that project work on some contracts could not be completed in time, resulting in higher costs recognized without associated revenues. The effect of this was a plunge from a net profit to a net loss for 4Q 2008, which dragged down the performance for the entire FY 2008.
After going through the numbers, facts and figures, below is my analysis of the situation and comments on whether the Company can steer through the difficulties it is currently facing, and also to determine if this surprise loss is a one-off incident, or may likely occur again in future. As shareholders and investors, we should be most concerned about what our asset (business) is doing and whether it can continue to give us steady returns over the long-term.
Profit and Loss Analysis
As mentioned, the 4Q 2008 numbers are not pretty mainly due to the late deliveries of 2 vessels – Swiber Concorde (pipelay barge) and Swiber Supporter (dive support work barge). This resulted in delays in completing work for pipeline installation and subsea tie-in and led to increased cost of goods sold without associated revenue being recognized. In addition, a confluence of other factors such as higher sub-contracting costs for an offshore fabrication project as well as costs associated with rapid mobilization and de-mobilization of vessels to handle projects in different locations resulted in a gross loss of US$12.3 million (gross loss margin of 12%). Net loss margin for 4Q 2008 stood at 10.9% as a result too of higher administrative costs associated with increased staff strength due to the expansion of the company, but part of the costs were defrayed by the higher share of profits from associates Principia Asia and Swiwar Offshore. Finance costs rose about 150% due to the increase in bank loans and bonds taken up by the company to finance its capex requirements. This will be dealt with under the Balance Sheet analysis.
For FY 2008, gross margin compression caused gross margin to fall from 28.3% in FY 2007 to just 15% for FY 2008, principally due to the performance of the 4Q 2008. Stripping out exceptional gains from sale and leaseback transactions (S&L), net margin would have been 6.35% for FY 2008 against 18.5% for FY 2007, a drastic drop no doubt.
To put things in perspective, one has to analyze the factors behind this occurrence and put forward a conjecture on whether it is reasonable to assume that it is likely to occur again in the near future. According to the Company’s press release, the vessels which were delayed are slated to be delivered in 1Q 2009 instead, where they will then presumably be able to finish up the job and complete the projects. What was not mentioned though was the probable loss in confidence from their customers as a result of this fiasco, which would hurt Swiber’s reputation for timely project execution. While it can be argued that clients should understand that this credit crunch is unprecedented and was the principal cause for the shipyard’s delay, I would think that Swiber’s reputation would still be somewhat tarnished after this unfortunate incident. This may affect their ability to clinch new contracts and also strain relations with existing customers. However, the Company did announce US$70 million worth of new contracts clinched in the first 2 months of FY 2009; so one can infer that the reputational damage should be fairly contained and customers may dismiss it as a mere one-off incident. Shipyard delays make it difficult to schedule project work and Swiber must have felt this very keenly in 4Q 2008 when global trade financing came to a near standstill and freight rates also plunged. This caused problems for companies such as Ezra as well as they had to cancel their MSFV orders with Keppel Singmarine and Karmsund.
So it can be seen that the effects of the crunch have affected all companies; hence it can be concluded that the reputational damage is mitigated by this fact and also the fact that Swiber has established long-term relationships with customers prior to such an event occurring, which makes it unlikely for the relationship to strain further. I view this as a one-off unfortunate incident for the Company, but it pays to observe if things will go as planned for 1Q 2009 with the eventual delivery of the 2 vessels. Mr. Raymond Goh did mention in the Business Times today that he does NOT forsee any more delivery problems as “the situation has changed (from one of over-capacity in the yard) to one whereby the yards are more desperate for work now”.
Balance Sheet Review
To be honest, Swiber’s balance sheet has considerably worsened from FY 2007 to FY 2008, due mainly to the higher gearing (debt level) as well as the drop in the current ratio. Due to Swiber’s ambitious expansion plans, it had issued bonds and taken up more bank loans in FY 2008, with non-current bank loans increasing by 500%, non-current bonds increasing by 200% and trade and other payables nearly doubling as well. The result of this was a drop in the current ratio from 2.15 in FY 2007 to 1.37 in FY 2008. Most of the current assets for FY 2008 was made up of cash and work-in-progress, which are unbilled portions of completed projects. This will likely reverse itself in FY 2009 to bills or trade receivable and by observing the trade receivables balance for FY 2008 compared to FY 2007, the increase of just 38% compared to an increase of 183% in revenues shows that collections are not a problem. Understandably, this should be because of the nature of Swiber’s customers (mainly oil majors and state-owned oil companies).
Debt-Equity ratio hit 1.01 for FY 2008 as a result of higher gearing to fund their vessel expansion plans. This was a significant rise from FY 2007’s D/E of 0.53 and is a worrying sign amidst this credit crisis. The interest paid on their debt totals about US$11 million and can be comfortably managed by operating cash inflows, but they have a portion of debt due within a year amounting to about US$81 million. Comparing this with their cash balance of US$74.7 million as at Dec 31, 2008 and considering the fact that no other major capex requirements are un-funded, coupled with the steady contract flow for Swiber; I do not forsee the repayment of this debt to be a major problem and there is also a remote chance of a rights issue to shore up their Balance Sheet, heavily geared though it may be. This will be covered in detail under future plans and also the Cash Flow Statement analysis.
ROE (annualized) is 18.9% for FY 2008 but much of this can be attributed to the increase in debt, meaning the quality of the ROE is in question. ROA was pathetically low at just 5.6% for FY 2008 compared to a more robust 13.3% for FY 2007, mainly due to lower earnings for FY 2008 as a result of the aforementioned losses in 4Q 2008 and also the Group’s asset base increasing as it expands its fleet. In future periods, this ratio is likely to stay depressed as the Group grows its asset base further; but it is hoped that earnings can increase at a correspondingly healthy rate to be able to make up for this drop.
Cash Flow Statement Analysis
It is quite deceiving to just look at the Income Statement as the drop of about 20.6% in full year net profit might lead one to assume that cash flows are corresponding poor as well. But in fact, the cash flow for FY 2008 was more robust than FY 2007 mainly due to the previously mentioned 38% increase in trade receivables when revenues surged so much, as well as the fact that there was a net operating cash inflow of US$2.2 million compared to a net operating cash outflow of US$16.8 million for FY 2007. Though small, it shows that the Group can maintain positive cashflow even with decreased earnings, higher income taxes as well as higher interest payments. The main reason for the cash inflows not being higher than they could be can be attributed to the work-in-progress accumulation which has not been billed and collected from customers (a possible timing difference) which could result in more cash flowing in during 1Q 2009.
For investing activities, the capex is pretty apparent for both years as US$92 million was paid in FY 2007 and US$226.3 million paid in FY 2008 to purchase PPE. However, do note that cash also flowed in from disposals of PPE and assets held for sale, as Swiber attempts to replace their older fleet with a newer one. All in all, 10 vessels were acquired in FY 2008 while 6 vessels were disposed of. The details can be found in Swiber’s powerpoint presentation material which can be downloaded from the Company’s website. Net cash used for investing activites ballooned nearly 400% to US$206 million, and constituted a major drag on cash.
The shortfall for this capex has to come from financing activities, of course. During FY 2008, US$235 million was raised from bank loans alone, and another US$92.2 million from the issuance of bonds. While hindsight would dictate that gearing up so quickly in one of the worst recessions in 70 years was a bad idea, it is at least a comfort to know that Swiber has already obtained its bank lines and successfully sold its bonds (which have a 3-year maturity by 2011). Interest costs of US$11 million per annum should be manageable only if the Group can secure sufficient contracts in the next 10 months of FY 2009, which I perceive as a key risk and uncertainty given this protracted downturn. On the other hand, also note that US$133.4 million worth of bank loans were repaid during FY 2008, about 64.7% more than the US$81 million due within one year. If you add in the interest, this comes up to about US$92 million worth of cash outflows for financing activities for FY 2009, which I am confident the Group can comfortably handle due to its order book of US$596 million as at end-FY 2008. Do not forget to factor in the additional US$70 million worth of new projects for 2M 2009, bringing the total order book for end-Feb 2009 to US$666 million, most of which will be recognized in FY 2009.
Prospects and Future Plans
After announcing the scrapping of their plans for the much talked about Equatorial Driller (a relief considering the huge capex burden it would have entailed), the Group now plans to focus its business efforts on managing costs and also on timely execution of projects. According to its press release, a total of 17 new vessels will be added to its fleet for FY 2009, most of which will be delivered in 2H 2009. Assuming Swiber Supporter and Concorde are delivered in 1Q 2009, this means that more of the revenue will be recognized in 2H 2009 due to most of the deliveries being timed for that period. It would also signal lumpy revenues and that quarterly results should not be relied upon too stringently (a case similar to Boustead).
As Mr. Raymond Goh had mentioned, Swiber has the manpower and the contracts awarded to it from Thailand (CUEL), India, Middle East, Indonesia and Malaysia. The only thing lacking are the vessels which are critical to perform the job well and free Swiber from the usage of third-party charters which are not only costly but also run the risk of problematic scheduling. I personally perceive that problems may continue into 1Q 2009 and the early part of 2Q 2009 before things stabilize, which means the Group may see more volatile earnings and margins ahead.
