Swiber – Analysis of DBSV Report dated September 21, 2007

DBSV’s Chong Wee Lee had written a very detailed report on various aspects of Swiber on Sep 21, 2007 (CIMB GK Goh followed up on Sep 28, 2007 after the Vietnamese tie-up). As usual, I feel the analyst is being overly optimistic on various aspects of the business; insomuch that the target prices being set and the assumptions used are over-inflated, leading potential investors to purchasing without a decent margin of safety. This posting will attempt to highlight the various aspects of Swiber’s business which I feel the analyst has been too optimistic about, and also to sound out risks relating to the rapid growth of the business. Only then will investors be able to adopt a more balanced and realistic attitude towards the company and purchase when there is a margin of safety. My comments (as usual) will be in italics beside a summary of the points flashed out by the DBSV report.

On strengthening of Management team – DBSV writes positively about the appointment of Mr. Ronald L. Schakosky and Mr. Joseph Chen Hin Tin, who were recently appointed to head Swiber’s FSO operations and Brunei Operations respectively. While I agree that the new appointments are positive, one also has to note that these two new appointees would require time to familiarize themselves with the corporate culture and the company’s operations before being able to contribute positively. Every new staff (especially one of such a senior post) needs time to adapt to a new company and assimilate into the culture before he or she can start contributing. Thus, I prefer to assume that it will be at least 3 to 6 months before these new divisions can contribute something substantially positive to the Swiber Group (“The Group”).

On building up and increasing accessibility to financial resources – DBSV is explicit in this section where they mention the various modes of financing which Swiber had utilized in order to raise funds for expansion. The 2 sale-and-leaseback so far will provide upfront cash for the Group and the MTN program can be called upon to provide more debt financing to expand the Group’s fleet. They have also estimated the latest sale and leaseback transaction to be close to the one announced in March 2007. The risk here which is not mentioned in the report is one where Swiber over-extends itself in terms of raising capital through debt and equity markets. Note that there is significant dilution already from the issue of 55.35 million shares (thus increasing the total share capital to the current 424 million shares), while gearing is also rising due to their MTN program. In addition, the Group must also ensure that their operating cash inflows are sufficiently steady as DBSV mentions that they may need working capital equivalent to 25% of the proportionate value in each phase of an EPCIC project. Don’t forget that the Group also has to make progress payments for its currently constructed/converted vessels while paying interest on its medium-term notes too. Cash flow management is thus a very important aspect of the business and if mismanaged, will increase risks significantly.

On Swiber’s vessel fleet – DBSV mentions that Swiber will be able to handle a larger spread of contracts once their new construction vessels come on board. They have also mentioned about the refurbishment of existing vessels such as accommodation barges to crane barges, thereby saving costs (versus buying a newbuild). The risks to be highlighted here are the timely and scheduled delivery of each new vessel, as any delays may hamper the ability of the company to execute contracts on time and it may have to resort to relying on third-party vessel chartering again (which reduces margins). There is also the perennial question of whether there will be any demand for their new vessels, some of which will only be delivered two to three years from now. It is hard to estimate what the oil and gas E&P scene would be like in future, but I believe the CEO Mr. Raymond Goh is trying to make an educated guess based on current conditions (record-high oil prices above US$83 per barrel). Another aspect to consider if whether refurbished barges would be as efficient or effective as newbuild barges in terms of performance. As I am not technically inclined, I am unable to ascertain this but I will remember to bring it up at the next EGM (for the second wave of sale-and-leaseback transactions).

On Project Budget and Execution – For a newly-listed company like Swiber, the key attribute to look for is the successful and on-time completion of their projects within budget; rather than speculating too far on their growth prospects. It was mentioned that DBSV assumed another US$64 million worth of contracts for 4Q 2007, effectively closing FY 2007 with a total of about US$275 million of contract wins. Their targets are even more optimistic for FY 2008 and FY 2009 and there is no concrete basis for their optimism even though there has been a lot of positive news flow lately. I believe that right now, Swiber is on a strong growth trajectory but shareholders should not get too complacent and assume that everything is ginger peachy. By looking at it from a business perspective, going from the usual below US$50 million contracts to one which is worth US$146.6 million is indeed a big step for the company to take; and the risks cannot be understated. I will only feel more assured and confident when the company has successfully completed and delivered the entire project to Brunei Shell (by end-FY 2008), thus cementing their position as one of the leading EPCIC providers for the oil and gas industry.

Deployment of Vessels for Projects – DBSV states that Swiber is studying the possibility of bidding for projects in excess of US$500 million, and they have also guided that revenue visibility is high for the near-term. I have compiled the more recent facts and found that for the US$12 million Malaysia LOI, vessels will only be available in late Sep 2007. For the US$31 million LOI in Malaysia and US$21.3 million LOI in Indonesia, the vessels will only be free for re-deployment in Oct and Nov 2007 respectively. This would mean that there are limited means for re-deployment of their existing fleet of vessels for other EPCIC projects till after the year-end, implying that DBSV’s forecasts may be a tad too optimistic. As for the clinching of US$500 million projects, Swiber is still considered a small player and though it is good to be ambitious, such ambition should also be tempered by a dose of reality as this is not going to happen anytime soon. I would hazard a guess that FY 2009 is the earliest we can see them clinching a mega-project of this size, scale and amount.

From my analysis and understanding, it has been shown that time and again, analysts tend to be too optimistic in their assumptions and play up the numbers for future years based on current positive news flow. Shareholders and potential investors should be aware of the difficulties in managing a real-life business and temper their expectations with realism as well. The key, I personally believe, is to assess Management’s ability to deliver existing projects successfully and to manage their capex, cash flows and opex. Such juggling is by no means easy and if successful, will demonstrate Management’s skill in running a company. I will ignore all forecasts for now and concentrate on the facts, while waiting for the 3Q 2007 financial report to be out by early Nov 2007.

Note: Readers can feel free to drop a comment on any posting (whether old or new) and I will be informed of it. I will take time to reply each individual comment when I have the time.

End-September 2007 Portfolio Review

The market has managed to bounce back quite amazingly in just under 6 weeks, since the August 17 crash of the STI to the 2,900+ level. Now the index is back again and rallying to even higher levels of above 3,700 (a level previously reserved for the end of the year) while analysts (being analysts) are predicting and calling for STI to close the year at 4,000 to 4,200 points. Why is there so much optimism and why are people so eager to sink more of their money into shares when they are expensive ? That always gets me wondering. Suffice to say I remain a very sad and disappointed man in this rally, as valuations have all gone ahead of fundamentals and there are hardly any bargains left.

Below is the summary of my investments and related news as at September 28, 2007 (STI at 3,706.23 points):-

1) Ezra (Vested since October 6, 2005) - Buy Price $1.30 (bonus adjusted), Market Price $6.40, Gain 392%. On September 17, 2007, Ezra announced that they had contracted with Karmsund to purchase a large 27,000 bhp deep-water multi-functional support vessel for S$162.4 million. This will augment their new fleet of ultra-large 30,000 bhp AHTS which are going to be delivered in FY 2009 and FY 2010. On September 20, Ezra completed the conditional sale of 36,413,500 shares at NOK 22 per share (about S$219.71 million at NOK 22 = S$6.0338), which will leave them with a 55.2% stake in EOC Limited. Subsequently, on September 23, EOC Limited released its prospectus (approved by Oslo Bors) to retail investors to subscribe for 7,000,000 shares of EOC, which would further reduce Ezra’s stake in EOC to below 50%. The retail offering commences on September 24 and closes on September 28, and I believe Ezra will announce the subscription level and the gross proceeds raised from this entire listing exercise once they have the numbers ready.

2) Boustead (Vested since September 13, 2006; averaged down November 13, 2006) - Buy Price $1.295 (average), Market Price $2.40, Gain 85.3%. On September 28, Boustead announced that the sale of 40 Changi North Crescent has been completed. This would mean that the profits from this transaction would be recognized in Boustead’s 1H FY 2008 financials as today is still within the 1H of the financial year.

