Swissco Holdings - CIMB Research 2016-03-29: Scrapped value

Swissco Holdings - CIMB Research 2016-03-29: Scrapped value SWISSCO HOLDINGS LIMITED ADP.SI 

Swissco Holdings - Scrapped value 

  • Swissco’s current share price implies that six of the nine rigs that it operates will be scrapped, with further impairment of c.US$170m. We believe this is too bearish. 
  • FY16 is a watershed year for Swissco and all eyes are on FY17, when its maiden liftboat contribution should start to fill the gap left by drilling. 
  • Cash flow is tight and we forecast that net gearing will inch up to 0.75x in FY16, with more revolving facilities to be drawn down. 
  • We cut EPS by 42-63% for FY16-17 and introduce FY18, incorporating lower utilisation and rates for OSV division, and deferral of liftboat revenue to FY17. 
  • Maintain Add with lower target price, based on 0.5x FY16 P/BV (previously 1x), in line with average ROE in FY16/17. Our target price implies impairment in FY16-17. 

Current share price implies that six drilling rigs will be scrapped 

  • The current valuation of 0.35x FY16 P/BV implies that four of its Ensco-inherited rigs and two of the bare-boat charter rigs to GSP (in partnership with Ezion) will be scrapped. We believe that this is over bearish. 
  • Technically, one of the Ensco rigs is bound by contract until Oct 16 and the bareboat charter to GSP is valid until 2019, albeit with slower payment. Management is still marketing the Ensco rigs and hopes to find work in the Middle East. We have assumed no contract extension for these rigs in FY16-18. 

Accommodation rigs offer steady return, liftboat hope in FY17 

  • Swissco has two other rigs for accommodation purposes (North Asia and Middle East) that are under four-year contracts (Apr 15 to Mar 19). These contracts generate steady cash flow of c.US$20m p.a. 
  • Construction of its maiden liftboat by Triyards is on track. However, we have conservatively assumed deferral of delivery from Jul 16 to 2017 due to stiff newbuild competition in the market. The delivery of the unit is likely to be tied with a firm charter. 
  • We forecast EBITDA of US$14m p.a. from the liftboat in FY17-18. 

OSV faces common challenge of higher utilisation but lower rates 

  • Offshore support vessels (OSV) chartering incurred a net loss of loss of US$6m in FY15, which included US$2m of impairment. Blended utilisation has picked up from 35% in 4Q15 to c.40% YTD at the expense of lower rates. 
  • We have factored in a further 10% yoy cut in rates in FY16 and assumed a slight recovery in FY17. 

Net gearing to go up to 0.8x 

  • Cash flow is tight in the short term. We estimate negative operating cash flow of c.US$4m in FY16 mainly due to lower revenue from drilling and OSV. 
  • The slower repayment from JV could put further pressure on cash flow. Net gearing is likely to inch up to 0.8x in FY16 as more short-term facilities are drawn down for working capital. 
  • The next major bullet repayment for its S$100m fixed-rate notes will be in FY18. 

Maintain Add but lower target price to S$0.26 

  • Our revised target price is now based on 0.5x FY16 P/BV, based on the estimated average ROE of c.5% in FY16-17. 
  • Our target price implies that there will be further provisions for impairment in FY16. 
  • Catalysts include resumption of off-hire rig contracts, on-time delivery of liftboat in FY16 and oil price recovery.



LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2016-03-29
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.29 Down 0.52


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