The good news (if it can be considered good) is that no further capex plans are underway, and that all planned capex is fully funded by S&L, bank loans and disposals. It’s akin to the Company just sitting back to wait for the vessels’ arrival, then to use these vessels to generate revenues and recurring cash flows. In order to remain asset-light, Swiber has made use of S&L as well as to jointly-share assets with their partners in the Middle East (Rawabi) and other regions too. They plan to target the shallow water domain in South-East Asia, where they have fewer competitors; as well as sub-sea opportunities in the Indian and Middle Eastern region. Though oil prices have come off a high if US$147 per barrel to currently about US$42 per barrel, Mr. Goh still sees a consistent demand for shallow water EPCIC work as projects which have already begun would not be terminated prematurely, and Swiber has the advantage of being involved in the end-stage of the oil and gas extraction process; so it is very unlikely for contracts to be cancelled. This is unlike Keppel’s business model where oil rigs can be cancelled or deferred as they represent the E&P (Exploration and Production) phase of the oil and gas cycle. This acts as a natural buffer to Swiber’s business and allows for more clarity of cash flows and contract revenues.
On a final note, the Group has also mentioned the possibility of moving their expertise to serve the offshore windpower industry. No additional capex is required and the skills set is apparently transferable as well, thus opening up a window of opportunity for the Group. Though this is just “talk” at the moment, it could be a possible avenue for Swiber to branch out into in future and may become a separate business unit if the potential is large enough.
For industry prospects, most of the presentation material features updated research and quotes from Feb 2009 which support the fact that investment in oil and gas E&P will continue, and the sharp drop in demand for fossil fuels would only exacerbate this under-investment scenario past FY 2010. As a result, most oil companies are continuing to inject monies for capex and oil field discoveries, and they are unlikely to taper off anytime soon.
Conclusion
Ultimately, the value of a company should be determined not just by the quality of its assets and its growth potential, but also the quality of the Management and their ability to allocate capital efficiently to achieve a high ROE without excessive use of leverage. With the credit crunch affecting companies such as Ferrochina, it pays to be prudent and Swiber should focus on generating more FCF once their fleet expansion is complete by end-FY 2010. While some may lament the lack of clarity in the Company’s growth moving forward, the key focus now should be to hunker down and build up vital cash to tide over the protracted downturn, so as to emerge into the sun in future with the necessary resources to take advantage of new opportunities.
In view of this analysis*, I have added to my position at S$0.375 yesterday. My new average cost for Swiber is now S$0.802 and will be updated in my March 2009 portfolio review.
*Disclaimer: This analysis is personal and is not an inducement to buy or sell shares of Swiber Holdings Limited. The author of this blog will NOT be held responsible for any losses incurred due to the reliance on this article for investment decisions or for speculation opportunities.
Saturday, November 15, 2008
Corporate Results Announcements
As I have a serious lack of time, I will not be doing reviews for ALL my companies which have released results recently, but will just focus on one or two. I've realized that it takes a lot of effort to analyze and post all the analysis here on my blog, when actually one should be more concerned with the long-term prospects of the businesses rather than staying too focused on quarterly results. That is the domain of analysts, whose job is just to churn up reports based on short-term forecasts (yes, 1-year price targets are considered short-term !).
Tat Hong Holdings Limited
Tat Hong released their 1H FY 2009 results on November 12, 2008. Revenues for 2Q 2009 rose 15% but this was offset by higher COGS (increase of 20%), resulting in gross profit increase of only 5%. Profit for 2Q 2009 dipped 3% from 2Q 2008; but looking at half-yearly figures, net profit increased a decent 25%. The Company declared an interim dividend of 3.5 cents per share, payable on December 12, 2008. At my purchase price of 71.5 cents, this represents an interim yield of 4.9%. I will be doing a more detailed review of Tat Hong's financials and prospects in due course, as I have quite a bit to say about their various divisions and also for their regional prospects in the longer-term (up till FY 2012).
Swiber Holdings Limited
3Q 2008 revenues surged 186.5%, while COGS increased an even heftier 247.3%, resulting in a 68.4% rise in gross profits. As a result of lower exceptional items for 3Q 2008, net profit fell 7.4% while profit attributable to shareholders fell 18.7% on quarter. For 9M 2008, profits increased a healthy 58.9% to US$47.1 million, and this already more than covers the entire FY 2007 profits. During bear markets, analysts love to focus on the negatives, and I am sure the "surprise drop" in profits of 18.7% on quarter will be mentioned many times. Putting things in perspective, the lumpy nature of contracts and the increase in headcount and administrative expenses as a result of business expansion into the region probably added quite a bit to Swiber's cost structure, as did the finance expenses on their bank loans and bonds. While this is not good for the company in the short-term, in the longer-term their asset-light strategy and their larger spread of vessels will help to snare them larger contracts which are hopefully long-term (e.g. is the CUEL 5-year contract for US$50 million per annum).
Their Balance Sheet is healthy with gearing at about 1.06 and current ratio >1, thus there is no immediate cause for worry as their debt is not due till FY 2011. Their cashflows from operating activities is also healthy at US$19 million for 3Q 2008, though the bulk of their cash inflows still came from the raising of more banks loans worth US$74 million. Still, there is probably more visibility now in terms of operating cash inflows, and the Company will take a more cautious stance towards expansion, and has put their deep-water plans on hold until oil prices firm up in future years. Prudence will see the company through these lean times, and they should emerge stronger and more ready for challenges by FY 2010. I will NOT be writing a detailed review on Swiber.
Using US$47.1 million at an exchange rate of 1.50 to the USD, EPS is about 16.76 Singapore cents per share for 9M. If annualized, EPS will be about 22.35 Singapore cents. At today's closing price of 61 cents, this values the company at a mere 2.73 times PER.
Pacific Andes (Holdings) Limited
Revenues for 2Q 2009 dipped 4% while gross profit dripped 12.6% due to higher fuel costs and also the supply chain management division getting disrupted due to the Olympic Games. Net profits decreased by 16% on quarter and about 16% for 1H 2009 too. However, due to PAH's increased stake in CFG, profits attributable to shareholders rose 18.5% on 1H FY 2009 compared to 1H FY 2008. Management has reported that fish product prices have risen 10-20% due to increased demand during the economic slowdown (hey, people still have to eat fish right ?). Due to the deployment of less fishing vessels to the North Pacific, they suffered a temporary drop in fishing volume which will be made up in 3Q 2009 (4Q 2008 for China Fishery).
Higher fuel costs were also cited as one of the reasons for the fall in profits, which was largely in line with what I expected. Fuel prices have since dropped to around US$56 per barrel and are likely to remain low for as long as the recession does not blow over. Thus, this should ease the gross margins for CFG's fishing division. Catalysts for profit growth in 2H FY 2009 will include measures taken by CFG to fish for more catch and also for deployment of their elongated vessels to the North and South Pacific. In CY 2009, higher total allowable catch (TAC) is also expected as fish supplies have remained healthy due to sustainable fishing practices. There will be NO further review from me for PAH's 1H FY 2009 results.
China Fishery Group Limited
Revenues for CFG were up 3% for 3Q 2008 and 8.4% for 9M 2008. However, net profit dipped by 28.1% on quarter due to the problems mentioned in PAH's review - higher fuel costs and deployment of vessels to defer catch volume till 4Q 2008. As a result of these, lower volumes of fish were caught even though prices had risen. Gross margin for 9M 2008 was high at 34%, while net margin was a respectable 22%. The Group managed an 11% rise in 9M net profit to US$78 million. Assuming oil prices remain at current levels, and CFG replenishes the fish which they had failed to catch in 3Q 2008, this means that annualized profits should hit about US$104 million. Using exchange rate of 1.50 to the USD, annualized EPS will be about 20 Singapore cents. Using closing price of 61 cents, FY 2008 PER is just about 3 times. Considering their revenues are consistent and recurring (unless the ocean runs out of fish !), this is a very low valuation for a good fishing company to trade at, which is one example of Mr. Market's mood swings.
Net cash from operating activities was a healthy +US$42 million for 3Q 2008, and +US$60.1 million for 9M 2008. Net increase in cash was US$23.2 million for 9M 2008 after factoring in acquisition of PPE and subsidiaries. Net gearing improved to 92.9% from 108.3% as at December 31, 2007. Prospects are decent for CFG as they are expanding their number of vessels and also elongating their existing ones to increase the fish hold capacity. When the ITQ is implemented in Peru in FY 2009, this should provide a further boost to prices as quality of catch will improve. I have also noted the Chairman Ng Joo Siang's plans to eventually branch out to catching krill by FY 2010 and hope that they can implement this as an additional revenue stream. I hope to get more updates on this at the next AGM. Meanwhile, I will provide no more further analysis on CFG until the FY 2008 results are out some time in Feb 2009.
Boustead Singapore Limited
Boustead released a decent set of results today, underscoring their slow but steady growth in all divisions despite the economic downturn. Since I will be doing a more detailed review of Boustead's 1H FY 2009 results, I shall not say too much during this post. Suffice to say that the Company has grown all divisions decently, and has a net cash position of S$117.6 million. They have declared an interim dividend of 1.5 cents per share (a yield of 2.6 cents based on my purchase price) which is payable on December 18, 2008. On a comparative basis, after removing one-off items, net profit attributable to shareholders improved 30.2% to S$15.2 million.
One must note that the Company usually does better in 2H of the financial year and shows weaker financial results in 1H. Thus, due to their lumpy project nature of their revenues, it will not be wise to annualize their net profit to derive a valuation as it would be misleading. Also note that the sale of a leasehold property will net the Company another S$200 million in 2H 2009, and this should result in a very decent final dividend for FY 2009. I will be doing a detailed breakdown in a future post for Boustead, and discuss possible strategies which the Company may take to grow their top and bottom line.