3) Swiber (Vested since February 14, 2007) - Buy Price $1.01, Market Price $3.46, Gain 242.6%. Swiber is accelerating its expansion into other regions of South-East Asia by announcing, on September 26, 2007, that it had entered into non-exclusive co-operative agreements with two Vietnamese companies (PetroVietnam Construction JS Company and Vietsopetro JV). This will give them a presence in Vietnam in order to start bidding for EPCIC projects within Vietnam. Also, Swiber announced on September 28, 2007 that it had incorporated a new subsidiary called Kreuz Engineering Limited in Labuan.

4) Global Voice (Vested since November 23, 2005; averaged down January 25, 2006) - Buy Price $0.1775 (average), Market Price $0.175, Loss 1.4%. On September 18, GV announced that they have deployed IPNex for Allianz Worldwide Care; while on September 24, online travel company QCNS has selected them to set up a high availability platform which can support up to 350,000 transactions. Details can be found on the company’s website.

5) Suntec REIT (Vested since December 9, 2004) - Buy Price $1.11, Market Price $1.95, Gain 75.7%. There will be an EGM held on October 5 for the approval of the 33.33% stake acquisition of One Raffles Quay. Suntec REIT is also trying to raise funds via the issue of new units and convertible bonds as well. I will provide more details of this in a separate posting as this deal is technically complex.

6) Pacific Andes (Vested since March 29, 2006; Rights Issue July 11, 2007 at S$0.52 per share; averaged down August 17, 2007) - Buy Price $0.655 (rights-adjusted), Market Price $0.775, Gain 18.3%. There was no news from the company during the half-month ended September 28, 2007.

Overall Portfolio

My overall portfolio has increased by 122.3% from a cost of S$46.8K as at September 28, 2007. The market value of my portfolio is about S$104.1K and unrealized gains total S$57.3K. Realized gains remain at S$4.2K in the absence of further dividends.

Comparison against STI

Someone had asked me to do a comparison of my portfolio’s performance against the STI, which is Singapore’s benchmark index. I have now included this and it will be a regular feature of my portfolio reviews.

The STI was 3,037.74 on January 3, 2007. It is currently at 3,706.23 today, representing a gain of 22.0%.

Adjustment of cost to ensure consistency of comparison – My cost and market value was S$33.9K and S$46.0K respectively as at Jan 3, 2007 while my current cost is about S$46.8K. Thus, I will adjust the market value of my holdings as at Jan 3, 2007 according to the % difference in cost in order to ensure a fair comparison. After adjustment, the new market value will be about S$63.5K. The market value of my holdings as at today is S$104.1K. This represents an increase of about 63.9%.

Thus, for YTD Sep 2007, I have managed a gain of 41.9 percentage points more than the STI. Please inform me if there is any error in my computation, and I will seek to rectify it as soon as I can.

My next portfolio review will be on Monday, October 15, 2007 after market close.

The importance of Investor Relations

I have always wanted to write something on investor relations (IR) and how some companies have excellent IR while others simply do not know what it is ! Most shareholders may feel that IR is not necessary and may even use up valuable resources of the company (in order to maintain the headcount). This post will present my personal experience with IR and how it has benefitted me, as well as to outline the way IR works.

The concept of IR is that listed companies need to be public about all their activities, plans, corporate actions and strategies. Thus, the purpose of IR is to communicate important (and market-sensitive) information to the general public and shareholders in order to keep them informed of important developments surrounding the company. IR also gives shareholders a chance to engage Management directly through email or phone queries regarding various aspects of the company which they may feel curious about, or may wish to know more. This helps to enhance corporate governance and transparency as the flow of information means that there is no information assymetry; this also helps to reduce the probability of insider trading (but does not eliminate it completely).

A quick chat with a friend who works in an investor relation company revealed this: some companies use external IR companies such as OakTree Advisors (for Ezra) and August consulting (for Swiber). These companies employ staff such as my friend to type out announcements, compile financial reports and issue press releases. Most of the information is provided by the listed company and the staff of these external IR companies are given guidelines on how to phrase or structure the announcement. Amendments will then be made back and forth (similar to revising a draft) in order to come up with the final announcement, which will then be posted on SGXNet. The urgency of the announcement will determine when it is posted up; for example if it was a major contract win, then the news would probably be out within one working day.

Other companies do have their own in-house IR department to handle investor queries and help out with events such as organizing EGM, preparing the circulars, co-ordinating the share registers and even catering for the food ! Ezra is an example of a company with good corporate disclosure practices and an excellent internal IT department. I have personally emailed queries to Mr. Chan Eng Yew and Mr. Tan Tat Ming and they have always been polite, prompt and helpful in replying. I am impressed by the effort they put in in order to make sure shareholders are informed of any corporate developments and they also take a lot of time to explain things.

I had called several companies in the past before and suffice to say that IR seemed almost non-existent. One example is Amtek Engineering (soon to be delisted after being bought over). I had a lot of difficulty getting through to someone who knew what I was asking for: A hard copy of the company's Annual Report. I had called the main line and was forwarded all over the place before someone told me (in a slightly hurried, not-too-patient tone) that I could just download it from the SGX website. This attitude was a turn-off and I changed from being an interested investor to being a disinterested investor.

To summarize, a company with good IR also demonstrates good corporate practices and governance, and this can enhance the company's image in the eyes of retail and institutional investors. In turn, this boost in image will also come in handy should the company decide to raise funds through an equity placement. All-in, good IR is an indication of a well-run and transparent company (to me at least), and investors should also take this into account when deciding on whether to invest in a listed company.

Gambling versus Stock Market Speculation – Some Observations

While on my business trip in Cambodia, I visited a casino in the evenings to observe the psychology and behaviour of gamblers. Most of the casinos in Cambodia are “unregulated”, in that there are no strict guidelines on minimum age (I saw a kid running around in the premises, much to the chagrin of the staff) and no laws governing any “deposit” to be paid. Thus, one could just come and go as they please and observe the actions of the players within the casino. After reading about the casino-like behaviour of stock market punters and speculators, I was admittedly curious about whether there truly were any observable similarities.

It is interesting to observe that a lot of what happens in casinos (whether large or small) is similar. People will (alternately) get wildly excited or extremely pessimistic and depressed, mirroring Mr. Market’s mood swings. By observing the Baccarat table (which incidentally was played with electronic cards and not real physical cards), I was able to see that some men wagered more than a few thousand US$ on one bet, only to have it all blown down the drain. When these people won a few hundred back on the next hand, they became wildly excited and high-fived everyone around them. These are the people who will probably remember their wins rather than their losses. This is quite similar to stock market punters and speculators who usually prefer to talk about their winnings rather than their losses.

People who stay longer in a casino also have a higher tendency to lose, in what is called the “house advantage”. Apparently, the machines, mechanisms and reward systems in the casino are designed to give them an advantage over the long-term, meaning that if you bet consistently then on average you are going to lose out. I do not have the exact statistics for how much you lose per dollar of bet but it can be pretty alarming ! Similarly, stock market speculators who stay too long to enjoy the “party” are also subject to the “house advantage” which is reserved for professional traders. These institutional traders have access to real-time live pricing using powerful terminals and enjoy close to zero commission and brokerage fees when they trade at lightning speed. The average retail investor is thus severely disadvantaged by this, and long-term investing is a way to “beat the house at its own game” as you would smooth out the volatility.

Another prevalent attitude is the tendency for people to form patterns due to observable phenomenon. This was the most interesting observation of all, I would say ! By observing people playing roulette, I noticed that the number “22” had appeared three times in a row; thus prompting punters to predict that the next roll should be “22” or at least an even number. The reality, of course, is that the next number is totally RANDOM; but the lesson here is that people tend to seek patterns and form ideas on how things should turn out because our minds seek familiarity. Compare this to technical analysts who seek to find patterns in historical price data in order to predict future trends. As far as researchers have said, these patterns are similar to a random walk but nevertheless, legions of people keep trying to read the future direction of the market from charts and graphs anyway. The fact that most have failed is the reason why value investing can be so successful anyway.

