Posted by: donmihaihai | August 27, 2009

Ma Hou Pao 3

The timing is never better. Swiber announced that it is looking for 5 yrs convertible bonds that issue up to a total amount of US$100 million after I wrote “Do a Swiber”. Hmmm need to check where I bought my crystal ball. I can be in the business of selling crystal ball.

Let’s do a Ma Hou Pao.

Is Swiber fund raising exercises, 2 in total, back to back, raised US$49.8 million and US$100 million(if upsize) foreseeable? Yes!!! Timing and methods are unknown but there is no question on the need of capital. But the answer does not come from the management. The management painted a bright picture in 2008 AR by proudly said, “Despite the present banking crisis, Swiber’s capital expenditure for our new vessels is fully funded from sources that include sale and leaseback arrangements, secured bank loans and vessel disposals.” Did the management lie? I believe they believe in their belief.

2008 AR showed that Swiber is in massive capital expenditure mode with 17 vessels and barges to be delivered in FY2009 and 3 in FY2010. Total Capex unknown but 8 of these will be in sale and leaseback arrangements. But under commitments in Notes to financial statements, it stated that the committed Capex for FY2009 is US$309 million(it can be more). A quick check show that Swiber total equity stood at US$207 million and total assets at US$706 million. Since it is already highly leveraged with on-B/S items, don’t even need to look further for off-B/S stuffs. 

Here is the math. If Swiber is to generate all US$300 million through earnings, Swiber ROE in FY2009 will be 150% using starting equity. If US$150 million through Sale and leaseback, ROE will be at 72%, and ROE at 50% if Sale and leaseback at US$200 million. This is relatively easy, just flipping the number around, one can easily come up with any portion of equity and debt. Now the harder part, can Swiber generate return on equity of 50% in FY2009? One can look back to Swiber history and companies in the same industry. But the best option is to have a good understanding of this industry and what kind of ROE they are likely to earn in short period and on average moving forward. But whatever the number likes, it will be way lower than 50%. So logically, the answer is No Swiber can’t support it without new capital from outside.

At half time, 1H2009 results, Swiber total Capex for PPE spent was US$146 million with US$38 million on vessels for Sale and leaseback, about US$108 million on PPE. The next question is can generate another US$150 million in 2H2009 for Capex? And at this point of time, Swiber already raised US$49.8 million of capital.

The answer is simple. And this does not even take cashflow into consideration. Almost all players that I look into say situation is changing with collection being slowing, pressure in payment. This can be easily seemed by the shift in B/S.

So what next? If Swiber can get through FY2010, and with no new massive Capex, the pressure on this part will be lifted. But Swiber will face another new pressure, which is massive commitment to pay yearly thru their off-B/S items of which they got into in these few years — sale and leaseback contracts. These contracts doesn’t care how well Swiber is doing, Swiber has to keep pay and pay and pay. Chances are Swiber may unable to fulfill their financial covenants.

And the convertible bond, I think the Swiber is getting a good deal on this, better than Tat Hong. At anytime, I will sell Jaya at that valuation.

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Responses

  1. Hi Donmihaihai,

    You were right on your analysis, as well as your take on the CB. In fact, you were right about everything, and I should have listened. Lesson learnt.

    Anyhow, I have divested all my Swiber shares, and will treat this as a good learning experience. Hopefully I avoid making such mistakes in future, as I learn to become a better investor.

    Thanks once again and please continue to blog.

    Cheers,
    Musicwhiz

  2. I can’t be right on everything. So please leave me out of that.

  3. Sorry. I meant “right about everything relating to Swiber”.

    Cheers.

  4. It is the same. That won’t happened.

  5. Hi Donmihaihai,
    Thank you for the clear thoughts!

    I notice you last comment was “At anytime, I will sell Jaya at that valuation:..is it a typo?

  6. hope to see more 马后炮 articles in the future.
    i like this blog for being straightforward, rational.

  7. mitchell,

    No. While I did not do an exact valuation exercise as I wrote that, a rough estimatation told me to sell.

    If at the current price of EZRA, I will be laughing all the way to the bank.

  8. You are a much better analyst than musicwhiz, although he writes a more beautiful essay that fools people into believing he really knows what he is doing when he doesn’t know that he doesn’t know what he is doing.

    You are good man! May I have the honour of asking what you do in real life to be able to examine financials statements with such critical analysis.

    I have always thought musicwhiz read financial statements while you intepret them.

  9. nicknick,

    There are too many out there, and way better than me. The problem is you don’t know them.

    I do not care if musicwhiz, intepret, read or flip financial statements as it doesn’t concern me.

    Most importantly, this is not a place for you to take out your guns, blasting at other. If you continue, I will blast you.

  10. very nice ma hou pao.
    enjoyed reading your articles. keep blogging!

    i also did some paoing of swiber here: http://www.investideas.net/forum/viewtopic.php?f=31&t=296&start=310

    cheers
    aspellian

  11. well written. thanks for sharing your thoughts.

    i also did some paoing of swiber here:

    http://www.investideas.net/forum/viewtopic.php?f=31&t=296&start=310


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