MENU

What Investors Have To Know About Swiber Holdings Limited’s Business

Swiber Holdings Limited (SGX: AK3) had just announced on Monday that it would soon be issuing CNY450 million (around S$95 million) worth of bonds which would come due in 2017.

The bonds, which carry an annual interest rate of 7.75%, is expected to be issued on 18 September 2014 and is part of Swiber’s S$1.0 billion Multicurrency Debt Issuance Programme.

When companies raise capital, it might be worthwhile for investors to start taking a closer look at its business. So, here’s what’s happening with Swiber at the moment.

A profitable company, but…

A quick glance at Swiber’s latest quarterly earnings report seems to indicate that the company has no problem generating a profit. After all, its net profit for the first half of 2014 had actually jumped by 140% from a year ago.

Unfortunately, that profit growth did not translate into cash flow for the company. In fact, Swiber had generated negative operating cash flow of US$78.6 million in just the second quarter of 2014 alone.

The capital raised from the bond issuance would give the company a much needed injection of cash to sustain its operations. From the bond announcement, the CNY450 million raised will be used for the company’s general working capital and capital expenditure requirements.

…leverage is a worry

Though the infusion of cash from the bonds gives the company some financial breathing room, it should be noted that it is already heavily burdened by borrowings even prior to Monday’s announcement. Here’re some figures for a little perspective: As of 30 June 2014, Swiber’s total borrowings amount to US$1.135 billion and it has a net debt (total debt minus total cash) to equity ratio of 1.45.

It must also be noted though, that the company had S$120 million in bonds due on 25 July 2014. So, the soon-to-be issued notes might not have caused Swiber’s balance sheet to deteriorate.

Couple that with a lack of cash flow…

There are really only two ways for any company to reduce its debt load in the long run: 1) the company raises equity from existing or new investors to pay off the debt; 2) the company generates sufficient operating cash flow from its business to eat away at the borrowings.

With Swiber, generating positive operating cash flow seems to be an issue – it has not had positive operating cash flow in 2012 and 2013. Over the first half of 2014, the company’s operating cash flow was a negative US$241 million as well.

If the lack of cash flow continues, Swiber might be facing some headwinds going forward in terms of its finances.

Foolish Summary

Since the company has already started experiencing a big jump in profit, we can hope that its profit growth would translate into positive cash flow in the near future. But either way, investors would still have to keep an eye out on Swiber’s heavily leveraged balance sheet.

Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool's free investing newsletter. Written by David KuoTake Stock Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.

The Motley Fool's purpose is to help the world invest, better. Like us on Facebook  to keep up-to-date with our latest news and articles.

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 does not own any companies mentioned.