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Stay tuned for more posts coming on Investment Sins, as well as a continuation of the Behavioural Finance series. I am also planning a future "Your Money and Your Brain" series after reading the book by Jason Zweig, to draw out snippets to illustrate the fascinating relationship between money and our own brains.
As I have a serious lack of time, I will not be doing reviews for ALL my companies which have released results recently, but will just focus on one or two. I've realized that it takes a lot of effort to analyze and post all the analysis here on my blog, when actually one should be more concerned with the long-term prospects of the businesses rather than staying too focused on quarterly results. That is the domain of analysts, whose job is just to churn up reports based on short-term forecasts (yes, 1-year price targets are considered short-term !).
Tat Hong Holdings Limited
Tat Hong released their 1H FY 2009 results on November 12, 2008. Revenues for 2Q 2009 rose 15% but this was offset by higher COGS (increase of 20%), resulting in gross profit increase of only 5%. Profit for 2Q 2009 dipped 3% from 2Q 2008; but looking at half-yearly figures, net profit increased a decent 25%. The Company declared an interim dividend of 3.5 cents per share, payable on December 12, 2008. At my purchase price of 71.5 cents, this represents an interim yield of 4.9%. I will be doing a more detailed review of Tat Hong's financials and prospects in due course, as I have quite a bit to say about their various divisions and also for their regional prospects in the longer-term (up till FY 2012).
Swiber Holdings Limited
3Q 2008 revenues surged 186.5%, while COGS increased an even heftier 247.3%, resulting in a 68.4% rise in gross profits. As a result of lower exceptional items for 3Q 2008, net profit fell 7.4% while profit attributable to shareholders fell 18.7% on quarter. For 9M 2008, profits increased a healthy 58.9% to US$47.1 million, and this already more than covers the entire FY 2007 profits. During bear markets, analysts love to focus on the negatives, and I am sure the "surprise drop" in profits of 18.7% on quarter will be mentioned many times. Putting things in perspective, the lumpy nature of contracts and the increase in headcount and administrative expenses as a result of business expansion into the region probably added quite a bit to Swiber's cost structure, as did the finance expenses on their bank loans and bonds. While this is not good for the company in the short-term, in the longer-term their asset-light strategy and their larger spread of vessels will help to snare them larger contracts which are hopefully long-term (e.g. is the CUEL 5-year contract for US$50 million per annum).
Their Balance Sheet is healthy with gearing at about 1.06 and current ratio >1, thus there is no immediate cause for worry as their debt is not due till FY 2011. Their cashflows from operating activities is also healthy at US$19 million for 3Q 2008, though the bulk of their cash inflows still came from the raising of more banks loans worth US$74 million. Still, there is probably more visibility now in terms of operating cash inflows, and the Company will take a more cautious stance towards expansion, and has put their deep-water plans on hold until oil prices firm up in future years. Prudence will see the company through these lean times, and they should emerge stronger and more ready for challenges by FY 2010. I will NOT be writing a detailed review on Swiber.
Using US$47.1 million at an exchange rate of 1.50 to the USD, EPS is about 16.76 Singapore cents per share for 9M. If annualized, EPS will be about 22.35 Singapore cents. At today's closing price of 61 cents, this values the company at a mere 2.73 times PER.
Pacific Andes (Holdings) Limited
Revenues for 2Q 2009 dipped 4% while gross profit dripped 12.6% due to higher fuel costs and also the supply chain management division getting disrupted due to the Olympic Games. Net profits decreased by 16% on quarter and about 16% for 1H 2009 too. However, due to PAH's increased stake in CFG, profits attributable to shareholders rose 18.5% on 1H FY 2009 compared to 1H FY 2008. Management has reported that fish product prices have risen 10-20% due to increased demand during the economic slowdown (hey, people still have to eat fish right ?). Due to the deployment of less fishing vessels to the North Pacific, they suffered a temporary drop in fishing volume which will be made up in 3Q 2009 (4Q 2008 for China Fishery).
Higher fuel costs were also cited as one of the reasons for the fall in profits, which was largely in line with what I expected. Fuel prices have since dropped to around US$56 per barrel and are likely to remain low for as long as the recession does not blow over. Thus, this should ease the gross margins for CFG's fishing division. Catalysts for profit growth in 2H FY 2009 will include measures taken by CFG to fish for more catch and also for deployment of their elongated vessels to the North and South Pacific. In CY 2009, higher total allowable catch (TAC) is also expected as fish supplies have remained healthy due to sustainable fishing practices. There will be NO further review from me for PAH's 1H FY 2009 results.
China Fishery Group Limited
Revenues for CFG were up 3% for 3Q 2008 and 8.4% for 9M 2008. However, net profit dipped by 28.1% on quarter due to the problems mentioned in PAH's review - higher fuel costs and deployment of vessels to defer catch volume till 4Q 2008. As a result of these, lower volumes of fish were caught even though prices had risen. Gross margin for 9M 2008 was high at 34%, while net margin was a respectable 22%. The Group managed an 11% rise in 9M net profit to US$78 million. Assuming oil prices remain at current levels, and CFG replenishes the fish which they had failed to catch in 3Q 2008, this means that annualized profits should hit about US$104 million. Using exchange rate of 1.50 to the USD, annualized EPS will be about 20 Singapore cents. Using closing price of 61 cents, FY 2008 PER is just about 3 times. Considering their revenues are consistent and recurring (unless the ocean runs out of fish !), this is a very low valuation for a good fishing company to trade at, which is one example of Mr. Market's mood swings.
Net cash from operating activities was a healthy +US$42 million for 3Q 2008, and +US$60.1 million for 9M 2008. Net increase in cash was US$23.2 million for 9M 2008 after factoring in acquisition of PPE and subsidiaries. Net gearing improved to 92.9% from 108.3% as at December 31, 2007. Prospects are decent for CFG as they are expanding their number of vessels and also elongating their existing ones to increase the fish hold capacity. When the ITQ is implemented in Peru in FY 2009, this should provide a further boost to prices as quality of catch will improve. I have also noted the Chairman Ng Joo Siang's plans to eventually branch out to catching krill by FY 2010 and hope that they can implement this as an additional revenue stream. I hope to get more updates on this at the next AGM. Meanwhile, I will provide no more further analysis on CFG until the FY 2008 results are out some time in Feb 2009.
Boustead Singapore Limited
Boustead released a decent set of results today, underscoring their slow but steady growth in all divisions despite the economic downturn. Since I will be doing a more detailed review of Boustead's 1H FY 2009 results, I shall not say too much during this post. Suffice to say that the Company has grown all divisions decently, and has a net cash position of S$117.6 million. They have declared an interim dividend of 1.5 cents per share (a yield of 2.6 cents based on my purchase price) which is payable on December 18, 2008. On a comparative basis, after removing one-off items, net profit attributable to shareholders improved 30.2% to S$15.2 million.
One must note that the Company usually does better in 2H of the financial year and shows weaker financial results in 1H. Thus, due to their lumpy project nature of their revenues, it will not be wise to annualize their net profit to derive a valuation as it would be misleading. Also note that the sale of a leasehold property will net the Company another S$200 million in 2H 2009, and this should result in a very decent final dividend for FY 2009. I will be doing a detailed breakdown in a future post for Boustead, and discuss possible strategies which the Company may take to grow their top and bottom line.
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Stay tuned for more posts coming on Investment Sins, as well as a continuation of the Behavioural Finance series. I am also planning a future "Your Money and Your Brain" series after reading the book by Jason Zweig, to draw out snippets to illustrate the fascinating relationship between money and our own brains.
Monday, September 08, 2008
Swiber and Boustead - News Snippets
Just some short news snippets (my recent posts have been rather lengthy and will probably make readers fall asleep, so it's good to have short snippets now and then).
Swiber initiated its share buy-back programme last Friday and bought back 200,000 shares at an average price of S$1.3151, which will cost the company S$263,020 (excluding brokerage). Today, the company announced that it bought back another 186,000 shares at an average price of S$1.3662, incurring a total of S$254,113.20. The total shares bought back so far amount to 386,000 costing the company a total of S$517,133.20. Readers may recall that as recently as June 26, 2007, the company had raised S$120.4 million for business expansion through a placement of 55,350,000 new shares at S$2.1748. So I guess you can say that the company is buying back at a "discount" of nearly 38.3% (using an average re-purchase price of S$1.34 per share over 2 trading days). If we consider that the total amount they are allowed to re-purchase is only 42,435,000, I guess it's a pity that they cannot "re-purchase" all their share placement shares at $1.30+ and then hopefully re-issue new shares in future at a higher price ! Haha, just kidding but it's a sneaky thought.....
Boustead also announced today that Mr. FF Wong, CEO, had purchased an additional 142,000 shares of Boustead at a price of S$1.00 per share. This has effectively increased his already large stake of 31.7% to 31.73%. Perhaps the CEO is trying to signal something by purchasing shares in his own company, as he is acutely aware of the value of the business and the latent potential for future growth, but readers are free to conclude on their own if this means anything. Whatever the case, it is always more important to analyze the business first, before looking for any insider purchases.
Just some short news snippets (my recent posts have been rather lengthy and will probably make readers fall asleep, so it's good to have short snippets now and then).
