Swiber - Exceeded expectations, but can it be sustained?

2Q09 results ahead of estimates. Adjusting for one-off gain of US$4.5m, Swiber turned in better-than-expected operating profit of US$18m on the back of revenue of US$111m and profit margin of 16%. Another positive was Swiber’s net gearing of 0.75x following the equity fund raising in Jun 09. However, we caution investors on Swiber’s negative FCF and its declining orderbook. We raise our FY09/10 net profit estimates by 37%/32% after adjusting up the net profit margins by 2.9ppt/2.3ppt respectively. Keeping our valuation parameter at 9x on FY10 core EPS, our target price is revised up to S$1.09 (from S$0.85 previously) accordingly. A rerating without sustained order momentum and proven execution track record is difficult. Maintain NEUTRAL.

We are encouraged by operating margin… The 11% YoY decline in 2Q09 revenue to US$110.8m was mainly due to the completion of the projects in Malaysia and execution of fewer projects (4 vs. 6 in 2Q08). Stripping away the non- recurring gain on disposal of assets of US$4.5m, core operating profit of US$17.5m was down 34% QoQ but ahead of our expectations of US$14.0m. After several disappointing quarters, an increase in operating profit margin to 15.8% in 2Q09 is encouraging, though this is some way off pre-credit crisis’ margins of 20%.

.. and enhanced cash position. In Jun 09, Swiber successfully raised net proceeds of US$49.8m which improved net debt to 0.75x as at 30 Jun 09. But investors should take note of the negative free cashflow, Working capital was negative as advanced receivables were worked down while payments were due. As such, Swiber recorded negative FCF for the quarter.

..new order replacement rate is slower than orderbook depletion. While Swiber secured US$93m in 2Q09, its orderbook showed a declining trend, from US$515m in 1Q09 to US$509m in 2Q09. Without a reversal in the shrinking orderbook, revenue growth momentum is unlikely to sustain. Our earnings model shows that FY11 revenue would fall drastically.

..and little is known publicly on the working status of Swiber’s pipelay vessels. Through our discussions with the industry players, we learn that Swiber’s vessels appear to be facing several execution difficulties. We are unable to verify them, as there is limited public information to track the working status of offshore vessels. We hope to seek greater clarity from the management.

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Swiber Holdings: Slower contract flows

Results largely in line with expectations. Swiber Holdings (Swiber) reported a 22.9% YoY rise in revenue to US$87.1m for 1Q09 but this was a 15.4% QoQ decline. Net profit fell 5.0% YoY to US$9.8m, affected by lower gross profit margins (20% in 1Q09 compared to 26% in 1Q08). This is largely in line with expectations. The lower gross profit margin was mainly due to the roll-over effect of delayed deliveries of the group's pipelay barge and dive-support work barge in the previous quarter. Operating profit (excl. one-off items) was S$11.6m compared to S$12.9m in 1Q08.

Decreasing order book. The group's order book is now US$515m as at 31 Mar 09 compared to US$596m as at 31 Dec 08. Slower order flow should hardly be surprising, given lower oil prices and the global economic downturn. We note that so far about US$70m worth of contracts were secured in 1Q09 compared to about US$470m (including the US$250m CUEL contract) in 1Q08. Management, however, is optimistic about obtaining contracts from Saudi Aramco's US$60b investments in oil and gas production over the next five years, especially after forming a joint venture with a leading Saudi Arabian company, Rawabi Holding Co Ltd, which could increase the chances of securing contracts.

Little room for error. The group's net debt-to-equity ratio has eased from 1x as at 31 Dec 08 to 0.94x as at 31 Mar 09. It is imperative that deliveries of vessels under the sales and leaseback agreement are on time so as not to impact its cashflow (out of 15 sale and leaseback deals totaling US$408m, eight have been delivered). Management does not anticipate any more delays in vessel deliveries from reports of project management teams stationed at yards. The group mentioned that the delivery schedule is still in line so far.

Maintain SELL. We are keeping our FY09 estimates but lowering FY10 estimates by 13% with lower contract flow assumptions. However, we are raising our fair value estimate to S$0.66 based on 6x FY09F core earnings (peers trading around 7x) with lower risk aversion in the market and a re-rating of the sector. At current price, the market appears to have run ahead of Swiber's fundamentals and it is prudent to note a few things 1) slowdown in orders, 2) relatively high leverage, and 3) little leeway for hiccups in project execution. We maintain our SELL rating on the stock.

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.

Swiber Holdings: Not out of the woods yet

Unexpected profits in 1Q09. Swiber's headline net profit was S$9.8m (-5% y-o-y) in 1Q09, despite a 23% y-o-y increase in revenue. We estimate that its recurring net profit has dropped 34% y-o-y to about S$6.8m; if the net gains from sale of vessels under sales-and-leaseback agreements and other assets were excluded. Still, this is better than our expectation of a slight loss in 1Q09.

Net gearing has come down, as expected. Swiber's net gearing has come down to 0.94x as of end 1Q09, vs. 1.01x in 4Q08. As Swiber took delivery of more vessels under sales-and-leaseback agreements in 2009, we project the net gearing to reduce further to 0.5x by end 2009. However, all bets are off the table if the scheduled delivery of these vessels is again postponed.

Concern on the lack of new orders. Swiber's net order book as of end 1Q09 was US$515m, vs. US$596m as of end 2008. This implies that Swiber has not won any small offshore EPCIC contracts y-t-d in 2009. The 2009 work season in Southeast Asia has already started, and Swiber has to rely mostly on the award of contracts for new markets in South Asia/Middle East to boost its order book.

