Swiber Holdings: Net profit bumped up by one-off items (OCBC)

Core net loss in 3Q11. Swiber Holdings (Swiber) reported a 12.5% YoY rise in revenue to US$137.7m and a 14% fall in gross profit to US$22.8m in 3Q11, such that 9M11 revenue and gross profit figures formed 76% and 73% of our full year estimates, respectively. Net profit increased by 94.1% to US$13.5m in the quarter, but we note that this was bumped up by exceptional items such as fair value gains on financial liabilities, foreign exchange gains and disposal gains. Stripping away one-off items, we estimate the group experienced a US$1.8m core net loss in the quarter, worse than our expectations; 9M11 core net profit met only 60% of our full year estimate.

Still guiding for 15-20% gross margin range. Gross margin of 16.6% in 3Q11 was lower than 21.7% in 3Q10, but better than the 14.7% reported in 2Q11. Moving forward, management mentioned that margins may remain under pressure over the next 12-18 months, but the group will implement plans that seek to control costs to maintain a 15-20% gross margin range. As the number of employees in the group (inclusive of onshore and offshore personnel) rose from 1,290 as at 30 Sep 2010 to 1,676 as at 30 Sep 2011, administrative expenses continued to climb as well, increasing by 25.8% YoY and 12.8% QoQ to US$13.0m in 3Q11.

Order book of US$1b and still bidding. Swiber has secured new contracts worth about US$758m YTD for work in South Asia, SE Asia and the Middle East, and bidding activity in the industry remains active. Management is optimistic about the industry outlook, given the amount of jobs that are coming up for tender in SE Asia and South Asia in the next few years. As the group mainly works with large oil majors and national oil companies, there have not been significant changes with regards to payment terms. Looking ahead, the group has an order book of about US$1b (as of Nov 2011), which is expected to contribute to its results over the next two years.

Maintain HOLD. The group has put its proposed perpetual preference shares issue (refer to 24 Oct 2011 announcement) on hold, which is not surprising given current uncertainties in the market. We keep our peg of 10x for the stock but roll forward our valuation to FY12F core earnings, and this bumps our fair value up from S$0.51 to S$0.58. However, given limited upside potential, we maintain our HOLD rating on the stock.