Thus, to sum it up, the behaviour I have observed in a casino closely mirrors the frantic buy and sell activities seen in stock market rallies and crashes. The punter (speculator) is the one who tends to lose out the most eventually, as he cannot control his emotions and lets frequent over-trading erode any possible gains he makes (through commissions and other frictional costs). It would be wise to learn from the casino (and upcoming IR) in that: the house advantage is always there, if you are so confident of beating it, then you can try, but 95% of traders lose money in the long run.

Investment Mistakes Part 8 – Buying into a company whose business I did not understand

This can be said to be my second-last mistake of commission (thus far), my last probably being Global Voice once I have sold it off. The company in question is United Test & Assembly Centre (UTAC), a semi-conductor chip testing company similar to Stats Chippac and Chartered Semi-conductor. I had purchased UTAC on June 9, 2006 based on a friend’s rough TA guide (not considering fundamental characteristics – another mistake). According to him, he had identified a “support line” for UTAC and I also did some basic preliminary research on the company and found that it had 11 quarters of consecutive earnings and revenue growth. Strangely enough, the price had retreated to my buy price of 77 cents per share even though the prospects of the company seemed very good. It acquired a subsidiary in Thailand which it renamed UTAC Thailand and this helped to boost capacity further, creating economies of scale.

This is the only company in which I have made a profit from after selling but which I still classify as a mistake. This was because the capital gain was made from pure luck and a bull market, rather than based on proper research and fundamental considerations. After the Feb 2007 slump, I subsequently sold UTAC off on February 23, 2007 at 90 cents per share, netting a 15% gain over 8 months. This was about 1.5 weeks after I made my value purchased of Swiber (on Feb 14, 2007) after they secured a record LOI of US$146.6 million from Brunei Shell. It was a process of divesting my speculative companies and concentrating on value investments such as Boustead, Ezra and Swiber.

So what was actually wrong with UTAC, you may ask ? Technically speaking, nothing was “wrong” with the company in the sense that the company was doing fine; but the nagging thing about it was that its revenues and profitability could not be predicted with certainty, as the industry was cyclical and volatile by nature. This led to problems in terms of estimating future earnings and revenue, as the visibility was not present. Though there was a glut of information about the use of DRAM and about Korea’s Hynix expanding (plus a thousand and one other little bits and pieces of “related” information), this still did not help to accurately portray a picture of confidence for the company. This is one reason why the companies I invest in have a sustainable order book and good earnings visibility in the next 2-3 years (something different from the way Buffett invests, as he looks for companies with strong franchises and wide economic moats). More on this method in a future posting.

Besides the fact that the industry was competitive, margins were thin and future demand was uncertain, there was also the problem of complicated jargon relating to the semi-conductor industry which got me all boggled ! In UTAC’s quarterly review, there were a lot of technical terms used for various aspects of their operations and I was unable to determine the financial impact of these moves as I had limited knowledge and understanding of the industry as well as jargon. This caused further problems in trying to decipher what the future prospects of the company were like and whether it would be able to retain a certain competitive edge in future. It turns out that UTAC did not manage to continue their increasing profitability and suffered a drop because of UTAC Thailand’s slower start-up. Eventually, they were bought over for S$1.10 per share.

The lesson to be learnt here is that one should not invest in something which one does not fully understand, and this includes companies which are in fast-paced and ever-changing industries in which future demand and prospects cannot be ascertained confidently. In this way, we invest within our circle of competence and ensure that there are no unpleasant “surprises” which will crop up to cause our investment to stumble. Also, do not forget to buy with a wider margin of safety for investments which you do not 100% understand, in order to build a better safety cushion in case something goes wrong.

Note: This is my last posting on mistakes of commission; future postings on investment mistakes will focus more on mistakes of omission which have resulted in opportunity losses.

Why is Value Investing so unpopular ?

It has always made me wonder about the popularity and usage of value investing techniques among the general public. While technical analysis enjoys a widespread following and has a whole legion of supporters and theorists (who incidentally also write hundreds of books on various aspects of TA), it came somewhat as a surprise to me to find out that there are only a handful (yes, just a handful) of really good books written on value investing and value investment techniques. Historically, Warren Buffett and Benjamin Graham, along with a host of other notable investors as listed out in the “Super-investors of Graham and Doddsville” article written by Mr. Buffett, have been achieving higher returns than the DJIA for almost 25 consecutive years. This kind of success is obviously worth emulating and studying, yet there seems to be a consensus among Wall Street pundits that this form of investing is either not worth the time, or simply just a pure fluke. So what makes value investing so unpopular ?

The way I see it, there are several factors at play when one talks about practicing value investing. As Warren Buffett had mentioned, it is simple but far from easy to invest the right way. I had also conducted some informal chats and “interviews” with friends, colleagues and associates to find out their investment style, and the answers can be surprising at times. Basically, they can be broken down into the various reasons as stated:-

Difficult to Understand – The chief reason for most people to turn to “simpler” forms of investing is that value investing is perceived to be too difficult to practice. Difficulty is defined by them as being too complex (involving the analysis of many companies before finally choosing one to invest in) and too time-consuming (many hours poring over annual reports, news and data, see my point below). I would admit that this is particularly true for non-finance trained individuals who may have an uphill task in learning to read financial statements. Still, the mitigating factor is that I have seen people with IT and engineering background do equally well in value investing than accounting or finance professionals. It’s just the amount of effort you wish to put in, which boils down to the second point.

Time-Consuming – No doubt, sifting through hundreds of companies before arriving at just one is a tiring and time-consuming business. Many people are unwilling to compromise “quality family or friends’ time” and spend a few hours a day doing what seems like homework after their normal working hours ! Strangely enough, most people do a lot more thinking and research into choosing a potential life partner, which is also a process of sifting through hundreds of potential partners to arrive at just one !

Slow Returns (a.k.a. manifest impatience !) – Another BIG complaint is that the returns from value investing are too slow, and that the money is not growing at a fast enough pace. That’s the reason people turn to TA or momentum “investing” and buy and sell shares at lightning speed: they THINK it helps them to make money faster and at a better rate of return. Of course, the truth is that value investing gives you slow, but sure returns; while TA gives at most mediocre returns (taken as a % of amount invested) or at worst, causes you to lose a substantial amount of your initial capital.

Archaic – Now this was an interesting reason, I thought ! Some people felt that value investing was “old-school”; and that since we were living in a new economy (with the Internet, Skype, Blackberry, i-Pod etc.), this would inherently imply that such old techniques could not possibly work any longer.

Despite the amazing amount of negativity regarding value investing, there are actually still a few people practicing it in sunny Singapore. Take a look at several blogs such as Berkshireh and 8percentpa and you will find a wealth of information regarding value investing. Perhaps it is a blessing in disguise that not too many people are into value investing, otherwise Mr. Market would probably be rendered obsolete should that happen !

Ezra – S$162.4 Million Order for a Multi-Functional Support Vessel

On September 17, 2007, Ezra announced the order of a 27,000 bhp multi-functional support vessel (“MFSV”) at a contract cost of S$162.4 million (US$106.8 million) to be delivered in 2H FY 2010. The contract was offered to Karmsund Maritime Service AS of Norway, and will include the cost of sophisticated equipment and integrated features such as an ROV hangar and foundations for a heave-compensated offshore crane and A-Frame (very technical leh !) which can allow the vessel to provide subsea support services. In addition, the vessel will meet the stringent requirements of the “Environmental Protection” and “Clean Design” requirements for operation in the North Sea, including Norway.

The key point is that Ezra is aggressively building up its fleet for the future by ordering larger vessels capable of handling jobs in the North Sea, South America and West Africa. This will broaden their possible customer base and open up more opportunities for the Group to tap into more distant markets; but which also opens them up to competition from the big players who are already entrenched in these territories. The contract value is pretty large by Ezra’s standards (i.e. S$162 million) for a single vessel. Compare this to May 2007’s announcement of 2 newbuild Rolls-Royce 30,000 bhp AHTS (due in FY 2009 and FY 2010) which cost a combined S$98 million, as well as a second pipelay and accommodation barge costing only US$25.6 million (about S$38.9 million). The combined capex for these 3 previous vessel orders came up to only S$136.9 million; while this one MFSV order alone already costs S$162.4 million. It is debatable on why this new vessel costs so much more than the other previous 3 and I will be bringing this issue up to the Management by way of Email. More details will be provided on this blog once I get the reply from the IR team.

