Swiber – EGM July 31, 2007

I attended the Swiber EGM today, and surprisingly there were hardly any shareholders at all. Perhaps it was because it was mid-week and there was only one resolution, but I had expected more people to turn up to talk to the Management about the future prospects of the company. Still, this turned out to be a blessing in disguise as I had the chairman’s attention all to myself !

Aside from the usual perfunctory rituals of proposing, seconding and approving the transaction, I would like to highlight several points brought up by Mr. Raymond Goh (who so graciously ignored analysts just so that he could talk to shareholders).

a) The US$300 million medium term notes are preparation for their fleet expansion, and will not be drawn down in one large tranche; rather, it will be progressively utilized as and when the company needs the funds to grow their operations. The interest rate is not fixed yet as the notes have yet to be issued.

b) Another shareholder was asking Mr. Goh about the company’s operations. He stressed that Swiber was one of only a few EPCIC companies operating in this part of the world. He did mention a competitor based in India but this was a new company and thus had yet to build up a sizeable fleet to threaten Swiber’s position. Barriers to entry are high for this industry and Swiber intends to grow quickly with the funds raised from the equity placement and sale-and-leaseback in order to capture a larger slice of the market.

c) Swiber’s order book is about US$200 million currently, but the worldwide market for oil and gas investment totals about US$20 billion; thus Swiber has only got about 1% of this. According to Mr. Goh, there is much room for more contracts to flow in as long as the vessel fleet can be expanded so that more vessels can be deployed for contracts at any one time.

d) With regards to building the company, Mr. Goh mentions that Swiber stresses not only on building assets (i.e. vessels), but also on human resources. He is building process improvements using Shell as a role model in order to retain good talent and skills within the company. Swiber currently employs a Management team comprising 18 different nationalities.

e) The previous announcements for the LOI and contracts were from Indonesia and Malaysia. I asked if it was easy to break new ground into India and the Middle East and his reply was that prospects were good as the company has already laid the foundation for expansion into these countries by establishing an office and appointing VP of operations (for India).

f) The revenues from contracts are all taxed at a reduced tax rate as compared to normal revenue sourced from Singapore. This is because the Singapore Government is pro-active in promoting businesses and Swiber’s effective tax rate is thus only about 7% ! Even IE Singapore has approached Swiber with a view to helping it expand to other territories which it presently has no access to.

Prospects are good for the company to expand their operations and capture more contracts. With more of their own vessels coming on board and a new wave of vessels being ordered for FY 2008, Swiber is on track to improve on their profit margins and also capture larger contracts with prominent customers.

Pacific Andes – Annual General Meeting July 31, 2007

Many questions were raised at this AGM, both on a formal basis (i.e. addressed to the Board of Directors) as well as on an informal basis (talking with the Chairman after the meeting proper). I shall attempt to capture the essence of what was discussed as I did not write everything down (neither did I bring a tape recorder !):-

i) One shareholder asked about the earnings of the Group per quarter, which seemed to fluctuate somewhat. Mr. Ng (chairman) said that seasonality is a factor in the business and some months, you catch more fish and some months, you catch less.

ii) The elongation of the super-trawlers will enable fish hold capacity to triple. This will help to bring in more catch for each vessel as they need about 2-3 weeks to travel back and forth to the fishing grounds. Thus, a larger fish hold will ensure more fish can be brought back for processing each time in order to maximize efficiency.

iii) The problem of over-fishing is currently under control and many measures and regulations have been drawn up by Green Peace in order to discourage fishing companies from over-fishing. Mr. Ng mentioned that this was a good thing because setting quotas and limiting fishing would only drive prices up, which in the long run meant that margins would also improve for the entire business.

iv) A possible substitute for fishmeal was soya bean meal, which is a plant-based extract. However, Mr. Ng said that soya bean meal tends to pollute the water when placed in water, thus killing fish. Thus, it is not a good substitute for fishmeal and till now, this problem has not been solved. Fishmeal will continue to enjoy good margins for quite some time. When PAH bought over the fishmeal businesses and vessels in Peru, the price of fishmeal was only US$500 to US$600 per ton. This has risen in recent months to as high as US$800 to US$900 per ton (after a 15% correction off an all time high of over US$1,000 per ton), thus ensuring a very good margin for the Group in future.

v) One shareholder asked about the potential political risks involved in dealing in Peru, which is a South American nation. Mr. Ng mentioned two factors which mitigated this risk; one was that the Singapore Government has an agreement with the Peruvian government to protect Singapore businesses operating in Peru. Second was that in the contract signed with the Peruvian government under the current laws, it provides 10-year protection against the changing of laws which may restrict of impede CFG’s vessels from fishing in Peruvian waters.

vi) When asked about whether canning would form a major part of PAH’s revenue, Mr. Ng said that this was in a trial stage and canning would only form a minor portion of revenue for now. However, with the demand for fish rising in China and demand for canned anchovies (sardines) rising, canning operations may scale up in future.

vii) CFG and PAH currently operate under the Olympic fishing system, whereby a total allowable catch (TAC) is allocated to ALL fishing vessels within Peru. Thus, every month, all the vessels (including CFG’s) would essentially “rush out” to catch as much fish as possible. CFG’s strategy of increasing their number of supertrawlers and purse seine vessels means that they can catch a bigger piece of the TAC, which is why the senior notes were issued in order to buy over 5% of the total fleet in Peru. Mr. Ng mentioned that hopefully, in time to come, this would be changed to the quote system, whereby each company would be given a specific quote to catch (based on past years’ catch) in order to maximize yield and efficiency.

viii) Mr. Ng said that they have yet to prepay for the 4th VOA, and that the effects of the 2nd and 3rd VOA have yet to kick into the financial results. Also, the 63.9% ownership of CFG will only take effect from July 2007, thus 1Q 2007 financials would still reflect the 28.8% ownership.

ix) CFG will continue to actively seek out acquisitions of more vessels and to capture more VOA as this is a strong competitive advantage for the Group.

Based on the above observations, I would say there are still some risks and uncertainties relating to PAH’s business. Gearing is still uncomfortably high and Management has avoided directly replying to shareholders on how gearing can be reduced over time. As one shareholder put it, no use achieving higher growth and EPS as a result of the issuance of more debt as debt-boosted high ROE is useless. It remains to be seen if PAH can reduce their gearing to a more comfortable level, and I will have to monitor this as the months go by. One mitigating factor is that Mr. Ng mentioned that PAH has enjoyed 5 to 6 years of consistent growth in top and bottom line (except for a slight hiccup during the SARS period).

Thus, I remain cautiously optimistic on the Group’s prospects even as I await the 1Q 2008 financials to be released in 2 weeks time.

Note: My end-July 2007 portfolio review will be done possibly on 1 or 2 August as I will be away on a business trip to China. I shall return late Friday and only resume posting on Saturday August 4th.