Swiber initiated its share buy-back programme last Friday and bought back 200,000 shares at an average price of S$1.3151, which will cost the company S$263,020 (excluding brokerage). Today, the company announced that it bought back another 186,000 shares at an average price of S$1.3662, incurring a total of S$254,113.20. The total shares bought back so far amount to 386,000 costing the company a total of S$517,133.20. Readers may recall that as recently as June 26, 2007, the company had raised S$120.4 million for business expansion through a placement of 55,350,000 new shares at S$2.1748. So I guess you can say that the company is buying back at a "discount" of nearly 38.3% (using an average re-purchase price of S$1.34 per share over 2 trading days). If we consider that the total amount they are allowed to re-purchase is only 42,435,000, I guess it's a pity that they cannot "re-purchase" all their share placement shares at $1.30+ and then hopefully re-issue new shares in future at a higher price ! Haha, just kidding but it's a sneaky thought.....
Boustead also announced today that Mr. FF Wong, CEO, had purchased an additional 142,000 shares of Boustead at a price of S$1.00 per share. This has effectively increased his already large stake of 31.7% to 31.73%. Perhaps the CEO is trying to signal something by purchasing shares in his own company, as he is acutely aware of the value of the business and the latent potential for future growth, but readers are free to conclude on their own if this means anything. Whatever the case, it is always more important to analyze the business first, before looking for any insider purchases.
Friday, August 22, 2008
Swiber – 1H FY 2008 Financial Review and Analysis
It’s been a while since I had blogged about Swiber and related updates from the company. The company released its 1H 2008 financial results on August 13, 2008, and all I can say is that much was in line with what I expected, though quite a large part of its future is still uncertain at this point in time due to the absence of news about potential developments. Swiber’s presentation slides and Raymond Goh’s interview with Reuters did shed some light on the strategic direction the company plans to take, and I shall comment on it in a separate section after my usual financial statement review. I will keep the financial review short as I wish to focus more on the future and prospects for the company.
Income Statement Analysis
As expected, Swiber’s 2Q 2008 revenues increased by 391% from 2Q 2007 to US$124.5 million as a result of them working concurrently on 6 projects instead of 2 in the previous year. From their order book and award of contracts during the Jan to March 2008 period, one can already foresee that their volume of business is indeed growing. Gross margin came in at 25.9% for 2Q 2008 versus 29.4% for 2Q 2007, while gross margins for 1H 2008 weighed in at 25.9% against 28.6% for 1H 2007. I believe the reason for the fall in gross margins is due to the fact that Swiber is contracting third-party vessels for its projects until the new vessels arrive in 2H 2008. Net margins for 2Q 2008 and 1H 2008 were 17.8% and 16.7%, lower than 2Q 2007 and 1H 2007 mainly due to higher income tax expenses and higher interest costs as the company is gearing up.
Balance Sheet Review
The main points to highlight are that trade receivables and property, plant and equipment saw sharp rises in the last 6 months, due to the increased volume of business and also Swiber’s continued investment in new vessels to expand its fleet. Current ratio stood at 1.42 for June 30, 2008 compared to 2.15 as at December 31, 2008. This sharp drop was mainly due to the issuance of bonds, increased bank loans as well as a more than 100% rise in other payables. Net debt-equity ratio has increased from 0.53 to 1.03 times as at June 30, 2008, and this could represent a red flag if debt continues to remain high. However, in light of the nature of the company’s business and the industry in which it operates, I would expect gearing to remain fairly high. The question is whether it will get excessively high in future (i.e. more than 2.0) ? These concerns are addressed later on in my posting on prospects and plans.
Cash Flow Statement Analysis
In the previous quarter, there was a net cash outflow from operating activities which I flagged as a possible area of concern. For 2Q 2008 however, there was a net inflow of cash of US$18.5 million, chiefly due to the sharp rise in other payables and a drop in other receivables (using the “indirect” method of preparing cash flow statement). When compared to 2Q 2007, this is encouraging as net cash inflows increased nearly 6 times while net profit for 2Q had only increased 4 times. Still, such a comparison may be shallow as further analysis is required as to the nature of the “other payables” and the reason for the sharp increase. It could also be due to a timing difference which will result in a net cash outflow in the next quarter. With the indirect method of preparing the cash flow statement, sometimes I feel it is better to look at the full-year picture rather than just one quarter alone.
As expected, most of their cash was ploughed into purchases of vessels and also for assets held for sale (in their sale and leaseback arrangement). This sucked up US$117 million worth of cash in the 2Q 2008. Swiber paid off US$24 million worth of bank loans and raised another US$56.8 million through new bank loans, presumably using their new vessels under construction as collateral. Bond issuance helped to raise US$20.2 million worth of cash which will assist in financing the construction of vessels. It is these new bank loans and bonds which are responsible for raising the gearing of the company.
Valuation
Using a net profit figure of US$32.5 million and annualizing it, FY 2008 net profit will be about US$65 million. Using an exchange rate of 1.41 to the USD, this gives a net profit of about S$91.8 million. Earnings per share is thus about SGD 21.7 cents. At today's closing price of S$1.57, this translates into a PER of about 7.2 times (using a combination of historical and forward pricing). I have highlighted some factors below which may contribute to a higher intrinsic value for Swiber and may be worth considering. Based on my purchase price of S$1.01, I have purchased Swiber at a PER of about 4.65 times, and this gives me sufficient margin of safety in my opinion.
Order Book and Project Bidding
As at June 30, 2008, Swiber had an order book of US$664 million which includes the US$250 million CUEL project spanning 5 financial years. This order book is expected to be recognized as revenues progressively over the next 1.5 financial years, and a recent DBS report mentioned that the new bidding season for contracts will arrive soon from the November to January period. The total bids submitted as at August 2008 is for US$3.57 billion worth of jobs for the next 5 years. If we assume a conservative rate of 20% win, that’s an additional US$714 million worth of additional projects. One thing to remember is that bidding for projects is an ongoing thing and as Swiber expands its regional footprint, the chances of them clinching a project will be significantly higher. Thus, this should only be used as a gauge and not as an exact approximation. One issue with Swiber is that their project-based revenue tends to be “lumpy”, much like a property developer recognizes revenues for properties based on % of completion method. CUEL was the first multi-year dealed inked by Swiber and demonstrates that such contracts do exist in the industry and Swiber is more than capable of clinching one in the near future.
Qualitative Factors to justify higher intrinsic value
When one analyzes a company like Swiber, one may think that it is just another EPCIC player competing in the same space as other similar EPCIC players serving the oil and gas industry. However, several factors have been identified by myself as being of significance in assigning a higher intrinsic value for Swiber. Recall that the intrinsic value of a company is not just based on its financials, but also on “intangible” factors such as Management strength, network of clients, reputation of customers and other factors. These are as follows for Swiber:-
a) Completion of Mampak platform installation work for Brunei Shell on schedule and without incident. This demonstrates that the company is capable of handling larger, more complex projects without compromising on delivery timing and safety. The successful completion of a major project for a large reputable client like Brunei Shell will give Swiber an edge in bidding for future projects.
b) Gradual expansion of territories for client base – Swiber has gradually extended its regional footprint over the last 1.5 years since listing by signing MOU and LOI with parties in various countries. During listing in 2006, it only had clients located in Singapore, Malaysia, Indonesia and India. Currently, its client base has expanded to include Thailand (CUEL), Vietnam (PetroVietnam), Brunei (Rahaman and Brunei Shell) and most recently, Saudi Arabia (Rawabi). Thus, their expanding network shows that they are able to garner the confidence of the local parties in order to work hand in hand with them, and expands their area of influence.
c) Excellent Management Team for Offshore Drilling Services (ODS) – Swiber made a very good move by hiring Mr. Glen Olivera who has nearly 30 years of experience in drilling all over the world. With him to helm the ODS division as CEO (and also taking up a 10% stake in Equatorial Driller Pte Ltd), shareholders can be assured that only the highest quality will be delivered in terms of design and execution, due to this vast experience in drilling.
Prospects and Plans
Swiber has outlined its plans for growth in the next 5 years, and this will mainly be underpinned by its fleet expansion which will take its fleet from the current 30 vessels (to date) to 39 by the end of FY 2008 and then to 48 by the end of FY 2009. Their vessels are mainly to cater for higher value and larger EPCIC projects in which Swiber occupies a niche market, while at the same time, they are also providing offshore support services (OSS) through their fleet of AHT and AHTS.
However, Swiber intends to capitalize on its unique design for Equatorial Driller (ED) to take the company to the next stage of growth. Their immediate focus is to secure a drilling contract either in West Africa or Brazil, while at the same time finalizing the shipyard which is supposed to build the vessel. The vessel can only be delivered 24 months after the signing of the contract with the shipyard, so the estimated date of delivery will be about 4Q FY 2010. Mr. Goh mentioned that the ED will cost a lot less to build than a normal semi-submersible because of the difference in hull design and the lack of a DP2 positioning system. This is due to the target market which Swiber is aiming for as the operations for ED will be in mild waters which do not need DP2 technology. As ED will cost less, a competitive advantage Swiber will have is that they can charge clients lower day rates for the charter of the driller; thus creating a win-win situation for both themselves (their gross margin is preserved) and the client (cheaper day-rates as compared to semi-submersible drillers). I would expect Swiber to announced finalized plans for the ED by the end of September 2008 and hopefully a contract will follow swiftly.