Another worry is whether the Group is able to adequately fund this large purchase. The press release mentions that the contract will be settled “in stages”, which I assume to mean that progress payments will be made as the vessel is being constructed. Will the Group have sufficient cash flows to ensure that they can meet the payments ? It was also mentioned in the press release that they will be using a mixture of internal funds and bank borrowings to finance the purchase; but just what % of the purchase will be funded using debt ? This is of course a concern as gearing will then increase and interest expenses will go up as well, which will impact cash flows further. Although the listing of EOC on the Oslo bourse will free up cash amounting to nearly S$240 million (roughly), Ezra did not mention that it would be using the proceeds from the listing to fund this latest purchase.

Costs aside, the advantages of having such an advanced and sophisticated vessel are also questionable. Will jobs in the North Sea require such a vessel and are there already many such vessels of this size and capability deployed there ? If so, then are Ezra just following the crowd or are they at the forefront of new technology in terms of coming up with this MFSV ? These are just some of the serious questions to ask Management in order to probe for more details on the rationale for this newbuild acquisition. Other questions will include the exact function of this vessel (in relation to their fleet of AHTS which most shareholders know are used as support vessels for the oil and gas industry), as well as the charter rates for such vessels (if any).

It was mentioned that this vessel would form part of a special “task force” to meet the demands for mid to deepwater oil and gas exploration activities. Thus, will the vessels all be deployed as a whole unit (package deal so to speak) to service a client, or will they each be deployed individually for various jobs ? It would be good if Management could enlighten shareholders further on these queries, as these new vessels are unfamiliar and shareholders would need to gain more comfort by knowing more about how these vessels work and where they will be deployed.

Another pressing issue is: how much of the earnings from these new vessels will be recognized in the Group’s books ? As it is, the vessels will be 100% owned by EOC Limited which will only be 48%-owned by Ezra post-listing. Thus, there may be a gap between recognized profits on the charter of the vessels versus the costs of building them (which are fully borne by the Group).

Thus, it would seem that this announcement has thrown up more questions than answers, and I hope to be able to resolve this in the upcoming Dec 2007 AGM for FY 2007 results.

Swiber – Review of recent news regarding their Brunei Operations

On September 13 and 14, 2007, Swiber made announcements regarding its Brunei operations. Firstly, they announced the appointment of Mr. Joseph Chen Hin Tin (“Joseph”) as the vice-president (“VP”) of Swiber’s Brunei operations. The following day, a separate announcement was made regarding the formation of a joint venture with Rahaman Sendirian Berhad (“Rahaman”), in which Swiber will have a 51% stake in.

The appointment of Mr. Joseph represents another step for Swiber in beefing up its Management team, and the 54-year old is a Bruneirian with experience as a Business Development Manager in a Brunei-based civil and mechanical construction company. His key focus is to leverage on Swiber’s Brunei presence to drive the Group’s business and to tune the Group’s focus on regional expansion, alliances and activities. I view this development as positive for the Group as Mr. Joseph has requisite experience working in Brunei (he is a local after all) and will thus be familiar with the culture, working style and prospects for the company. His experience as a business development manager is also very helpful as he will have the expertise and experience in building up Swiber’s business within Brunei. This continues Swiber’s focus on the recruitment of good, talented personnel in order to spearhead its rapid growth. Recall that they had, on July 12, appointed a new VP of Indian operations and on August 22, appointed a new VP of FSO operations. Thus, it would seem that there is one new key appointment every month.

The 51:49 joint venture with Rahaman serves to further cement Swiber’s presence in the oil rich country of Brunei, after their record contract win of US$146.6 million from Brunei Shell on February 13, 2007. Subsequent to that, on April 19, the Group set up a branch office in Brunei to explore more opportunities. With this new joint venture, Swiber is poised to further benefit from the demand for oil and gas as this JV allows them to bid for projects previously only allowed to local companies. Thus, it significantly expands their reach and increases the chances for them to land another contract in Brunei. Furthermore, the fact that Rahaman is chaired by Yang Mulia PG (the brother of the Crown Princess of Brunei) means that Swiber will have better connections within the country and will also cement their position as one of the leading players there.

So far, Swiber has been releasing a lot of news and updates on their operations at a rapid pace, with almost 3 to 4 announcements per month. While it is obvious that the company is growing very quickly, I also hope that they do not over-stretch themselves in terms of project management. Warren Buffett did mention that investments should be treated in the most business-like manner in order for them to do well. Thus, if I were running the company, I would also ensure my cash flow was sufficient for me to establish a strong position in existing markets first, before venturing out to other untapped markets. Swiber appears to be taking this route as well, as they have appointed VP in India and Brunei (existing markets).

I believe that once the Group manages to consolidate their position in these countries and secure more contracts, then they will start to venture out to other markets for more contracts. In this respect, I believe the Group is taking a more cautious stance in order not to spread itself too thin. I will be keeping track of the Group’s progress and also monitoring the upcoming second sale and leaseback transaction. Hopefully, they can follow up these business developments with more contract wins to boost their order book through FY 2008 as well.

Boustead – Thoughts on Interview with F.F. Wong in The Edge Singapore

This week’s issue of The Edge Singapore featured a two-page detailed write-up on Boustead regarding their recent record contract win in Libya. Mr. F. F. Wong (Mr. Wong) was interviewed and he details his strategy of why he avoids China and concentrates on the Middle East instead for more projects and contracts. I will present this post as such: summaries will be provided on various key sections of the article, and my comments and opinions will follow in italics.

On working hard - The first part of the article talks about Mr. Wong flying to various far-flung locations of the globe in order to discuss about prospects and trying to snare more contracts. Comment: Mr. Wong strikes me as a CEO who is very hardworking and hands-on. His strategy is to sell off Boustead’s non-core businesses and focus the Group’s strengths, thus yielding strong results for the Group and benefiting shareholders as well.

On Expertise and the S$300 million Libyan Project – Mr. Wong believes that Boustead has the expertise to handle housing developments as his own private company built 80,000 housing units in Malaysia over the last 25 years. Thus, he believes that the knowledge and expertise can be distilled into Boustead Projects, thus the Libyan township project should not be a problem. Also, the deal is partly lump sum and partly cost plus; cost plus ensures that a margin will always exist for the project in case of delays or unanticipated problems. Comment: Mr. Wong is making use of his knowledge in housing development to push Boustead towards this direction; and the Group’s Libyan and Middle East connections over the years have paved the way for them to comfortably manage large scale water/wastewater projects as well as township projects. The structure of the deal also acts as a safety cushion for Boustead in case of any cost overruns, as cost plus always ensures a margin for the developer(s). The co-operation with Surbana was also a brilliant move as Surbana was in charge of planning, designing and developing 26 HDB new towns in Singapore.

On Potential of Middle East and Challenges in China – Mr. Wong views the Libyan township deal as more of a one-off occurrence for the Group, but analysts feel that this may signal the start of many more lucrative contracts for the Group in years to come, even if it may not be in the arena of new township development. Doing business in the Middle East is more favourable than in China, where conditions were described as “brutal” by Mr. Wong. EPC (engineering, procurement and construction) model is used in the Middle East while BOT (build operate transfer) is used in China. For the Middle East, he says the playing field is more level (as compared to China where political “connections” are viewed as being more important), but the only problem is that Boustead is not viewed as a “big-league” player as it has a paid-up capital of S$153 million and a market capitalization of only S$598 million. Thus, contracts which are of higher value may not be readily available to the company even though they have demonstrated that they can deliver projects on schedule as the mega projects are awarded to companies which have in excess of US$1 billion in revenues. Comment: I concur with Mr. Wong in that doing business in China can be harsh and a lot of “guanxi” is involved as well. Even though lots of people are bullish on China’s market as the middle class is expanding, purchasing power is increasing and their economy is booming (buoyed by the upcoming 2008 Beijing Olympics), I have my reservations regarding Chinese companies as the competition is very stiff and margins can be very poor for water projects (single-digit as stated by Mr. Wong, unless you have superior state of the art technology). Laws are also not strictly enforced as the lower class are struggling to survive and eke out a living, in flagrant disregard for laws. There have been many cases of illegal coal mining and other “atrocities” committed just to boost production or cut costs (with the Mattel toy recall, things seem to be spiraling downwards for China). Thus, I am personally pleased that Boustead is not going the China direction, but instead setting their sights on North Africa and the Middle East.

