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Sunday, April 16, 2006

Swissco @ 43.5 cts ( Marine / Singapore ) 2 comments



Final Poll Results: 1:5

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Main issues

1.One-time items boosting profits

2.Real operational profits marginal

3.Placement and subsequent insider selling


If someone can explain to me why a micro-cap that has been making operating losses for the last two years (ex-extraordinary items) has been on an upward price trend for the past few months I will be very grateful.

I have decided to take a break from China stocks and look at some others this week (since I have already called a not-to-buy on all China stocks earlier, I figure that should be rather comprehensive :-). Inadvertently, it has led me to a stock in another hot sector: marine and offshore support.

Supporters of this stock will point to several factors in its favour: (1)ultra-cheap valuation at 5X FY05 PE; (2)red-hot marine and offshore sector; (3)recent placement as circumstantial evidence of its strength (ie. the argument that if the company wasn't good, would institutions want to buy in?). I shall try to debunk each in turn.

Firstly, the profits for the past two years post-IPO have been mainly generated from vessel disposals, which are non-recurring income. Let's see how much more capital gains they can squeeze out of existing vessels in today's booming offshore vessel market where other companies like Ezra are also using trading gains to inflate their earnings statements. In Dec 04's balance sheet, Swissco's property, plant & equipment (which I shall assume as mainly vessels) was S$15M. From the investing segment of FY05's Cash Flow statement, equipment disposals was S$22M . Since disposal gains was S$9M (from P&L), this means book value of these assets was S$13M ie. there's only S$2M worth of old assets to capitalise on further from now on. (One may also note that Dec 05 Balance Sheet equipment & fixed assets of S$30M was due to new vessels acquired during the year of S$26M). This asset analysis is for the benefit of those who might argue that these asset disposals could be a form of semi-recurring income.

Without these asset disposals, Swissco's operating performance would have been in the red, or at best marginal, for the past two years post-IPO. This can easily be seen from Cash Generated from Operations (in Cash Flow statement) or by taking off the asset gains from the net profit in the P&L statement.

What about its prospects since it is in the red-hot marine and offshore sector? The strength of the sector is undeniable, but my point is why invest in a company that has not shown to be able to take advantage of a high operating leverage situation? It has virtually revamped its entire fleet over the last two years (in FY05 alone, it received 14 new vessels out of a total 19 in its current fleet) but operating profits are marginal (see earlier paragraph); compare that to other offshore companies like CH Offshore and Jaya which are taking in 40% pre-tax profit margins. In particular, the administrative expenses have nearly doubled as salaries and bonuses have increased; that is a rather odd situation to me and suggests lack of shareholder orientation.

Last but not least, the recent placement. Without placing too much emphasis on the fact that the placement was at $0.355, I draw attention to the behaviour of company management and substantial shareholders in the period after the placement, with a director selling out several hundred lots and more disturbingly, a substantial shareholder Winstedt Chong selling out from 10% to below 5% (post-placement dilution). The latter, of course, is an industry insider, being former executive officer of Links Island, so one should pay attention to his actions (although his timing was rather bad in his HG Metal purchases last year, admittedly). I also feel that investors/fund managers sometimes take up placement shares not necessarily for the purpose of holding long-term, but rather they believe they have a reasonable to good chance of cashing out easily in a buoyant market and with a market being made for the shares (that's where the underwriter plays a part). For share placements made during a bull market, one really has to exercise a bit of contextual judgment.

Given these concerns, I wouldn't want to buy this particular marine stock.

 

 

2 Comments:

Anonymous cheras said...

LOL!
Danielxx, quite a few sacred cows (and SSH) got slaughtered in this article!
:)

Very insightful. As usual, good job!

4/17/2006 3:54 PM  
Blogger DanielXX said...

Thankless task it is sometimes, especially in this bull market. People don't like someone to talk down their stocks. It is comments like your that keep me going. Cheers!

4/18/2006 9:42 AM  

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