Saturday, 19 July 2014

Swissco - Share Price Surge 20%

Swissco share price surge 20% over the last two trading days to a high of S$0.50. In the past one year, the company share price has increased from a low of 0.22 to 0.50. That is a whopping 130% increase!


While reasons of price spike are not explicitly known, it may be related to the coming EGM on 22 July held mainly to approve on (1) Consolidation of shares 2 to 1. (2) Acquisitions of entire share capital of Scott and English Energy (S&E).

Scott & English (S&E)

S&E is owned by Kim Seng Holdings (KSH) controlled by Tan Kim Seng, the founder of KS Energy. KSH is also the major shareholder of Swissco at 18.1% currently.

S&E owns and operates a fleet of four service rigs via a 50/50 JV with Ezion. Three of the Rigs were for Pemex in the Gulf of Mexico and one is for Saudi Aramco in Middle East. The estimated aggregate charter contract value of these Rigs is approx. US$495.7m. These contracts are backed by long-term bareboat charters of four to seven years from 2013, with a total annual net profit of S$20-23m. From a report by CIMB in Apr this year, it shows that the fleet of four service rigs could generate strong FCFE of S$14-16m and can be potentially used to fund future fleet expansion. Refer to my post 

The competitors of S&E are Ezion, KS Energy, Mermaid Maritime Public Co Ltd etc. Of course Ezion is a partner of Swissco, and similarly future partnerships can be established among competitors for win-win business strategies.


Acquisition of S&E and Share Consolidation

The proposed acquisition of S&E from KSH is for S$285mil a 1.4% discount to its valued price. The net profit of S&E is 19.4mil for FY2013 with a NTA of S$54.4mil. This translate to a PER of 14.7 times and a P/NTA of 5.2 times.

The proposed acquisition is to be satisīŦed by the issuance of 452.4mil of Swissco shares at S$0.630 per piece. After the acquisition, the group profits will increase from S$23.1 to S$39.4mil with a weighted average number of shares increases from 218 to 670mil. KSH and its associates will then have a combined stake of 63.9% share capital.   

The basis of the acquisition is simple. It represents an opportunity for the Group to penetrate the Rig business and diversify group’s earnings from its existing OSV business. The rationale for share consolidation is to have a higher trading price. This will then increase the profile of the company amongst institutional investors for capital raising purposes and also provide a more diverse shareholder base.

Without doubt, there is inherent risk from the acquisition. Rig business is much more complicated than tugs, barges and OSVs, with higher associated risks and costs. Moreover, Swissco has no prior experience in S&E business and there can be no guarantee that the Rigs owned are able to secure future contracts. The business is very much dependent on the global demand and supply dynamics of rigs.

Dilution of Shares

While the proposed acquisition seems all positive, it will result in immediate dilution of share capital. Refer to table below. We can see that after the acquisition, the share price is diluted from S$1.00 to S$0.75. 


Going forward, the enlarged group may also require more funding in order to grow and expand its operations. This may result in further fund raising through shares issuance, resulting in more dilution of shares.

Termination of Acquisition of Property

Swissco also announced acquisition of a property at 21 Tuas Road was cancelled with no reasons provided. The company is taking all necessary actions to recover the money paid under the option of purchase. The waterfront property is supposed to cost Swissco S$16.2mil in order for the group to use it to docking, service and repair in view of its growing fleets over the past years.

Maybe Swissco has decided that the money should be better-spend in acquiring more service rigs rather than more land?

Summary

Is Swissco able to follow the footsteps of Ezion to tap on the robust E&P sector successfully? Or is it already too late now with the Rig segment already saturating? That is something left to be uncovered! If the Rig business continues to bullish, what lies ahead for Swissco may be startling bright. Afterall Swissco is steered by the same man "Tan Kim Seng" who also orchestrated the success of Ezion in the last few years. 


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