On Salcon and potential water projects – Salcon’s entry into the Middle East was spearheaded by IE Singapore and it forms part of a consortium which can bid for higher value projects. Thus far, there has been no progress on the bidding for large projects as there have been delays (refer to Boustead’s AGM post) but the company is still trying for smaller projects. The company has completed well over 50 membrane filtration projects (with the biggest one for a refinery in Doha, Qatar) and the size of each project is around S$10 to S$15 million. Comment: The IE Singapore consortium has yet to break significant ground in terms of bidding successfully for a mega-scale water project in the Middle East, but there is room for optimism as Boustead itself has cracked part of the market there already with its demonstrated expertise. Although Salcon under-performed expectations in FY 2007, there is reason for optimism as it is still uniquely positioned as one of the world’s leading wastewater specialist, and it can use that competitive advantage to bid for other projects too. Thus far for FY 2008, there have been no announcements of water projects by Salcon, yet Boustead’s book order is already at a record high of S$650 million. Any water-related project announcements would therefore be an added bonus for the company which will further swell their order book.

On Staffing and Human Resource – Mr. Wong is cautious about the rate of growth of Boustead, due in part to the lack of skilled personnel in specialized fields to manage projects for the Group. His opinion is that there is no lack of projects in upcoming months to keep the Group’s order book filled; the problem lies with finding enough competent personnel to helm these projects. Comment: Human resource is a critical aspect of any business and I am confident Boustead will be able to recruit the requisite talent in order to man the new projects. Recall too that Swiber regularly announces important management appointments in order to emphasize the significance of human resource in managing a business. Mr. Wong himself is a dedicated CEO who has shown himself to be a good turnaround specialist (with QAF), and all these factors make Boustead a strong company to invest in for the long term.

The article basically outlines the potential for the Boustead Group to benefit from more projects in the Middle East, as also mentioned in the Phillips report on Boustead. With a good cash hoard, I will be looking forward to the Group making acquisitions (to better utilize the cash) as I believe Mr. Wong knows how to look for high IRR yielding projects and companies. This is preferable to the cash being returned to shareholders via a dividend, as long as the company demonstrates effectiveness in channeling excess cash to projects with a good rate of return. There is also a problem with the liquidity of the shares, as they are tightly held by majority shareholders (Mr. Wong himself holds around a 30% stake), and a possible share split may improve liquidity of the shares and attract institutional interest. Given time, I am optimistic that Boustead will be able to grow steadily (20-25%) year on year for the next 5 years.

Mid-September 2007 Portfolio Review

There was quite a bit of news regarding my investments during the half-month ended September 14, 2007. As I was away on a business trip and am only just back in Singapore, I have not really had time to analyze developments in Swiber, Boustead and Global Voice during the last few days. I will be summarizing the developments in my portfolio review, while the detailed analysis will come in later posts. I guess September 11, 2007 managed to come and go without much incident, therefore there was not much to “rock” financial markets to create windows of opportunity to increase stakes in fine companies. But I am willing to wait !

Below is the summary of my investments and related news as at September 14, 2007 (STI at 3,536.40 points):-

1) Ezra (Vested since October 6, 2005) - Buy Price $1.30 (bonus adjusted), Market Price $6.30, gain 385%. On September 10, 2007, Ezra announced more details of the listing of EOC. It will place out 44.5 million EOC shares to institutional fund managers in order to raise up to a maximum of S$282 million. The book building period will end on September 19, after which I would expect another update from the company on the status of the listing and the exact amount of cash raised. The FY 2007 results can be expected in late October (as per FY 2006) as I think the company has got quite a bit to handle during September 2007.

2) Boustead (Vested since September 13, 2006; averaged down November 13, 2006) - Buy Price $1.295 (average), Market Price $2.33, gain 80.0%. On September 13, 2007, Boustead Projects announced the disposal of a warehousing facility at 40 Changi North Crescent in Singapore. The consideration for this deal is S$12.39 million (which will add to their cash hoard) and the gain on disposal recognized in the Income Statement amounts to S$6.07 million. This amount is already more than 50% of their 1H FY 2007 of S$9.61 million, and Boustead is set to achieve another record year as it focuses on its core competencies and leverages on its strengths.

3) Swiber (Vested since February 14, 2007) - Buy Price $1.01, Market Price $2.97, gain 194%. There are many updates for Swiber in just half a month: On September 4, Swiber announced a second wave of sale-and-leaseback transactions for 5 more vessels (also with R.S. Platou) in order to free up more cash and maintain an asset-light balance sheet. On September 6, they announced the purchase of a derrick crane for US$53.13 million to be delivered in 3Q FY 2009. This will add to their existing fleet capabilities and allow for more complex job handling. On September 13, Swiber announced the appointment of Mr. Joseph Chen Hin Tin as vice-president of its Brunei operations in order to spearhead growth in that market. Subsequently, the following day Swiber also announced a joint-venture (51:49) with Rahaman Sendirian Berhad to explore further opportunities in the country. The JV allows Swiber to bid for projects in the oil and gas industry which were previously only for domestic companies, thus it increases their competitive edge and the chances of getting more contracts within Brunei.

4) Global Voice (Vested since November 23, 2005; averaged down January 25, 2006) - Buy Price $0.1775 (average), Market Price $0.17, loss 4.2%. On September 5, GV extended their contract with AMS-IX while on September 11, 2007, GV announced that they have deployed a solution for Picturemaxx. Details can be found on the company’s website and the announcements are, as usual, pretty technical.

5) Suntec REIT (Vested since December 9, 2004) - Buy Price $1.11, Market Price $1.89, gain 70.3%. There were several announcements from Suntec which related to the acquisition of One Raffles Quay and the REIT mentioned that they have in-principle approval to issue new units to Cheung Kong (held by tycoon Li Ka-Shing) to partially fund the acquisition. Also, there will be an issue of convertible bonds to finance the remainder of the acquisition and a circular will be sent out shortly to shareholders.

6) Pacific Andes (Vested since March 29, 2006; Rights Issue July 11, 207 at S$0.52 per share; averaged down August 17, 2007) - Buy Price $0.665 (rights-adjusted), Market Price $0.725, gain 10.7%. There was no news from the company during the half-month ended September 14, 2007.

Overall Portfolio

My overall portfolio has increased by 107% from a new cost of S$46.8K as at September 14, 2007. The market value of my portfolio is around S$96.9K and unrealized gains total S$50.1K. The increase in my portfolio value from August 31, 2007 is about 1.44% or S$1.4K. Realized gains remain at S$4.2K in the absence of further dividends. For this month, I am not expecting too many corporate developments though Swiber’s seemingly never-ending “stream” of news and updates has over-whelmed me (though I sound like I am complaining, I am in actual fact very pleased with the direction the company is taking to build their business). Hopefully, I can also expect more positive developments from Ezra and Boustead till end-September as they try to build up their respective businesses as well.

My next portfolio review will be on Friday, September 28, 2007 (last trading day for September 2007) after market close.

Analyzing Companies – Adopting a Multi-Disciplinary Model

While reading through “The Essential Buffett” written by Robert G. Hagstrom while on a business trip in Cambodia, I was struck by the wisdom dished out by Warren Buffett’s long-time partner Charlie Munger. He mentioned that companies should not just be analyzed using one aspects (e.g. sales, marketing or financials), but that one should have various models in their mind in order to build a complete picture of a company, its industry and its potential. He goes on to stress that most people only specialize in one area (e.g. accountants do accounting, marketing people do marketing etc.) and thus fail to use a more holistic approach to looking at a company in order to assess if it is worth investing in.