Mr. Raymond Goh had also mentioned in a Reuters interview recently that he intended to maintain the debt-to-equity ratio of the company at about 1 (the current level). In order to do this, there are two possible options: he can either issue more shares through a secondary offering (thus diluting current shareholders) and then drawdown on the medium-term notes and bonds facility (hence preserving the ratio at 1) or to utilized sale-and-leaseback to free up cash and lighten the Balance Sheet (Swiber had already done this twice). The first option seems unlikely as current market conditions (in a bear market, valuations are lower) do not facilitate an efficient use of the capital markets for fund-raising, therefore I feel Swiber will gravitate more towards the second option of using more sale and leasebacks to free up cash for expansion. In light of their capital-intensive nature of business and the fact that larger contracts can only be secured through the expansion of their fleet and capabilities, this is a necessary evil.
In a surprising and (to me) somewhat unrelated announcement, Mr. Raymond Goh has commented that Swiber is studying the offshore windpower market to assess the potential for windpower as an alternative source of energy. In the Reuters interview, he mentioned that he hoped Swiber would be able to clinch a contract within a year with a major European company, and that windpower may contribute as much as 10% to Swiber’s revenue in 5 years’ time. Their powerpoint presentation to analysts does not paint a very pretty picture of windpower as costs have been escalating and many projects are stalling due to lack of funding. Though offshore windfarms are a new and interesting idea, it remains to be seen if a good enough return on investment can be achieved in order to justify future capex in this new business unit. The company may be biting off a lot more than it can chew if it plans to “diversify” its revenue stream. I would rather it focused on its core competence instead of trying too many different things at the same time. Hence, this is one area of worry for me in the near-term, as there are no earnings visibility for windpower and not much is known about the future potential as well as the gross margins for such contracts.
It’s been a while since I had blogged about Swiber and related updates from the company. The company released its 1H 2008 financial results on August 13, 2008, and all I can say is that much was in line with what I expected, though quite a large part of its future is still uncertain at this point in time due to the absence of news about potential developments. Swiber’s presentation slides and Raymond Goh’s interview with Reuters did shed some light on the strategic direction the company plans to take, and I shall comment on it in a separate section after my usual financial statement review. I will keep the financial review short as I wish to focus more on the future and prospects for the company.
Income Statement Analysis
As expected, Swiber’s 2Q 2008 revenues increased by 391% from 2Q 2007 to US$124.5 million as a result of them working concurrently on 6 projects instead of 2 in the previous year. From their order book and award of contracts during the Jan to March 2008 period, one can already foresee that their volume of business is indeed growing. Gross margin came in at 25.9% for 2Q 2008 versus 29.4% for 2Q 2007, while gross margins for 1H 2008 weighed in at 25.9% against 28.6% for 1H 2007. I believe the reason for the fall in gross margins is due to the fact that Swiber is contracting third-party vessels for its projects until the new vessels arrive in 2H 2008. Net margins for 2Q 2008 and 1H 2008 were 17.8% and 16.7%, lower than 2Q 2007 and 1H 2007 mainly due to higher income tax expenses and higher interest costs as the company is gearing up.
Balance Sheet Review
The main points to highlight are that trade receivables and property, plant and equipment saw sharp rises in the last 6 months, due to the increased volume of business and also Swiber’s continued investment in new vessels to expand its fleet. Current ratio stood at 1.42 for June 30, 2008 compared to 2.15 as at December 31, 2008. This sharp drop was mainly due to the issuance of bonds, increased bank loans as well as a more than 100% rise in other payables. Net debt-equity ratio has increased from 0.53 to 1.03 times as at June 30, 2008, and this could represent a red flag if debt continues to remain high. However, in light of the nature of the company’s business and the industry in which it operates, I would expect gearing to remain fairly high. The question is whether it will get excessively high in future (i.e. more than 2.0) ? These concerns are addressed later on in my posting on prospects and plans.
Cash Flow Statement Analysis
In the previous quarter, there was a net cash outflow from operating activities which I flagged as a possible area of concern. For 2Q 2008 however, there was a net inflow of cash of US$18.5 million, chiefly due to the sharp rise in other payables and a drop in other receivables (using the “indirect” method of preparing cash flow statement). When compared to 2Q 2007, this is encouraging as net cash inflows increased nearly 6 times while net profit for 2Q had only increased 4 times. Still, such a comparison may be shallow as further analysis is required as to the nature of the “other payables” and the reason for the sharp increase. It could also be due to a timing difference which will result in a net cash outflow in the next quarter. With the indirect method of preparing the cash flow statement, sometimes I feel it is better to look at the full-year picture rather than just one quarter alone.
As expected, most of their cash was ploughed into purchases of vessels and also for assets held for sale (in their sale and leaseback arrangement). This sucked up US$117 million worth of cash in the 2Q 2008. Swiber paid off US$24 million worth of bank loans and raised another US$56.8 million through new bank loans, presumably using their new vessels under construction as collateral. Bond issuance helped to raise US$20.2 million worth of cash which will assist in financing the construction of vessels. It is these new bank loans and bonds which are responsible for raising the gearing of the company.
Valuation
Using a net profit figure of US$32.5 million and annualizing it, FY 2008 net profit will be about US$65 million. Using an exchange rate of 1.41 to the USD, this gives a net profit of about S$91.8 million. Earnings per share is thus about SGD 21.7 cents. At today's closing price of S$1.57, this translates into a PER of about 7.2 times (using a combination of historical and forward pricing). I have highlighted some factors below which may contribute to a higher intrinsic value for Swiber and may be worth considering. Based on my purchase price of S$1.01, I have purchased Swiber at a PER of about 4.65 times, and this gives me sufficient margin of safety in my opinion.
Order Book and Project Bidding
As at June 30, 2008, Swiber had an order book of US$664 million which includes the US$250 million CUEL project spanning 5 financial years. This order book is expected to be recognized as revenues progressively over the next 1.5 financial years, and a recent DBS report mentioned that the new bidding season for contracts will arrive soon from the November to January period. The total bids submitted as at August 2008 is for US$3.57 billion worth of jobs for the next 5 years. If we assume a conservative rate of 20% win, that’s an additional US$714 million worth of additional projects. One thing to remember is that bidding for projects is an ongoing thing and as Swiber expands its regional footprint, the chances of them clinching a project will be significantly higher. Thus, this should only be used as a gauge and not as an exact approximation. One issue with Swiber is that their project-based revenue tends to be “lumpy”, much like a property developer recognizes revenues for properties based on % of completion method. CUEL was the first multi-year dealed inked by Swiber and demonstrates that such contracts do exist in the industry and Swiber is more than capable of clinching one in the near future.
Qualitative Factors to justify higher intrinsic value
When one analyzes a company like Swiber, one may think that it is just another EPCIC player competing in the same space as other similar EPCIC players serving the oil and gas industry. However, several factors have been identified by myself as being of significance in assigning a higher intrinsic value for Swiber. Recall that the intrinsic value of a company is not just based on its financials, but also on “intangible” factors such as Management strength, network of clients, reputation of customers and other factors. These are as follows for Swiber:-
a) Completion of Mampak platform installation work for Brunei Shell on schedule and without incident. This demonstrates that the company is capable of handling larger, more complex projects without compromising on delivery timing and safety. The successful completion of a major project for a large reputable client like Brunei Shell will give Swiber an edge in bidding for future projects.
b) Gradual expansion of territories for client base – Swiber has gradually extended its regional footprint over the last 1.5 years since listing by signing MOU and LOI with parties in various countries. During listing in 2006, it only had clients located in Singapore, Malaysia, Indonesia and India. Currently, its client base has expanded to include Thailand (CUEL), Vietnam (PetroVietnam), Brunei (Rahaman and Brunei Shell) and most recently, Saudi Arabia (Rawabi). Thus, their expanding network shows that they are able to garner the confidence of the local parties in order to work hand in hand with them, and expands their area of influence.
c) Excellent Management Team for Offshore Drilling Services (ODS) – Swiber made a very good move by hiring Mr. Glen Olivera who has nearly 30 years of experience in drilling all over the world. With him to helm the ODS division as CEO (and also taking up a 10% stake in Equatorial Driller Pte Ltd), shareholders can be assured that only the highest quality will be delivered in terms of design and execution, due to this vast experience in drilling.
Prospects and Plans
Swiber has outlined its plans for growth in the next 5 years, and this will mainly be underpinned by its fleet expansion which will take its fleet from the current 30 vessels (to date) to 39 by the end of FY 2008 and then to 48 by the end of FY 2009. Their vessels are mainly to cater for higher value and larger EPCIC projects in which Swiber occupies a niche market, while at the same time, they are also providing offshore support services (OSS) through their fleet of AHT and AHTS.
However, Swiber intends to capitalize on its unique design for Equatorial Driller (ED) to take the company to the next stage of growth. Their immediate focus is to secure a drilling contract either in West Africa or Brazil, while at the same time finalizing the shipyard which is supposed to build the vessel. The vessel can only be delivered 24 months after the signing of the contract with the shipyard, so the estimated date of delivery will be about 4Q FY 2010. Mr. Goh mentioned that the ED will cost a lot less to build than a normal semi-submersible because of the difference in hull design and the lack of a DP2 positioning system. This is due to the target market which Swiber is aiming for as the operations for ED will be in mild waters which do not need DP2 technology. As ED will cost less, a competitive advantage Swiber will have is that they can charge clients lower day rates for the charter of the driller; thus creating a win-win situation for both themselves (their gross margin is preserved) and the client (cheaper day-rates as compared to semi-submersible drillers). I would expect Swiber to announced finalized plans for the ED by the end of September 2008 and hopefully a contract will follow swiftly.
