Swiber Holdings Ltd - Kreuz secures US$25m contract with option (OCBC)

Maintain HOLD

Previous Rating: HOLD

Current Price: S$0.465

Fair Value: S$0.51

Kreuz secures US$25m contract with option. Swiber Holdings (Swiber) announced that its 63.17%-owned unit, Kreuz Holdings, has secured a US$25m contract with a US$10m option from a leading offshore construction company in the Middle East. Swiber will be utilizing its in-house fleet of vessels to perform the full spectrum of projects comprising subsea installation works, which will commence in 3QFY11. Work is scheduled to be completed in 2QFY12.

From a third party, not Swiber. This latest win from a third party (instead of Swiber) is encouraging for Kreuz, as well as its parent company Swiber. Before this contract win, Kreuz had won contracts worth US$16.8m from third parties and US$52m from Swiber this year. For now, more than 40% of its contracts won to date are from external parties, which is encouraging for both itself and its parent company. As for Swiber, its outstanding order book now stands at US$777m compared to US$752m as at 15 Aug 2011, and we estimate that about US$36m of the total figure relates to subsea installation work by Kreuz and US$49m relates to inspection, repair and maintenance (IRM) work by Kreuz.

Projects out for grabs in different regions. Swiber has clinched new orders worth US$432m YTD, with US$137m of it secured this month. However, the group is still actively bidding for projects in various parts of the world, especially in SE Asia, India and the Middle East. In SE Asia, the group is looking at potential projects worth about US$3.6b, but this is for work up to 2016. We would also monitor the margins at which the projects can be secured at, considering the competitive nature of the industry.

Trading below book. With an enlarged vessel fleet and growing capabilities, Swiber has been announcing contract wins this year. However, it has disappointed the market with its core earnings and along with weaker market sentiment, its share price has fallen such that the stock is now trading at about 0.6x P/B, close to its 2009 low of 0.3x book. Although its order book has increased from US$515m in 1Q09 to US$777m currently, net debt-to-shareholder equity has also risen from 0.95 in 1Q09 to 1.17 in 2Q11. Companies with relatively high leverage are generally more vulnerable in an environment with increasing macroeconomic risks and market volatility, and we lower our peg from 11x to 10x blended FY11/12F core earnings, reducing our fair value estimate to S$0.51 (prev. S$0.56). Maintain HOLD.