What Mr. Munger is suggesting is that all of us should utilize various mental models (and, if possible, theoretical models as well) in order to analyze a company. Most people who undertake fundamental analysis of a company tend to look only at financials; or they may only look at one aspect of valuation such as price-earnings ratio. Fundamental analysis is closely tied to research for value companies but most people only scratch the surface when they look at a company. While it is true that most people tend to specialize in one field only, reading can be done in order to improve other aspects of one’s knowledge; and this is especially true for business analysis which requires one to have a good grasp of economics (supply/demand) and the way businesses operate. Obviously, taking a course on entrepreneurship is not going to make one understand how to run a business, any more than a bird can teach a fish to fly; but the idea is to try to build up a lattice of knowledge which can act as a strong mental framework which one can use to look at a company.

Such a meshwork of inter-connecting disciplines may sound daunting, but actually the task of looking at companies becomes much simpler when we ask several very basic questions about a company. These questions will, of course, eventually lead to more difficult drill-down-to-details questions; but the idea is to get a preliminary feel first before deciding if it is worth the effort to delve deeper. Such questions would include (but are not limited to):-

a) What industry is the company in and what is it doing ?
b) What are its sales and profits like and how is it planning to grow its business ?
c) Which markets does it sell its products and/or services to ? Are its customers other businesses (B2B) or final consumers (B2C) ?
d) What are its profit margins like (gross and net) ?
e) What makes this company special such that I deserve to put more attention to researching deeper into it ?

The above is just a simple sample of questions one should ask when faced with a potential investment. I would think if e) is not met, then one should just stop there and not waste too much time trying to pick the company apart. Should one need to delve deeper (as I mentioned), then one should look at these various macro-aspects of a company:-

1) Financial Model – Analysis of Balance Sheet, Income Statement and Cash Flow Statement
2) Marketing Model – What are it’s A&P activities ? What is its product life cycle like ? What is its target market, market segment and how is the product positioned ?
3) Business Strategy Model – How is the company planning to expand ? What is the pricing power which the company has ? Is the industry prone to competitive threats ?
4) Human Resource Model – What are the experience and qualifications of key management ? What makes them so competent in running this business and growing it ?

Once again, the above are some examples of models to use when analyzing a company deeper. Gurus such as Warren Buffett and Charlie Munger have, no doubt, all this hardwired into their craniums and its easy for them to apply when they look at companies. For ordinary folk, some effort must be put in if one wishes to achieve outstanding results.

Research Series Part 7 – The Cash Flow Statement

Part 7 of this series will focus on the Cash Flow Statement, another often-neglected financial document. As said previously, most investors simply focus excessively on the Profit and Loss Statement (Income Statement) and totally and completely ignore the Balance Sheet and Cash Flow Statement, to their detriment. The Income Statement can be manipulated to a certain extent through adjustments to fair value instruments and revaluation of properties or intangible assets to show large gains; while the Balance Sheet can similarly be “bumped up” to include “nice” numbers such as healthy receivables and increased assets. However, the cash flow statement makes it difficult to hide such anomalies, because it attempts to “strip” all accruals out and leave just the bare facts behind; which is how the company makes use of cash and liquid resources to run the business.

For those who are unfamiliar, the cash flow statement is a financial document which lists out all the cash flows associated with the company for a period of time (either quarter, half-year or full-year). This is broken down into three key sections; namely operating activities, investing activities and financing activities. Operating activities is the main focus of the company (i.e. its core business) and represents cash flows it receives from carrying on its principle business. All cash flow statements as reported by listed companies have the indirect method format as required by the Financial Reporting Standards, thus all of them start with net profit before tax or loss before tax and then add back all non-cash items such as amortization, depreciation and revaluations. This is the section which lets readers see what has been charged to the Income Statement which is non-cash by nature. Learn more in the section below as I split my explanation into three distinct sections tackling the three aspects of the cash flow statement.

Investing activities are defined as activities which include the purchase and sale of fixed assets as well as investments in AFS (available-for-sale) securities. These activities generally help to bolster the fixed asset base of the company and are long-term in nature. Financing activities include cash inflows from the issuance of shares and bonds, and this category includes methods of financing from the company in order to raise cash, as well as payments for interest expenses relating to loans, convertible bonds and debts. Let’s now take a look at each section to pick out the important points:-

Cash Flows from Operating Activities – The most important aspect of a company is its ability to generate cash flows from its daily operations. This section of the cash flow statement essentially deals with the generation of cash from the normal activities of the company. These include changes in inventory levels as well as levels of debtors and creditors over two periods in order to ascertain the net cash inflow and outflow. Warning bells should start ringing if there is a net operating cash outflow, and though it may not be a signal of any deterioration in the cash generating ability of the company, I would think that it still warrants some investigation. In such cases, it would be prudent to assess the cash conversion cycle of the company and also the credit terms given by creditors and to customers.

Cash Flows from Investing Activities – Normally, companies which are expanding very quickly would see a negative cash outflow in this section; principally due to the increase in the purchases of fixed assets. There may also be a net cash outflow due to the company investing in long-term investments which have yet to yield any cash benefits but which may possibly be earnings-accretive in the short-term. Net cash inflows to this section occur when companies divest fixed assets and sell off investments to generate more cash, but take note that these are usually one-off items which will not recur. Also, note that the sale of fixed assets also creates a corresponding one-off exceptional profit/loss in the Income Statement.

Cash Flows from Financing Activities – This is the section of the cash flow statement which shows how a company raises funds in order to sustain growth and expansion. Companies which are expanding quickly (such as Swiber) and are in need of various forms of financing would have to declare the cash effects here. These will include raising monies through the issue of new equity (shares), issuance of bonds or debentures as well as cash inflows from bank loans. Conversely, the company may also choose to pay down bank loans (reduce leverage) if it has excess cash, or to do share buy backs in order to improve EPS.

Simply put, there is no quick and easy formula for analyzing a cash flow statement as all companies are at different stages of expansion/contraction and require or use up cash differently. What this post hopes to achieve is to allow the reader to better understand the various aspects of the cash flow statement; and to highlight the importance of this financial document in the analysis of a company.

On a final note, please do remember that companies cannot survive without CASH, though they certainly can survive without profits ! Thus, cash generation ability is always a more crucial aspect of a company rather than purely looking at the Income Statement.

Investment Philosophy

Sorry for the lack of posts, I actually managed to get my hamstring "strained" during some exercise and was forced to rest in bed; thus really did not have the mobility to move around and was thus even less inclined to do a posting. Fortunately, I am feeling better now and can do a short posting for the weekend.

While reading a book called "Warren Buffett Wealth" by Robert P. Miles during my temporary "break", I was quite fascinated about the section on developing one's personal investment philosophy. Just what is an investment philosophy and why is it so important to help us achieve our investment goals ? Let me explain and elaborate....

An investment philopsophy is a set of rules one should live by with regards to his or her investment, and it sets the tone for how you invest, how you evaluate your investments in order to decide on what to invest and also how you measure your performance. This also includes your expectations on your expected return per annum and whether it can help you to achieve your long-term financial planning goals. Thus, an investment philosophy encompasses many key aspects of wealth planning for the future and helps one to steer and navigate through the treacherous waters of money management.

One should plan their philosophy based on realistic expectations and this is also dependent on his age and status in life, taking into account family factors as well. For instance, an old man would tend to be less "risky" than a younger one as he has a shorter time horizon, while a married lady with 2 children will have different priorities and wealth goals as compared to a single lady of the same age. One has to be realistic meaning your expectations for growing your wealth through investment cannot be too ridiculous. There is no such thing as growing your wealth 100% compounded per annum (even though it sounds so fantastic !); a more realistic goal would be 10% per annum on average for 20-30 years.

The importance of having a philosophy cannot be over-stated. It helps you to focus on your long-term goals and gives your wealth planning meaning and direction. Most people have a fuzzy and vague idea of how they want to grow their wealth but they tend to approach it in a haphazard way. A philosophy will help you to stay focused, temper any unrealistic expectations and keep you firmly grounded in reality.

I admit this post is rather "summarized" as there is a lot more to say about investment philosophy, but I would rather just leave readers with this for now. Perhaps when I have more to add in future, I will do so accordingly.