Mr. Raymond Goh had also mentioned in a Reuters interview recently that he intended to maintain the debt-to-equity ratio of the company at about 1 (the current level). In order to do this, there are two possible options: he can either issue more shares through a secondary offering (thus diluting current shareholders) and then drawdown on the medium-term notes and bonds facility (hence preserving the ratio at 1) or to utilized sale-and-leaseback to free up cash and lighten the Balance Sheet (Swiber had already done this twice). The first option seems unlikely as current market conditions (in a bear market, valuations are lower) do not facilitate an efficient use of the capital markets for fund-raising, therefore I feel Swiber will gravitate more towards the second option of using more sale and leasebacks to free up cash for expansion. In light of their capital-intensive nature of business and the fact that larger contracts can only be secured through the expansion of their fleet and capabilities, this is a necessary evil.
In a surprising and (to me) somewhat unrelated announcement, Mr. Raymond Goh has commented that Swiber is studying the offshore windpower market to assess the potential for windpower as an alternative source of energy. In the Reuters interview, he mentioned that he hoped Swiber would be able to clinch a contract within a year with a major European company, and that windpower may contribute as much as 10% to Swiber’s revenue in 5 years’ time. Their powerpoint presentation to analysts does not paint a very pretty picture of windpower as costs have been escalating and many projects are stalling due to lack of funding. Though offshore windfarms are a new and interesting idea, it remains to be seen if a good enough return on investment can be achieved in order to justify future capex in this new business unit. The company may be biting off a lot more than it can chew if it plans to “diversify” its revenue stream. I would rather it focused on its core competence instead of trying too many different things at the same time. Hence, this is one area of worry for me in the near-term, as there are no earnings visibility for windpower and not much is known about the future potential as well as the gross margins for such contracts.
Tuesday, June 03, 2008
Swiber - 1Q 2008 Financial Statements Review and Analysis
Yep, this review was somewhat delayed but the past few weeks have been very busy and in addition, there was also Pac Andes and Boustead's FY 2008 results to contend with. Below is my brief analysis of Swiber's 1Q 2008 financial results; do note that quarterly results are not too significant on their own and it is better to see the overall trend in earnings and margins for any company rather than to focus solely on one quarter alone.
Income Statement Review
To compare 1Q 2008 with 1Q 2007, it is obvious that revenues and hence net profits have grown tremendously as a result of fleet addition and the presence of a new source of income (i.e. shipbuilding and ship repairs). However, one should also note that gross margins had fallen from 27.5% in 1Q 2007 to 25.9% in 1Q 2008. This can principally be attributed to the growth of Kreuz Shipbuilding and more revenues coming from the ship-building business unit, which traditionally commands lower margins compared to EPCIC. Moving forward, we should see more margin contraction as Swiber has yet to take delivery of its first drilling vessel (thus, it has to rely on third-party vessels which increase costs). The contraction should smoothen out once more of Swiber's fleet comes on-stream, but should still be below current levels as ship repairs/building takes a slightly larger chunk of revenues. That said, the gross margins for deepwater drilling should be very attractive and this unit should help to boost gross margins as the company heads on into FY 2010.
Net margin for 1Q 2008 was 14.6% against a net margin of 18.9% for 1Q 2007. This was mainly due to higher admin costs (up 185%) and much higher finance costs (increase of 896% on a low base). I would assume the higher admin costs are a result of more intensive hiring to fill up job vacancies for Swiber's new expanded operations and businesses; while the increase in finance costs are a necessary evil from the bond issue and the raising of additional monies through bank loans. Net margin should stabilize once Swiber stops relying on additional financing, and should even improve in future due to greater economies of scale between the various business units.
Balance Sheet Review
On to the Balance Sheet, the most noticeable items are trade receivables which have increased about 46% from US$100.7 million to US$146.5 million; and other receivables which have increased 81.2% from US$26.1 million to US$47.3 million. Presumably, these relate to monies which are yet to be received with regards to the sale-and-leaseback transactions (as Mr. Francis Wong had stated during the AGM). Another plausible explanation might be the 200+% increase in revenues which necessarily generates a greater receivables balance. It is precisely because of this receivables balance that the operating cash flows is negative.
Current ratio stands at 1.96 for 1Q 2008, against 2.15 for 1Q 2007. The ratio was lower due to the increase in trade payables and also the decrease in cash; but is otherwise still healthy. Quick ratio does not apply to Swiber as their inventories are negligible (they are a service provider, not a manufacturer or producer).
Also note that long-term liabilities had increased significantly due to the second bond issue of US$72.0 millio, as well as additional bank loans obtained. The additional gearing is to enable the firm to purchase new assets (vessels) in order to expand its fleet and garner more revenue.
Cash Flow Statement Review
There was negative operating cash flows mainly due to the aforementioned increases in trade and other receivables. The 1Q 2008 presentation slides presented this as "cash used to grow operations" and I would argue that this cannot continue for too long, otherwise the cash position of the company may be seriously compromised. A company can only rely on external funding for so many quarters before it MUST generate sufficient internal cash flows to operate on its own. As Swiber is currently in "rapid growth" stage, this is borderline acceptable though I am not comfortable with it should it shoot past 3Q 2008.
Cash outflows for investing activities was expected to be negative, as the company invested a lot of cash into purchasing assets for use in its EPCIC operations. In fact, cash inflows came mainly from financing activities, where US$70.2 million was raised via a bond issue and US$41.2 million was raised through new bank loans obtained (with collateral presumably on the vessels which were to be delivered to Swiber progressively).
Future Plans
As at March 31, 2008, Swiber's order book stood at US$476 million. According to Management, FY 2008 profit should be much better than FY 2007 due to the schedule for recognition of revenue from the projects. The order book does NOT include a 5-year US$50 million per annum recurring revenue stream from Swiber's tie-up with CUEL. With shipbuilding and EPCIC in full swing and the company about to take on a new business unit for offshore drilling in FY 2008, prospects look positive for the company. Risks would include delay in obtaining vessels, delay in completing projects and subsequent negative goodwill generated, slowdown in orderbook building and possible margin squeeze from rising costs.
I had also noted that most of the contracts and LOI seem to have been awarded in the Feb to April 2008 period, similar to last year's mega-project worth US$146.6 million awarded by Brunei Shell. Mr. Goh was quick to dismiss this idea and said that projects were clinched on an ongoing basis and that there was no specific timing to the award of projects. However, I personally suspect that smaller, lower value contracts are given out throughout the year while the larger ones have to be bidded for and are won close to certain periods of the financial year. Whether this is true or not remains to be seen, but it is hoped that Swiber can continue to build on their core competencies to grow the business, and to leverage on their networks, joint ventures and tie-ups thus far to secure more contracts of worthwhile size.
Yep, this review was somewhat delayed but the past few weeks have been very busy and in addition, there was also Pac Andes and Boustead's FY 2008 results to contend with. Below is my brief analysis of Swiber's 1Q 2008 financial results; do note that quarterly results are not too significant on their own and it is better to see the overall trend in earnings and margins for any company rather than to focus solely on one quarter alone.
Income Statement Review
To compare 1Q 2008 with 1Q 2007, it is obvious that revenues and hence net profits have grown tremendously as a result of fleet addition and the presence of a new source of income (i.e. shipbuilding and ship repairs). However, one should also note that gross margins had fallen from 27.5% in 1Q 2007 to 25.9% in 1Q 2008. This can principally be attributed to the growth of Kreuz Shipbuilding and more revenues coming from the ship-building business unit, which traditionally commands lower margins compared to EPCIC. Moving forward, we should see more margin contraction as Swiber has yet to take delivery of its first drilling vessel (thus, it has to rely on third-party vessels which increase costs). The contraction should smoothen out once more of Swiber's fleet comes on-stream, but should still be below current levels as ship repairs/building takes a slightly larger chunk of revenues. That said, the gross margins for deepwater drilling should be very attractive and this unit should help to boost gross margins as the company heads on into FY 2010.
Net margin for 1Q 2008 was 14.6% against a net margin of 18.9% for 1Q 2007. This was mainly due to higher admin costs (up 185%) and much higher finance costs (increase of 896% on a low base). I would assume the higher admin costs are a result of more intensive hiring to fill up job vacancies for Swiber's new expanded operations and businesses; while the increase in finance costs are a necessary evil from the bond issue and the raising of additional monies through bank loans. Net margin should stabilize once Swiber stops relying on additional financing, and should even improve in future due to greater economies of scale between the various business units.
Balance Sheet Review
On to the Balance Sheet, the most noticeable items are trade receivables which have increased about 46% from US$100.7 million to US$146.5 million; and other receivables which have increased 81.2% from US$26.1 million to US$47.3 million. Presumably, these relate to monies which are yet to be received with regards to the sale-and-leaseback transactions (as Mr. Francis Wong had stated during the AGM). Another plausible explanation might be the 200+% increase in revenues which necessarily generates a greater receivables balance. It is precisely because of this receivables balance that the operating cash flows is negative.
Current ratio stands at 1.96 for 1Q 2008, against 2.15 for 1Q 2007. The ratio was lower due to the increase in trade payables and also the decrease in cash; but is otherwise still healthy. Quick ratio does not apply to Swiber as their inventories are negligible (they are a service provider, not a manufacturer or producer).