Raise fair value to S$0.69. We have cut our new order win assumptions for 2009 and 2010, and reduced our recurring FY10 net profit estimate by 5.0% to US$30.7m. Still, we upgrade fair value to S$0.69, due to: 1) The use of higher 7x normalized FY09 PE, and 2) The increase in our FY09 net profit estimate to US$28.6m, vs. US$17.6m previously, due to the unexpected profits in 1Q09. Maintain SELL, given the lack of price catalysts.

Swiber Holdings: Bolsters its balance sheet, Sell

Swiber successfully completed new share placement. Swiber has raised net proceeds of S$71.8m from its placement of 84m new shares last Friday, representing about 19.9% of its previous issued capital. The new share placement is priced at S$0.88 per share, and is sold to institutional investors. Swiber would utilize the net proceeds for general working capital purposes.

Swiber may be in a net cash position by end 2009. The net cash proceeds from new share placement would greatly improve Swiber's balance sheet, vs. 0.94x net debt as of end 1Q09. As Swiber takes delivery of vessels under sales-and-leaseback agreements, we expect the group to be in a net cash position by end 2009.

Two critical months for new orders. Swiber's order win season is now reliant on the award of contracts for relatively new markets in South Asia/Middle East, especially in June/July. The international/national oil companies have been asking for 20-40% dip in supply chain cost, which to-date, has not happened. While higher oil prices are of help, the new orders flow would still be uncertain, given the still high offshore EPCIC costs and unfavorable credit terms. Note that Swiber's net order book as of end 1Q09 was US$515m, while its order pipeline is unchanged q-o-q at about S$5b.

Maintain SELL. Our lowered fair value for Swiber is S$0.60, due to negative share dilution impact, and using 7x FY09 PE. Maintain SELL, due to low earnings visibility.

Swiber Holdings: Concerns of financing and a declining orderbook still present

1Q09 results review. Swiber Holdings (Swiber)’s 1Q09 revenue grew 23% YoY to US$87.1m on the back of increased activities in the offshore construction projects in Malaysia, Brunei, Indonesia and India, but declined 15% QoQ. This flowed down to net profit of US$11.9m, which saw an increase of 15% YoY (and a turn-around from 4Q08). Adjusting for gain on disposal of assets of US$3.5m, core operating profit was US$11.6 (above our estimates of US$9m). Operating profit margin of 13.3% was a reversal from 4Q08’s margin of -16.7%, but a decline of 5ppt on a YoY comparison. This was also better than our expectation of 9%.

Nonetheless, financing is still our key concern. Swiber’s net debt to equity ratio stood at 0.94x as at 31 Mar 09 due to debt repayments and sale-and-leaseback arrangements. Going forward, financing is still our key concern. We note that the repayment of Swiber’s non-current bonds would be due in 3Q10 (US$71.2m) and due in 1Q11 (US$72m).

Declining orderbook is another worry. Swiber has an orderbook of US$515m as at 31 Mar 09 as compared to US$596m as at 31 Dec 08.

Target price under review. Maintain SELL. Over the past month, Swiber’s share price (+76%) has outperformed the STI (+12%) and its peers (+53%). We are currently evaluating our estimates, pending a talk with the management. Our target price is currently under review. We continue to be cautious on this counter, especially on financing concerns and weakness in earnings quality. Maintain SELL.

Swiber - Placement 0f 84m shares at 88 cts

Size: Up to 84,000,000 new shares, (approx 19.9 % of existing share capital)
(Note 30m shares anchored and the balance will be on an accelerated book building process)


In view of the recent rally in the market, the Swiber Management has agreed to price the placement of the 10-day VWAP which works out to a 7.7 % discount to the 10-day VWAP off S$0.9531.This is a 16.2% discount to the last done price of S$1.05.

Swiber - Slower contract flows

Results largely in line with expectations. Swiber Holdings (Swiber) reported a 22.9% YoY rise in revenue to US$87.1m for 1Q09 but this was a 15.4% QoQ decline. Net profit fell 5.0% YoY to US$9.8m, affected by lower gross profit margins (20% in 1Q09 compared to 26% in 1Q08). This is largely in line with expectations. The lower gross profit margin was mainly due to the roll-over effect of delayed deliveries of the group's pipelay barge and dive-support work barge in the previous quarter. Operating profit (excl. one-off items) was S$11.6m compared to S$12.9m in 1Q08.

Decreasing order book. The group's order book is now US$515m as at 31 Mar 09 compared to US$596m as at 31 Dec 08. Slower order flow should hardly be surprising, given lower oil prices and the global economic downturn. We note that so far about US$70m worth of contracts were secured in 1Q09 compared to about US$470m (including the US$250m CUEL contract) in 1Q08. Management, however, is optimistic about obtaining contracts from Saudi Aramco's US$60b investments in oil and gas production over the next five years, especially after forming a joint venture with a leading Saudi Arabian company, Rawabi Holding Co Ltd, which could increase the chances of securing contracts.

Little room for error. The group's net debt-to-equity ratio has eased from 1x as at 31 Dec 08 to 0.94x as at 31 Mar 09. It is imperative that deliveries of vessels under the sales and leaseback agreement are on time so as not to impact its cashflow (out of 15 sale and leaseback deals totaling US$408m, eight have been delivered). Management does not anticipate any more delays in vessel deliveries from reports of project management teams stationed at yards. The group mentioned that the delivery schedule is still in line so far.

Maintain SELL. We are keeping our FY09 estimates but lowering FY10 estimates by 13% with lower contract flow assumptions. However, we are raising our fair value estimate to S$0.66 based on 6x FY09F core earnings (peers trading around 7x) with lower risk aversion in the market and a re-rating of the sector. At current price, the market appears to have run ahead of Swiber's fundamentals and it is prudent to note a few things 1) slowdown in orders, 2) relatively high leverage, and 3) little leeway for hiccups in project execution. We maintain our SELL rating on the stock.