Business Trip to Cambodia

Dear readers, please note I shall be away on Biz Trip to Cambodia from Sep 11, 2007 (yeah, what a day to fly huh ?) till Sep 14, 2007 (close to midnight). Thus, I will do my portfolio review post over the weekend, and my posts would be minimal during this period due to poor internet connectivity over at Phnon Penh. Thanks !

Swiber - Purchase of Derrick Crane worth US$53.13 Million

On September 6, 2007, Swiber announced the acquisition of yet another vessel. This time, it's a derrick crane worth US$53.13 million purchased from Hydralift AmClyde Inc. (Amclyde). This new vessel is slated to be delivered in 3Q FY 2009 and can lift a total of 4,180 tons, making it one of the largest heavy lift cranes in the Asia-Pacific region.

This most recent purchase comes hot on the heels of their previous announcement (on August 30, 2007) regarding the acquisition of 4 barges, 3 accommodation ones and 1 submersible, to be delivered from 4Q 2007 through 1Q 2009. The company is certainly expanding their fleet very aggressively, as it has been less than a year since its listing on the SGX, yet it has already snared a number of large contracts and made announcements to acquire a myriad of vessels. In addition, the company has also utilized its listing status in order to raise more funds by tapping on to the equity markets (private placement) and bond markets (multi-currency medium term note programme). Being listed also gave them additional visibility and recognition as one of the more promising players in the fast-growing EPCIC niche industry within South-East Asia, which perhaps is one of the factors for Swiber being able to work with R.S. Platou (for the 2 sale-and-leaseback transactions) as well as finding a partner in AmClyde (for their most recent purchase).

Below is a list of Swiber's current fleet as well as its expanded fleet. I have included the approximate dates of delivery as well. It is hoped that with an expanded fleet equipped with cutting-edge technology and heavy-lift capabilities, it can snare contracts of larger size from a bigger pool of customers.

Swiber's Current Fleet of 20 vessels (FY 2007)


Swiber's Second Wave of Fleet Expansion (FY 2007 to FY 2009)


Swiber's Future Expansion Plans


I would expect Swiber to use the proceeds from their recent bond issue and the upcoming sale and leaseback to purchase more vessels to carry on their next wave of expansion. At the same time, the company is also aggressively recruiting talented and experienced Management staff in order to broaden their knowledge base and expertise. FY 2008 should be a very exciting year for the company as it embarks on its ambitious expansion plans; and it is also the year when a lot of the newly ordered vessels would come on board, thus they will be available for deployment for EPCIC jobs. I will be updating my blog when more announcements come from the company. In the meantime, shareholders should sit back and look forward to more corporate developments to be announced.

Swiber – Acquisition of 4 Vessels for US$70.6 Million

On August 30, 2007, Swiber announced the acquisition of 4 vessels in order to bolster their current fleet. Their wholly-owned subsidiary Swiber Engineering will purchase 2 vessels each from Pacific Crest Pte Ltd and Pacific Ocean Engineering and Trading Pte Ltd for a total consideration of US$70.6 million, excluding certain owner-furnished equipment. These vessels include one 400 ft submersible barge and three accommodations barges measuring between 328 to 371 ft. The delivery dates for the barges are between 4Q FY 2007 (for the submersible barge) to 1Q FY 2009 (for the other 3 accommodation barges).

This is a very clear indication that Swiber is intending to build up their fleet and is “on the warpath”, ordering their first wave of vessels for FY 2008 through FY 2009. According to the company’s plans, they also intend to add a second wave of vessels to continue the company’s growth plans, and have so far raised a substantial sum of money in order to pursue this initiative. Below are the moves taken by the company so far in securing immediate cash for expansion:-

1) May 10, 2007 – Sale and Leaseback transaction for US$87.5 million (about S$133 million) for 4 AHTS and one pipe-lay barge to be delivered between August 2007 and December 2008.

2) June 26, 2007 – Private Placement by Swiber of 55.35 million new shares of the company to raise approximately US$79.2 million (S$120.4 million) for fleet expansion.

3) August 24, 2007 – Inaugural bond issue of US$71.4 million (S$108.5 million) to insurance companies, asset managers and banks under their S$300 million multi-currency term note programme to raise funds for expansion.

4) September 4, 2007 – Interim announcement made by the company on a second sale and leaseback transaction, this time involving 2 AHT, 2 AHTS and one pipe-lay barge. The value of this transaction was not disclosed as yet but it will probably rake in around US$80 million to US$90 million going by estimates from their first sale and leaseback.

From bullet points 1 through 3, it can be seen that a total of US$238.1 million (about S$362 million) has been raised in just 4 months alone in order to prepare Swiber for their fleet expansion exercise. Considering that the 4 new vessels ordered only cost US$70.6 million, that still leaves them with about US$167.5 million worth of cash to deploy. This is not counting in another potential US$80 million from the second sale and leaseback transaction which will probably be concluded around November 2007. Remember though, that Swiber will have to pay about S$2.4 million in interest expenses every year from FY 2008 onwards, but this should not put much of a strain on their cash flows assuming that they generate enough cash from operations.

The major catalysts for Swiber’s growth now will be in securing more contracts in their established regions, while at the same time continue to bid for larger contracts in areas which they intend to expand into. An expanded fleet will definitely enable Swiber to control their costs better and improve project co-ordination and completion, thus ensuring satisfied customers who will (hopefully) give repeat business. A key concern is whether the company has the ability to grow the business along with their fleet; otherwise they may be saddled with debts and operating expenses relating to their new fleet but with no corresponding income. That would be the worst-case scenario, of course. But a value investor should always be prepared for such scenarios, thus I insist on the margin of safety all the time.

Ezra – Approval for EOC Listing on Oslo Bourse

On August 31, 2007 (yes, the last day of Ezra’s financial year), Ezra announced that it had obtained in-principle approval from Oslo bourse (in Norway) to list EOC Limited. This is subject to five conditions which must be met:-

1) Requirements of holders of one round lot in EOC shares as stipulated in Section 2.4.2 of the Stock Exchange Listing Rules;
2) At least 25% of the shares to be admitted for listing must be held in the hands of the general public;
3) EOC to publish an approved prospectus;
4) EOC is to ensure that the composition of its Board of Directors is in accordance with the Norwegian Code of Practice for Corporate Governance;
5) EOC is to enter into a listing agreement for primary-listed companies.

EOC has also decided to allow the President of the Oslo Bourse to decide if EOC will be listed on Oslo Axess (something akin to a second board) or the Oslo Main Board. The first day of listing should be no later than October 26, 2007 (by then, Ezra’s FY 2007 should have been released).

This listing is seen as being strategic for Ezra as it allows them to get a foothold in Europe and brings them closer to their markets in South America, the North sea and West Africa. The divestment of 43% of EOC Limited will also allow Ezra to remain “asset-light” while unlocking the value of EOC’s assets through a listing vehicle (listed assets generally enjoy much higher valuations than unlisted assets due to the presence of liquidity). Norway is also one of the leading countries in the oil and gas industry and therefore EOC’s assets will get a much better valuation there as compared to other bourses which may not understand oil and gas assets very well.

The only uncertainties remaining are whether Ezra is going to declare a dividend-in-specie from the listing of EOC as 25% of the listed shares needs to be held by the public (and not institutions). This means that Ezra’s originally intention to derive cash to distribute to shareholders as a special dividend may be altered upon receipt of this new requirement. I believe the Management are still working out the details and will inform shareholders soon on their decision and how the deal will be structured.

Another uncertainty is the eventual valuation which EOC will command. A 10% discount to market price will be given in order to list EOC’s shares on the bourse and the last traded price on the OTC market for EOC was NOK 23.5 (and not NOK 26 as stated in the circular). Upon further clarification from Mr. Tan, he said that the price will be fixed on the day the contract for the listing is signed; and I assume this means that it should be no later than October 26, 2007 as a decision will have to be made by then. The valuation will affect the amount of proceeds that Ezra will obtain (net of professional fees to the listing agent). It remains to be seen what the proceeds will be used for although Kim Eng’s report dated September 3 did mention the possibility of Ezra further expanding their AHTS fleet.