Also note that long-term liabilities had increased significantly due to the second bond issue of US$72.0 millio, as well as additional bank loans obtained. The additional gearing is to enable the firm to purchase new assets (vessels) in order to expand its fleet and garner more revenue.
Cash Flow Statement Review
There was negative operating cash flows mainly due to the aforementioned increases in trade and other receivables. The 1Q 2008 presentation slides presented this as "cash used to grow operations" and I would argue that this cannot continue for too long, otherwise the cash position of the company may be seriously compromised. A company can only rely on external funding for so many quarters before it MUST generate sufficient internal cash flows to operate on its own. As Swiber is currently in "rapid growth" stage, this is borderline acceptable though I am not comfortable with it should it shoot past 3Q 2008.
Cash outflows for investing activities was expected to be negative, as the company invested a lot of cash into purchasing assets for use in its EPCIC operations. In fact, cash inflows came mainly from financing activities, where US$70.2 million was raised via a bond issue and US$41.2 million was raised through new bank loans obtained (with collateral presumably on the vessels which were to be delivered to Swiber progressively).
Future Plans
As at March 31, 2008, Swiber's order book stood at US$476 million. According to Management, FY 2008 profit should be much better than FY 2007 due to the schedule for recognition of revenue from the projects. The order book does NOT include a 5-year US$50 million per annum recurring revenue stream from Swiber's tie-up with CUEL. With shipbuilding and EPCIC in full swing and the company about to take on a new business unit for offshore drilling in FY 2008, prospects look positive for the company. Risks would include delay in obtaining vessels, delay in completing projects and subsequent negative goodwill generated, slowdown in orderbook building and possible margin squeeze from rising costs.
I had also noted that most of the contracts and LOI seem to have been awarded in the Feb to April 2008 period, similar to last year's mega-project worth US$146.6 million awarded by Brunei Shell. Mr. Goh was quick to dismiss this idea and said that projects were clinched on an ongoing basis and that there was no specific timing to the award of projects. However, I personally suspect that smaller, lower value contracts are given out throughout the year while the larger ones have to be bidded for and are won close to certain periods of the financial year. Whether this is true or not remains to be seen, but it is hoped that Swiber can continue to build on their core competencies to grow the business, and to leverage on their networks, joint ventures and tie-ups thus far to secure more contracts of worthwhile size.
Sunday, May 04, 2008
Swiber Holdings Limited – AGM Highlights and Snippets
Swiber’s AGM had the uncanny timing of 1 p.m., which was sandwiched between the morning and the afternoon, right smack in the middle of lunch. I had made feedback to Swiber’s IR company (August Consulting) prior to the AGM informing them of the weird timing and that it was very difficult for shareholders who were working to make it for the meetings as afternoon leave was usually granted at 12:30 p.m. The problem was exacerbated by the fact that the company was holding its AGM at its premises in International Business Park, unlike for FY 2006 where their AGM was held at the more central location of Raffles Hotel near Beach Road.
Despite these “obstacles”, I managed to rush down to the AGM via a cab and was pleasantly surprised to find that the AGM was held at Swiber’s newly completed auditorium on the third floor. Their previous EGM was held in the company’s Boardroom on the fourth floor, so it was a good experience to attend the AGM in a spanking new auditorium which could seat up to 200+ people. Mr. Oon Thian Seng (Independent Director) told me that the auditorium was completed just this year and was used for training and briefings to staff.
At the AGM, the formal proceedings were brief and quick and the turnout was quite poor (due to the aforementioned reasons). I took the opportunity to speak to Mr. Oon Thian Seng, Mr. Francis Wong and finally Mr. Raymond Goh. I covered topics with them ranging from the credit crisis, to the potential for deepwater as well as various accounting issues (accounting issues were handled by Mr. Francis Wong as he is a trained chartered accountant and is very knowledgeable about the financial affairs of the company).
Chat with Mr. Oon Thian Seng:-
1) Prospects of the Company – Mr. Oon mentioned that Swiber was entering an “exciting phase of growth” and that he was sure the equatorial driller (to be delivered in FY 2010) would be very well-accepted and would provide a boost to the company’s earnings. He mentioned that Glen Olivera designed the entire driller and his industry experience shows that he was perfectly capable of designing something which would suit the benign deepwaters of South East Asia. He was surprised that other competitors had not done this before and designed a driller which was suitable for Asian waters, but my personal view is that other companies may not have Glen’s expertise and experience when it comes to designing a driller. More on this later during my chat with Mr. Goh.
Chat with Mr. Francis Wong:-
2) Long-term Receivables of US$8.8 Million – Mr. Wong explained that this amount was part of the seller’s credit placed for the sale and leaseback transactions. This was a standard clause for all sale and leaseback which means that a portion of the proceeds needs to be placed with the buyers. This amount earns interest and will be repayable in 8 to 10 years time. This, plus other receivable amounts in the Balance Sheet, are principally the reason for the negative operating cash flows in Swiber’s Cash Flow Statement. If not for this timing difference and this seller’s credit, there will be an operating cash inflow.
3) Hedging for Bonds – I enquired if the company does hedging and asked if Mr. Wong could explain the hedging policy of the company. Mr. Wong said that hedging would be done every time debt was taken up from the MTN programme, as the funds received would be in Singapore Dollars (they report their accounts in US dollars). The hedge used was a simple one to lock in the rate at a given point in time, coupled with interest rate swaps as stated in their Note 16. Any hedging gains or losses would be recognized in equity till such time that the transaction was completed, then the reserves would be reversed out to Profit and Loss account as realized derivative instrument gains or losses.
4) Oil Trends and Prices – Mr. Wong’s view of the current high oil price situation was that it was unsustainable as it is partly contributed by speculators driving up the price of oil. He also said we had to account for the weak USD playing a part in driving prices to recent record highs of nearly US$120 per barrel. By right, oil companies can function very profitably at US$70 per barrel, which he thinks will be the eventual price oil will settle to once the current bout of speculation dies down. For most oil companies, their cost is about US$40 per barrel for deepwater oil extraction; while for shallow water he says their cost is even lower (at less than US$1 per barrel !). This was because most oil companies had set up proper equipment and infrastructure near coastal areas (shallow waters), thus all they needed to do was to “turn on the tap” and oil would flow. It was effortless and cheap but the problem was that oil in such areas is running out; thus oil majors are moving to regions such as South East Asia and into deeper waters in search of more oil reserves.
5) Obtaining Financing During Credit Crunch – Mr. Wong did concede that obtaining good financing during the current sub-prime crisis-related credit crunch was proving tough. This was because banks, suffering from a lack of liquidity due to massive write-downs of debt-related securities, are less prone to lend money to just anyone and would be highly selective when it came to extending loans. In spite of this, he proudly mentions that Swiber had managed to draw down on their medium term note (MTN) program to raise S$100 million at a very attractive interest rate of around 4%. He said the rate was very good as SIBOR and LIBOR used to be about 5 or 6% just a few years back.
Chat with Mr. Raymond Goh:-
6) Prospects for Offshore Drilling Services Division – Mr. Goh was very optimistic about the prospects for Swiber’s Drilling Division, because of the Equatorial Driller. He said that this driller represents Swiber’s future growth and that he anticipates the drilling unit will contribute as much as the construction unit is doing now. Once the first driller is completed and rolled out by FY 2010, contracts should start to flow in. When oil majors see how successful the first driller is, Swiber will then consider building a second one to follow up, but this will come much later. Mr. Goh feels that the market is not placing enough value on the drilling division as it has the most potential for growth in the coming years. In fact, he said Swiber had saved money by not acquiring a drilling company; in fact just by hiring an experienced drilling team (including Mr. Glen Olivera who had worked for UNOCAL’s drilling team before and drilled more than 150 wells) and designing and building the Equatorial Driller, Swiber had effectively already obtained their Drilling Unit at a much lower cost.
7) Competitive Advantages of Equatorial Driller – The driller costs less to build as it is unlike the semi-submersible drillers which are more catered for the harsh North Sea conditions. As a result of lower costs in manufacturing the driller, Mr. Goh mentions that lower rates can be charged to customers; thus creating a win-win situation as Swiber still gets good margins (as costs are lower to build), yet they are also under-cutting the competition by offering very competitive rates to entice customers to use Swiber’s services. In a sense, I will see this as a competitive advantage which is unique as the Equatorial Driller’s design is difficult to mimic (it is an original design from Mr. Glen Olivera) and thus such cost savings can be maintained as competitors will find it difficult to duplicate.
8) Diverse Nationalities within Swiber’s Headcount – Mr. Goh mentions that Swiber has hired staff from about 20 different nationalities to work in the company; and all are hired based on merit and expertise and not based on familial connections or through internal networks. In the spirit of meritocracy, no person will be hired based on family relations and Mr. Goh imposes the rule that no Management staff can have any siblings within the company. These are the hallmarks of a professionally-run company employing high standards in terms of hiring quality staff to join its ranks and head its various divisions.
9) Ability of the company to continue growing – Mr. Goh cautioned that growth will eventually have to slow down and stabilize for the company, but he still sees an exciting 5-year period from now till FY 2013 where the company would be growing both its EPCIC operations as well as its new drilling division. Since the drilling unit was still new, it had yet to build up a track record and this was necessary to make the oil majors take notice. Thus far, the drilling division has only secured one contract valued at US$25 million from NuCoastal in Thailand. Mr. Goh asked for shareholders to be patient and to give him time to build the company to greater heights. In the meantime, I will fully support the company’s decision to fully retain ALL its earnings and NOT to pay out a dividend.
