Swiber – Acquisition of 100% of North Shipyard Pte Ltd

On August 6, 2007, Swiber announced the acquisition of a 100% interest in the share capital of a company North Shipyard Pte Ltd for a sum of S$10.3 million (to be confirmed contingent upon assessed tax payable for the acquiree company). The acquiree company is in the business of building and repairing ships, tankers and other ocean-going vessels. This acquisition is set to complement Swiber’s operations as it provides a base for the Company’s vessel fleet and also allows Swiber to grow their technical design capabilities for more specialized vessels.

Financial Effects and Comments

The consideration for the S&P agreement is S$10.3 million subject to the confirmation of adjustment for provision for tax in North Shipyard’s books. The entire sum will be paid in cash and will be funded from internal resources, thus there will be no additional debt burden or equity dilution. The acquisition will make North Shipyard a 100%-owned subsidiary of Swiber Holdings, which means that upon consolidation, all items in North Shipyard will be added on a line by line basis to obtain the consolidated financial statements for Swiber. I expect this to take effect from August 2007 onwards.

As stated in the announcement, the NTA of North Shipyard is S$6.26 million and the unaudited net profit is S$3.58 million. This means that at the purchase price of S$10.3 million, Swiber is paying for a price-to-book of 1.65 and price-earnings of 2.88 times. This would imply that Swiber can recoup their investment in North Shipyard within 2.88 years; and this is indeed a very attractive valuation at which they purchased this company. The profits will add to their bottom line and boost this for FY 2007, while the NTA may also possibly rise once Swiber begins pumping assets into its new subsidiary.

Operations Analysis and Comments

In terms of strategy, Swiber is trying to move up the value chain with this acquisition as they have found a complementary business in North Shipyard which can integrate with their existing business. Mr. Raymond Goh mentioned that Swiber is positioning itself to become a “top-notch offshore oil and gas specialist”; and it is doing this through improving its margins by moving into higher value-added vessels specially catered for Asian waters, expanding its vessel fleet and vertically integrating their operations. With the new shipyard, Swiber need not rely on outsourced third-party support for the repair and conversion of their vessels. This would mean lower costs and faster turnaround time as there may be time constraints imposed by third-party shipyards.

The importance of project co-ordination and control cannot be over-emphasized for a company such as Swiber. From the recent LOI wins, one can see that some of these contracts are to be executed within a period of 2-3 months on average; thus it is important for the Company to maintain control over its vessel deployment so that they can fulfill their contractual obligations. Thus far, the risk for Swiber is the ability to deliver on their contracts, as they are still a growing company which is in the midst of rapid expansion. I believe that Management is trying to mitigate this risk and reduce it by procuring a company which will allow them to have greater operational control over their vessel fleet. For a project-based company like Swiber, control over processes and costs is important to be able to allow them to fulfill contracts (thereby gaining the confidence of customers and encouraging repeat business) and improve their profit margins (by focusing on in-house conversion and repair activities instead of the more costly option of outsourcing).

Conclusion and Outlook

As detailed above, this acquisition is expected to bring tangible as well as intangible benefits for the Swiber Group of companies. The Management has a long-term vision for growing the company and I am pleased with the foundation that the Company is building in order to establish a foothold in other countries. The key risk is of course the rate of cash burn for the company and whether they can use cash efficiently enough to grow earnings and to ensure a ready cash inflow to cover operations. Thus, in the upcoming 1H 2007 results release, I will be focusing my attention more on their margins and their cash flow statement rather than the absolute profit figure (which should surely be higher as a result of so many new contracts for FY 2007 as compared to FY 2006).