Swiber – Clinching of US$12 Million LOI in Malaysia

On July 25, 2007 (today), Swiber announced yet another LOI clinched for an offshore installation project in Malaysia. This brings their total order book to date to more than US$200 million, but note that not all this amount will be recognized in FY 2007. I will not be going through the computations of intrinsic value with every successive LOI or contract win as I think I need more clarity on their margins before I begin to make assumptions.

From historical records, their first quarter results were released on May 15, 2007, which is about 1.5 months after the end of the previous quarter (i.e. March 31, 2007). By using this as a rough guide, we can expect Swiber to release its 2Q 2007 results on and around August 15, 2007. With this results release, I can then obtain a more accurate picture of the earnings growth for Swiber on a quarter-on-quarter basis. Also, margins will now be clearer if we take into account the fact that some of their own vessels have been delivered to them in the first half of FY 2007. Using the 2Q 2007 margin might be more indicative of the 3rd and 4th quarter margins as more and more of their vessels come on board.

I have noticed too that their contract duration is getting shorter, even though the amounts are still small (i.e. less than US$50 million per contract) as compared to their mega-contract value of US$146.6 million with Brunei Shell. This shortening of contract duration for smaller contracts is actually a positive thing as it allows quick earnings to be recognized within the same financial year as the date of contract; in addition, it will help to boost cash flows as well and does not “tie down” the support and construction vessels for extended periods. However, I do hope that their efforts to venture into India and Middle East will bear fruit eventually; and that they will be able to clinch a future contract or LOI which is as large as (if not larger) than their Brunei Shell deal.

Since this posting on Swiber is not about the calculation of intrinsic value (i.e. not too numbers-based), I would like to comment more on the strategy and direction of the business. Value investors constantly analyze businesses (not stock prices !) and try to extrapolate whether the business will do well in the long run based on current conditions. Swiber has announced 4 contracts so far this year, which boils down to an averageof 1 contract every 1.5 months. They are building up their momentum and profile to take on more projects in India and Middle East by setting up representative offices there and appointing capable Management to helm the growth there. Swiber is also aggressively securing more funds by way of a sale-and-leaseback of 5 vessels (yet to be approved at the EGM), private placement of shares to institutional parties and now the establishment of a US$300 million medium term note facility. This funding will boost their fleet size and allow Management to embark on an ambitious growth strategy which will see their fleet expanding rapidly and the company trying to clinch larger contracts with prominent customers.

To be fair, whether this will all pan out is still a big question mark. All I can conclude at this point is that Swiber seems to be in high gear, and we should expect more news to come during the remainder of FY 2007 which should attest to Management’s ability to deliver on their promises.

Borrowing to Buy Shares

Just a quick comment here, I recently read in the New Paper (I think it was Monday’s edition) in the Dr. Money section which states that banks such as DBS and UOB are now aggressively targeting people who play the stock market to borrow in order to “feed their habit”. On the surface, the loans appear to be interest-free but if you read the fine print, they are actually imputing in an interest factor upon loan confirmation. Some banks even charge obscene rates such as 17.6% per annum on these loans, which almost amounts to daylight robbery !

The thing which bugs me is not that they are granting such loans, which probably would have been in existence for some time already. It is the way the whole thing is marketed which is so irksome and, I feel, socially irresponsible. Banks are saying things like:”Would you like to invest in your favourite counter during this bull run ? Don’t miss out, XXX bank can give you an interest-free loan to help you seize the chance !”

These banks are basically feeding off people’s greed to make more money and capitalizing on ignorant people who do not read fine prints in order to generate more interest income for itself. I feel this is unethical and totally irresponsible, as many people may not know the risks involved in borrowing to play shares and may not be able to cough up the money should their shares fall. Add in the interest component and you can immediately see why this scheme is so insidious !

So please, dear readers, think for a moment before you plunge yourself into further debt. Only invest using spare cash which you can afford to lose or lock up for a long time. Do NOT over-leverage and use tomorrow’s money to pay for today’s gamble.