Through my interactions with the Directors, I can sense that they are also looking forward to an exciting growth phase for Swiber. It will be interesting and insightful to see how the company leverages on the joint ventures and alliances which it has made so far in order to extend its business further. Tie ups have been announced in Brunei with Rahaman, Vietnam with Petro-Vietnam; as well as Principia and most recently, CUEL of Thailand. The important thing is for the company to be able to capitalize on such relationships to secure good repeat business and larger contracts for the company; to enable it to scale new heights in terms of revenue and earnings growth. Only through consistent and stable recurring earnings stream can the value of the company be enhanced, and all shareholders will benefit as a result.
News Alert: This just in from Energy Current. One of Swiber's barges, Swiber Giant V, sank off the coast of Indonesia. Salvage operations are underway now and Swiber has chartered SMIT's pontoon Giant 2 to fulfill their contractual obligations. The incident is not expected to impact Swiber's earnings, though I suspect it may affect margins as they need to charter a vessel instead of using their own. During the course of work, accidents do occur and I accept this as part of the risk of owning a business. The full news article can be viewed here.
Swiber’s AGM had the uncanny timing of 1 p.m., which was sandwiched between the morning and the afternoon, right smack in the middle of lunch. I had made feedback to Swiber’s IR company (August Consulting) prior to the AGM informing them of the weird timing and that it was very difficult for shareholders who were working to make it for the meetings as afternoon leave was usually granted at 12:30 p.m. The problem was exacerbated by the fact that the company was holding its AGM at its premises in International Business Park, unlike for FY 2006 where their AGM was held at the more central location of Raffles Hotel near Beach Road.
Despite these “obstacles”, I managed to rush down to the AGM via a cab and was pleasantly surprised to find that the AGM was held at Swiber’s newly completed auditorium on the third floor. Their previous EGM was held in the company’s Boardroom on the fourth floor, so it was a good experience to attend the AGM in a spanking new auditorium which could seat up to 200+ people. Mr. Oon Thian Seng (Independent Director) told me that the auditorium was completed just this year and was used for training and briefings to staff.
At the AGM, the formal proceedings were brief and quick and the turnout was quite poor (due to the aforementioned reasons). I took the opportunity to speak to Mr. Oon Thian Seng, Mr. Francis Wong and finally Mr. Raymond Goh. I covered topics with them ranging from the credit crisis, to the potential for deepwater as well as various accounting issues (accounting issues were handled by Mr. Francis Wong as he is a trained chartered accountant and is very knowledgeable about the financial affairs of the company).
Chat with Mr. Oon Thian Seng:-
1) Prospects of the Company – Mr. Oon mentioned that Swiber was entering an “exciting phase of growth” and that he was sure the equatorial driller (to be delivered in FY 2010) would be very well-accepted and would provide a boost to the company’s earnings. He mentioned that Glen Olivera designed the entire driller and his industry experience shows that he was perfectly capable of designing something which would suit the benign deepwaters of South East Asia. He was surprised that other competitors had not done this before and designed a driller which was suitable for Asian waters, but my personal view is that other companies may not have Glen’s expertise and experience when it comes to designing a driller. More on this later during my chat with Mr. Goh.
Chat with Mr. Francis Wong:-
2) Long-term Receivables of US$8.8 Million – Mr. Wong explained that this amount was part of the seller’s credit placed for the sale and leaseback transactions. This was a standard clause for all sale and leaseback which means that a portion of the proceeds needs to be placed with the buyers. This amount earns interest and will be repayable in 8 to 10 years time. This, plus other receivable amounts in the Balance Sheet, are principally the reason for the negative operating cash flows in Swiber’s Cash Flow Statement. If not for this timing difference and this seller’s credit, there will be an operating cash inflow.
3) Hedging for Bonds – I enquired if the company does hedging and asked if Mr. Wong could explain the hedging policy of the company. Mr. Wong said that hedging would be done every time debt was taken up from the MTN programme, as the funds received would be in Singapore Dollars (they report their accounts in US dollars). The hedge used was a simple one to lock in the rate at a given point in time, coupled with interest rate swaps as stated in their Note 16. Any hedging gains or losses would be recognized in equity till such time that the transaction was completed, then the reserves would be reversed out to Profit and Loss account as realized derivative instrument gains or losses.
4) Oil Trends and Prices – Mr. Wong’s view of the current high oil price situation was that it was unsustainable as it is partly contributed by speculators driving up the price of oil. He also said we had to account for the weak USD playing a part in driving prices to recent record highs of nearly US$120 per barrel. By right, oil companies can function very profitably at US$70 per barrel, which he thinks will be the eventual price oil will settle to once the current bout of speculation dies down. For most oil companies, their cost is about US$40 per barrel for deepwater oil extraction; while for shallow water he says their cost is even lower (at less than US$1 per barrel !). This was because most oil companies had set up proper equipment and infrastructure near coastal areas (shallow waters), thus all they needed to do was to “turn on the tap” and oil would flow. It was effortless and cheap but the problem was that oil in such areas is running out; thus oil majors are moving to regions such as South East Asia and into deeper waters in search of more oil reserves.
5) Obtaining Financing During Credit Crunch – Mr. Wong did concede that obtaining good financing during the current sub-prime crisis-related credit crunch was proving tough. This was because banks, suffering from a lack of liquidity due to massive write-downs of debt-related securities, are less prone to lend money to just anyone and would be highly selective when it came to extending loans. In spite of this, he proudly mentions that Swiber had managed to draw down on their medium term note (MTN) program to raise S$100 million at a very attractive interest rate of around 4%. He said the rate was very good as SIBOR and LIBOR used to be about 5 or 6% just a few years back.
Chat with Mr. Raymond Goh:-
6) Prospects for Offshore Drilling Services Division – Mr. Goh was very optimistic about the prospects for Swiber’s Drilling Division, because of the Equatorial Driller. He said that this driller represents Swiber’s future growth and that he anticipates the drilling unit will contribute as much as the construction unit is doing now. Once the first driller is completed and rolled out by FY 2010, contracts should start to flow in. When oil majors see how successful the first driller is, Swiber will then consider building a second one to follow up, but this will come much later. Mr. Goh feels that the market is not placing enough value on the drilling division as it has the most potential for growth in the coming years. In fact, he said Swiber had saved money by not acquiring a drilling company; in fact just by hiring an experienced drilling team (including Mr. Glen Olivera who had worked for UNOCAL’s drilling team before and drilled more than 150 wells) and designing and building the Equatorial Driller, Swiber had effectively already obtained their Drilling Unit at a much lower cost.
7) Competitive Advantages of Equatorial Driller – The driller costs less to build as it is unlike the semi-submersible drillers which are more catered for the harsh North Sea conditions. As a result of lower costs in manufacturing the driller, Mr. Goh mentions that lower rates can be charged to customers; thus creating a win-win situation as Swiber still gets good margins (as costs are lower to build), yet they are also under-cutting the competition by offering very competitive rates to entice customers to use Swiber’s services. In a sense, I will see this as a competitive advantage which is unique as the Equatorial Driller’s design is difficult to mimic (it is an original design from Mr. Glen Olivera) and thus such cost savings can be maintained as competitors will find it difficult to duplicate.
8) Diverse Nationalities within Swiber’s Headcount – Mr. Goh mentions that Swiber has hired staff from about 20 different nationalities to work in the company; and all are hired based on merit and expertise and not based on familial connections or through internal networks. In the spirit of meritocracy, no person will be hired based on family relations and Mr. Goh imposes the rule that no Management staff can have any siblings within the company. These are the hallmarks of a professionally-run company employing high standards in terms of hiring quality staff to join its ranks and head its various divisions.
9) Ability of the company to continue growing – Mr. Goh cautioned that growth will eventually have to slow down and stabilize for the company, but he still sees an exciting 5-year period from now till FY 2013 where the company would be growing both its EPCIC operations as well as its new drilling division. Since the drilling unit was still new, it had yet to build up a track record and this was necessary to make the oil majors take notice. Thus far, the drilling division has only secured one contract valued at US$25 million from NuCoastal in Thailand. Mr. Goh asked for shareholders to be patient and to give him time to build the company to greater heights. In the meantime, I will fully support the company’s decision to fully retain ALL its earnings and NOT to pay out a dividend.
Through my interactions with the Directors, I can sense that they are also looking forward to an exciting growth phase for Swiber. It will be interesting and insightful to see how the company leverages on the joint ventures and alliances which it has made so far in order to extend its business further. Tie ups have been announced in Brunei with Rahaman, Vietnam with Petro-Vietnam; as well as Principia and most recently, CUEL of Thailand. The important thing is for the company to be able to capitalize on such relationships to secure good repeat business and larger contracts for the company; to enable it to scale new heights in terms of revenue and earnings growth. Only through consistent and stable recurring earnings stream can the value of the company be enhanced, and all shareholders will benefit as a result.
News Alert: This just in from Energy Current. One of Swiber's barges, Swiber Giant V, sank off the coast of Indonesia. Salvage operations are underway now and Swiber has chartered SMIT's pontoon Giant 2 to fulfill their contractual obligations. The incident is not expected to impact Swiber's earnings, though I suspect it may affect margins as they need to charter a vessel instead of using their own. During the course of work, accidents do occur and I accept this as part of the risk of owning a business. The full news article can be viewed here.
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.
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