Swiber Holdings Ltd - Lowering core net profit estimates (OCBC)

Maintain HOLD

Previous Rating: HOLD

Current Price: S$0.505

Fair Value: S$0.56

2Q11 core net profit lower than expected. Swiber Holdings (Swiber) reported a 69% YoY increase in revenue to US$180.6m but saw a 46.2% drop in net profit to US$7.4m in 2Q11, such that 1H11 revenue and net profit accounted for 54% and 43% of our full year estimates, respectively. Stripping away one-off items such as gain on asset disposals and fair value gains on financial liabilities, core net profit of US$5.3m in 1H11 was also lower than expected, mainly due to lower gross margin of 14.7% in the last quarter, compared to 16.2% in 1Q11 and 22.1% in 2Q10.

US$112m contract wins after last one in May. After its last order win in May this year, the group announced three contract wins from undisclosed oil majors in SE Asia worth a total of US$82m for pipeline installation work in the region, including mobilization of vessels, equipment and personnel. The projects will start immediately with completion scheduled for 2Q12. Yesterday, Swiber announced another US$30m contract which it secured from an oil major in South Asia - the group will perform platform installation work starting in 4Q11 with completion targeted for 1Q12.

Bidding for projects around the world. Swiber is 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. However, this is for work up to 2016, and we would monitor the margins at which the projects can be secured at, considering the competitive nature of the industry.

Trimming core earnings for FY11 and FY12. As of Aug 2011, Swiber has an order book of about US$752m which is expected to contribute to the group's results over the next two years. The group is guiding for a gross profit margin of 15-20% going forward, which is a rather wide range, as a 1% change in gross margin could affect core net profit by about 30%, given the significant one-off items that support bottomline. Meanwhile, net gearing has been increasing steadily from 0.91 in Jun 2010 to 1.06 in Jun 2011. We lower our gross margin assumptions and decrease our core net earnings estimates for FY11 and FY12 with lower expectations from Swiber's associates and JVs. Along with the persistent weakness of the USD, our fair value estimate falls to S$0.56 (prev. S$0.88). Maintain HOLD.