Swiber Holdings: S$0.55, Downgrade to NEUTRAL (TP: S$0.62) - Margins decline paint a difficult operating environment

Growth in topline, but decline in bottomline. Swiber Holdings (Swiber) announced its 3Q08 results last Friday. 3Q08 revenue grew 186.5% YoY (4.5% QoQ) to US$130.1m buoyed by increased activities in the offshore construction projects in Malaysia, Brunei, Indonesia and India. However, as a result of higher administrative expenses & finance costs, Swiber’s 3Q08 PATMI declined 7.4% YoY (-18.1% QoQ) to US$16.0m. On a 9M08 basis, Swiber’s revenue turned in US$325.5m, representing 91% of our FY08 estimates, while core PATMI, excluding exceptional gains from disposal of assets, was approximately US$44m, accounting for 74% of our FY08 forecast.
Compression in profit margins faced. Gross profit margin declined by 13.8 ppt YoY (-6.1 ppt QoQ) to 21.6% as a result of the increased usage of third party vessels. Core operating profit margin, excluding gains from disposal of property, plant and equipment and assets held for sale, slid 17.5 ppt YoY (-9.5 ppt QoQ) to 11.9% primarily due to higher administrative expenses of US$10.1m (+85.9% YoY, 46.7% QoQ) as well as finance cost of US$2.9m from bond and bank loans (+215.7% YoY, -7.2% QoQ).
Financing concerns still valid. Swiber’s net debt to equity ratio increased from 0.53x as at 31 Dec 07 to 1.05x as at 30 Sept 08 mainly due to the increase in borrowings (comprising of bank borrowing and issuance of Multi-currency Term Notes bonds). The management assured that it has adequate funding for total committed outstanding capex of US$336m. The management also added that Swiber is exploring other strategies such as asset transfer to further lighten the balance sheet.

Decline in margins reflected difficult operating environment. We have left our FY08 estimates unchanged, but lowered our FY09 revenue by 21% on the back of slowing new contract orders. Consequently, our FY09 net profit is reduced by 29% with further considerations from expected higher administrative and finance expenses. We have also cut our valuation parameter from 8.7x to 3x in line with its peers owing to P/E compression. We have rolled over our valuation based of 3x FY09 recurring earnings. In view of Swiber’s high gearing, we opine Swiber may not pay dividends for the next two years in a bid to preserve cash. Our target price is reduced to S$0.62 (from S$2.17 previously). Downgrade to NEUTRAL.

source:DMG

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