• Dreadful set of results
• Order flows remain slow
• Downgrade to SELL

Very weak set of 3Q14 results

Swiber Holdings reported a 60.9% YoY fall in revenue to US$107.3m and a 97.8% fall in gross profit to US$847k in 3Q14, such that 9M14 gross profit accounted for only 38% of our full year estimate. The group saw a net loss of US$27.5m in the quarter, compared to a net profit of US$7.7m in 3Q13. This brings 9M14 net profit to US$30.7m, vs our original full year estimate of US$63m. Stripping out one-off items, the picture looks even worse – 9M14 core net loss was ~US$62m. Gross margin was only 0.8% in the quarter vs 14.2% in 3Q13 as the group executed fewer projects, but still had to incur its high fixed costs.

Has to win orders soon

YTD, the group has only won orders amounting to US$315m vs last year’s US$588m. Its current order book stands at about US$535m, which is about 50% of FY13’s total revenue. This compares to US$610m as of Aug 2014. Although earnings are expected to pick up in 4Q, which is when a significant portion of projects in the order book will commence, we think the market is more concerned about new order flow which would impact earnings beyond 4Q.

Vulnerable to downturns

With higher debt and a lower equity base, net gearing rose to 1.7x in 3Q14 vs 1x in 3Q13. Along with weaker oil prices and the slow order win momentum, we believe players like Swiber with high overheads and operating on thin margins are more susceptible to any turn in sentiment. We roll forward our valuation to FY15, and based on 0.3x P/NTA, our fair value estimate is lowered from S$0.49 to S$0.34. The stock is cheap, but for good reasons: 1) likely core net losses in FY14 and FY15, 2) slow order flows amidst a competitive industry, 3) accounts receivables that remain high, and 4) a steadily rising net gearing. Downgrade to SELL.

Source: OCBC Research - 13 Nov 2014