Swiber - Analysis of DBS Report with TP of S$3.48

On July 6, 2007, DBS came out with a dual report on Swissco and Swiber. These two “sister” reports (so-called because Swissco is the parent company of Swiber and owns a 10% stake) caused the share prices of both companies to soar. I shall now attempt to analyze the DBS report written on Swiber by Chong Wee Lee to see if their assumptions and valuations are reasonable. I shall NOT be doing a review on Swissco as I am not vested and I am currently not undertaking to do extensive research on a company (as yet). The Edge Singapore did write a good article on Swissco which I may comment on in future postings, but on to Swiber now:-

Firstly, here is a summary of the assumptions by Mr. Chong as he embarks on his proposed valuation of the company:-

• Assumption of another US$76.1 million worth of contract wins by the end of FY 2007, bringing total new orders estimation to US$225 million for FY 2007
• Growth rate of 10% on order book for Swiber for new orders for FY 2008 and FY 2009; he thus forecasts revenue of US$303 million new orders by FY 2008 and US$333 million by FY 2009
• Net profit margin of 20.3% before factoring in exceptional items like gains from sale and leaseback
• Revenue split between 1H 2007 and 1H 2007 will be split about 28% versus 72% respectively as most of the new orders will be recognized in the 2H 2007.

From my previous blog post dated June 25, 2007, Swiber’s confirmed order book to be recognized in FY 2007 is US$152.1 million. The analyst has forecast another US$76.1 million of new contract wins to be recognized in FY 2007. Swiber’s average contract value for the last 2 contracts is about US$25 milliom, thus it would take 3 more contract wins for Swiber to reach his target revenue recognized for FY 2007. This is not an unrealistic assumption, but one has to be wary of the contract duration and how much of it will be recognized in the current financial year. While it is true that the Malaysian contract is worth US$31 million yet has a duration of only 3 months, not all contracts may be of the same nature.

The growth rate of 10% per annum for 2 consecutive years is quite a dangerous assumption to make, as the company may have full or near-full utilization of its vessels at this stage and not be able to deploy its vessels for more contracts of large size. Even though Swiber is aggressively expanding its fleet, it is not known exactly how many additional vessels they are ordering at this point in time, and when they will be delivered. Thus, I always believe in being prudent in my estimates, and 10% seems a little optimistic when it is not even clear how the company deploys its vessels for contracts.

The net profit margin of 20.3% seems reasonable as it is only slightly higher than my computed net profit margin of 18.9% for 1Q 2007, probably after taking into account the slightly higher margins from the reduced use of third-party vessels. The revenue split he mentioned has no material impact on forward valuations, but is merely an indication of the cut-off period for revenue recognition.

Conclusion: Mr. Chong’s analysis and forward forecasts are a tad too optimistic, in my opinion. By assuming more contracts worth about US$76 million for the remainder of FY 2007, he is demonstrating bullishness on the ability of the company to secure and consolidate its niche foothold. A 10% growth rate is also optimistic, as I have mentioned that utilization of their vessels is still unknown. A more realistic way of valuing the company would be to take a more conservative approach as it has not shown its ability to execute large contracts successfully as yet (example: Brunei Shell deal). Once it is able to demonstrate capability and competency, then a higher intrinsic value can be assigned to the company.

Planning to Retire with S$10,000 monthly

Today’s Sunday Times features Mr. Stanley Jeremiah in the “Me and My Money” section and his investment and saving habits (last week I wrote about Mr. Sean Toh and his 4 steps to financial freedom). Mr. Jeremiah, 47, was previously a general manager at NTUC and he believes in investing only in unit trusts and not in equities as equities carry to high a risk (recall the 1997 Asian Financial Crisis).

His investment “style” includes investing in properties (he purchased a 2,700 square foot terrace house in Eunos in 1992 for S$723K which he subsequently sold off in 1996 for S$1.7 million), antiques, watches and art pieces; as well as unit trusts. To comment, his investment in properties is a wise choice assuming he bought at the low of the property cycle back in 1993-1995, and chose to sell off during property high cycles (such as the current market). However, he himself admitted that the antiques, watches and art pieces could not be considered a “real” investment (one Omega watch cost S$13,000 !), as they are not liquid and do not necessarily appreciate in value.

He is risk-averse in the sense that he prefers a stable return of 4-6% in unit trusts rather than the average returns the equities market generates (on average, 11% per annum through bull and bear cycles). As mentioned in my previous post on funds, they are unable to generate spectacular returns as they are generally too highly diversified.

I am also surprised by him mentioning that he needs S$10,000 a month for retirement ! This would imply that his lifestyle is extremely high-maintenance, considering that he does not have children and that he is a widower. To be able to generate that kind of passive income is not easy at all, and I can frankly say that most Singaporeans (i.e. the man on the street) can survive comfortably on about S$2,500 to S$3,000 per month for retirement. Of course, this probably does not take into account the fact that most children (the filial ones, at least) will contribute part of their income towards supporting their parents.

Just some of my opinions, please feel free to comment as well. Have a great Sunday everyone !