Swiber Holdings: Fund working capital through placement

Placement of new shares. Swiber Holdings (Swiber) announced a proposed placement of 84m new ordinary shares at an issue price of S$0.88 per placement share to raise proceeds of S$73.9m last Friday. The issue price represents a 16% discount to last Friday’s closing price of S$1.05. The appointed share placement agent CIMB-GK Securities has agreed to use their best efforts to procure the subscription and payment for the placement shares. Completion of the placement is conditional upon in-principle approval from the SGX.

Dilutive impact on EPS but lower gearing resulted. The new shares of 84m represent 19.9% of Swiber’s existing issued ordinary share capital of 421.4m shares. As such, this placement deal will dilute FY09/10 EPS by 16%. In addition, net gearing will be lowered by 34ppt for FY09 to 0.62x following the completion of the placement.

Net proceeds used for general working capital purposes. In the circular released, Swiber estimated that it would raise net proceeds of S$71.8m (after deducting expenses incurred in connection with the placement and assuming that all the placement shares are sold), and the bulk of it would be used to fund working capital needs. We believe some cash may also be set aside for the repayment of Swiber’s outstanding notes maturing in 3Q10 (US$71.2m) and 1Q11 (US$72m). We are relieved that Swiber’s outstanding committed capex of US$318m is fully funded through sale-and-leaseback, secured bank loans and vessel disposal.

Declining orderbook and subsequently, earnings deterioration, is another worry. Swiber has an orderbook of US$515m currently. While Swiber noted that it has submitted or intended to submit bids for contracts amounting to US$5b, we remain concerned over Swiber’s success rate to clinch new orders and Swiber’s execution capabilities vis-a-vis its competitors.

SELL into strength. Over the past month, Swiber’s share price (+119%) has outperformed the STI (+21%) and its US peers (+19%). We have raised our valuation parameter from 3x to 9x (30% discount to the global EPCIC peers’ average of 12x) on FY10F recurring EPS as a result of sector re-rating. Thus, our target price becomes S$0.56 post completion of placement. We advocate investors to sell into strength, as we believe Swiber’s share price will continue to be pressured, first by concerns over declining orderbook and execution capability, then by signs of weakness in earnings quality. Maintain SELL.

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