Areas of Concern at Swiber Holdings despite Huge Profit Growth

Swiber Holdings (SGX: AK3) is a support services provider for the booming offshore oil and gas industry. It has three main business segments: Offshore construction services; offshore marine services; and offshore enginneering services. It reported its first quarter earnings yesterday and saw massive earnings growth of 139%.

On first glance, things look rosy for the company given such figures. But, there are areas of concern for the company that investors have to take note of.

Operational highlights

Swiber recorded revenue of US$199.5 million for the quarter, which is down by 35.6% from a year ago. However, profits had managed to spike by 139% (as mentioned earlier) to US$48 million.

Areas of concern

Now, we’re on to the areas of concern. Firstly, during the quarter, Swiber had logged US$95.1 million worth of one-time gains coming from the sale of some of its subsidiaries. This was a big reason why Swiber had managed to post such huge bottom-line growth. Now, Swiber had also recorded one-time losses of US$20.9 million due to fair value changes on certain financial derivatives which wouldn’t have helped its bottom-line. But, if all these non-recurring items were stripped away, the company would still have suffered pre-tax losses of US$18 million. Yet, there was no real explanation for the pre-tax loss after accounting for the non-recurring events that stemmed from the slide in revenue.

The second area concerns the revenue drop. Swiber did provide a brief statement regarding the drop in revenue which reads: “The decrease was due to significant revenue from on-going projects was recognized in FY2013 and recently awarded projects have not been commenced.” From Swiber’s latest annual report, the company should be recognizing revenue from its projects using the percentage of completion method – in other words, Swiber should be booking revenue accordingly as each project progresses on. As such, it was confounding for me to see a huge drop in revenue if the progress of current projects is continuing smoothly.

Thirdly, the order book for Swiber had also dropped from US$800 million as of the end financial year 2013 to US$650 million as of May 2014.

Lastly, the company’s net debt to equity ratio had increased from 0.91 to 1.34 sequentially, meaning to say the company is now taking on significantly higher leverage. Cash flow from operations for the quarter had also decreased dramatically from a negative US$30.2 million a year ago to a negative US$162 million.

Going forward

The company expects oil prices to remain attractive levels for oil exploration activities. Management is also expecting to see more order book growth in the next few quarters, especially from new markets such as West Africa which the company’s targeting. To reward shareholders after the big jump in profits, Swiber had declared a special dividend of S$0.03 per share for the quarter.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.