Swissco

Swissco: CIMB has an unrated report, where the house notes that Swissco’s market cap could double by Sep ‘14, after the injection of Kim Seng Holdings’ Scott & English business, worth $285m, into its fleet-chartering business. Earnings are expected to double, with upside only limited by the Scott & English owns and operates four service rigs via a 50:50 JV with Ezion (EZI SP, Add, TP S$2.59). Three are in the Gulf of Mexico (for Pemex) and one in the Middle East (for Saudi Aramco). These operations are backed by long-term bareboat charters of 4-7 years from 2013, with a total annual profit of $20m and strong FCFE of $14m-16m. Swissco’s existing OSV business made a net profit of S$23m in FY13, triple its $8m in FY11, thanks to its chartering fleet expansion/renewal and maritime services (build-to-stock vessel sales). Swissco will take delivery of six more chartering vessels by end-2014 and four in 2015, bringing total fleet from 34 currently to 44. Assuming a conservative growth rate of 10% p.a. for its OSV business, the enlarged entity (after completion of Scott & English’s injection) should achieve a minimum net profit of $46m in FY15. If Swissco adopts Ezion’s growth strategy, its earnings could further grow by 28% (S$13m p.a.), with every service rig worth US$80m added to its fleet (on a 100% stake). Completion of the deal is expected by Sep 14, which should lift Kim Seng Holdings’ stake in Swissco to 73% from 17%. CIMB believe that a share placement could be its fastest way of expanding its service rig business as Swissco’s net gearing is expected to rise to 0.9x (from 0.6x in FY13) by end-FY14 to support its OSV new-build programme. Incorporating Scott & English, Swissco is trading at 7.6x CY14 P/E, cheaper than the 10.4x average for its Singapore OSV peers. It is also trading below its 3-year average of 9x. Completion of the deal or contract wins should catalyse the stock.