Besides these exciting developments, there is also no update so far on the Vietnamese fabrication yard and how Ezion is supposed to be integrated into Ezra’s supply chain. I would expect an announcement before the end of this year regarding the Vietnamese yard and I believe this might be a further area of earnings and revenue growth for Ezra as we now move into FY 2008.

Investment Mistakes Part 7 – No consideration for industry characteristics

This mistake is one mistake which many investors frequently make, and it is admittedly one of the more difficult mistakes to analyze, predict and rectify. Being value investors, one is always supposed to analyze the company’s maco-environment including the industry and country where it provides its services or products (e.g. China market, local market or international market). Early on in my investing career, I had frequently failed to adequately consider these factors in my analysis, resulting in “shocks” and lost money.

I had purchased a company called C&O Pharmaceutical on February 28, 2006 at a price of S$0.405 per share. This was a China-based pharmaceutical company and at the time, they had just acquired another company called Shenzhen Liancheng in order to boost their distribution network and bolster their pipeline of available drugs to sell to the market. Their market was predominantly China and the pharmaceutical industry (at the time) was loosely regulated, meaning suppliers of drugs did not have to pass their drugs through intense scrutiny and draconian checks in order to be commercially saleable. Also, loose regulations meant that prices for drugs could also be “fixed” and many companies freely bumped up the prices of their drugs in order to secure a large gross margin. In short, the lack of regulation meant that a lot of drugs were being pushes to the market irregardless of their safety (or even intended) effects, and that prices were wildly out of proportion with international standards (even if the drugs were supposed to have the same effects).

The company in question was doing well at the time; the purchase of Shenzhen Liancheng meant that they would increase their pipeline of ready-to-market drugs and also enable “better control and greater effectiveness” in the distribution of third-party and C&O branded drugs. To be honest, I also did not do an in-depth research of the company or its industry and I based most of my purchase decision on this one piece of news (another mistake !).

In June 2006, after a series of drug scandals in China, the Chinese government announced a clampdown and tightening of the entire industry by imposing price ceilings for various drugs and also subjecting new drugs to greater scrutiny. This had the unexpected effect of compressing margins for all Chinese pharmaceutical players and overnight, many local-listed China pharmaceutical stocks (e.g. Landwind Medical, Reyoung pharmaceutical, C&O and Asiapharm) suffered. Looking back, I should have been able to anticipate such moves by the government as there was already rampant and uncontrolled drug distribution and pricing by unscrupulous drug companies. It was only a matter of time before such stringent regulations came into effect, as China wished to preserve its reputation in light of the upcoming 2008 Beijing Olympic Games.

Thus, on November 9, 2006, I sold out at a 36% loss (at S$0.255) after C&O gave a profit warning (amid a flimsy excuse of lower profits due to the “consolidation of inventories”). It is currently trading at S$0.48 today (only a slight 20% profit from my old purchase price after nearly 1.5 years) due to the continued challenging environment for Chinese pharmaceutical companies.

Note: The current scandals in the papers involving Chinese products should alert the intelligent investor to possible repercussions from the Chinese government, and one should stay alert of such developments as it may affect your investments in China companies, especially those which produce goods for the domestic market in China like shoes (e.g. Hongguo, China Hongxing), frozen foods (e.g. Youcan, Synear) and consumer goods.

Unit Trusts – 80% of Unit Trusts Under-performed the market from May to August 2007

Interestingly enough, an article in The Edge Singapore this weekend (in the pull-out Personal Wealth section) talked about the returns on unit trusts and how they have been battered left, right and centre by the recent market turmoil. Also on Friday, I was having lunch with two friends who expressed their views on the unit trusts market and one of them, incidentally, was heavily vested in unit trusts. I would like to comment on funds in general and also incorporate some of my friend’s personal views on unit trusts and how they have helped her in growing her money.

In the article, nearly 80% of the 700-odd retail investment funds (i.e. mutual funds) have lost money in the past three months up till August 17, 2007 (the day of the big rout and subsequent recovery). That’s about 560 funds in total, no small number by any measure ! The reason for this under-performance can be traced to the fact that during the correction, all asset classes such as equities, bonds, properties and commodities were hit, sparing no one and nothing. Thus, even a well-diversified investor who held on to equity funds, bond funds and real estate funds would be hard-hit. As an example, my friend had a 13% overall gain from her 8 unit trusts before the major correction, but this dropped to as low as 3% (fees inclusive) during the severe correction. Clearly, these funds could not withstand the battering and most were not prepared for this kind of “storm”.

To be fair, to expect mutual funds to consistently out-perform the benchmark index is a little too much to ask. Mutual funds usually show their performance over a stretch of time and this may include periods of under and over-performance; which in the end translate into an average which is then shown to the potential investor. What I would like to add is that funds have a tendency to be a little over-diversified at times, thus eroding any good gains from any particular investment within the fund. After all, owning just 5 excellent companies is much better than 5 out of 30 when the other 25 are just mediocre. But the problem with funds is that the fund manager is forced to (not literally, but in a manner of speaking) make investment decisions on a daily or weekly basis to increase the investment returns for the unit holder. In the end, transaction costs will pile up as the fund manager tries to get into the better investments and bail out of the worse ones. It’s more like fire-fighting in such cases rather than a case of good investment acumen.

Fund managers are trained professionals with a wealth of knowledge in investing, financial products and financial markets. I have the utmost respect for them because after all, it is not easy to handle large sums of money which are not yours and to be accountable to so many people. Herein lies the problem: Warren Buffett mentions that as a fund manager, you are constantly “forced” to make moves in order to grow other peoples’ money; and this is like being a baseball player who is forced to swing at every pitch, even if it’s a bad one. The analogy is apt because in the investment world, there cannot be that many good investments out there for everyone (otherwise, we would ALL be very rich by now). In fact, after doing several months of independent research on the Singapore Stock Exchange, I dare say there are only a handful of truly outstanding companies with capable management, good earnings growth and an endearing product/service. The fact that fund managers have to take action all the time or be labeled as “lazy” or “inefficient” is sad because all it takes is one really good investment to reap all the returns; instead most funds buy/sell constantly (eroding gains through transaction costs) and they also buy/sell into mediocre companies or investment products, further stunting performance. This is why there are only a few truly outstanding funds in this world (which, incidentally, are managed by fund managers who have a value investing mindset).

So I tell my friend: “Why don’t you invest in equities in order to enjoy a higher return ? Fund managers regularly under-perform the index plus you have to pay them an annual management fee even if they fail to perform !” Her reply was that these fund managers “know their stuff” and it was important to “diversify her risk” by investing in a myriad of asset classes. The sad fact is that the entire fund industry likes to convince retail investors that it is difficult and tough to invest on their own and thus the services of such professionals are required. The truth is that even though it is not simple to invest on our own, it is also far from being rocket science ! What most people don’t realize is all it takes is a keen interest in business news, basic accounting knowledge and an understanding of businesses and companies. I have a previous entry on the pros and cons of unit trusts so please refer to that posting for more detail.

For diversification of risk, apparently it also comes with a condition that you also “diversify” your returns ! Wide diversification is necessary if the retail investor does not know what he or she is doing, and even though diversification helps you to “weather” the storm, the flip side is that it cannot guarantee superlative returns. Most of my friends who are heavily into unit trusts report an overall gain of at most 15-20% for their entire portfolio (and that’s for the very outstanding individuals who have picked almost all the out-performing funds). For most value investors who regularly do their homework and research, focusing on just a few excellent companies can help weather storms much better and give much better returns as well.

Note: Kindly feel free to comment on this post as I know the issue is rather contentious (there will be people in strong support of UT, like my friend is). Rather than skew my discussion towards pure equities, I invite views from readers as well.

Also Note: From the feedback of readers, I have organized my blog into sections using labels so that it is easier to navigate and to read up on specific posts (e.g. on Ezra, Swiber or research series). Kindly use the right-hand toolbar called "Categories" to navigate through my blog's older posts. In future, I will "tag" each posting with a label for easier reference. Feel free to leave comments on ANY posting and I will attend to it when I have time.