Review: Swiber

Swiber recorded a profit after tax of US$3,922,000. Thats a 55.4% growth on the back of a 288.4% increase in revenue. This translated to a 22.9% profit margin in FY 06, versus a profit margin of 42.0% in FY 05. The board has stated that this reduction in profit margin was "mainly due to chartering of third party derrick crane barges and vessels for the installation jobs in Malaysia".

It is my opinion that this increase in cost (and decrease in margin) is due to Swiber's contract that included their non-core business of EPCIC services. That explains their need to "chartering" 3rd parties for installation jobs.

Hence, I believe this reduction in profit margin is not a sign of weakness.

Full year 06 revenue ammounted to US$66.772 M, 262.9% increase, with a 96.5% increase in profit after tax to $12.140M. With just the Shell contract they recently won expecting to contribute $70.5M to FY07's results, together with contracts with BG exploration worth $33.75 M, we are already looking at a healthy revenue growth of 56.13% in FY07.

"A revenue growth of 56.13% growth expected in FY07, remember, we are only 2 months into 2007."

Challenges for Swiber this year. They have to keep their profit margin up, with new ventures into Brunei for Shell expected to increase their infrastructure support cost. It is now up to Swiber to convert that $140M contract into a healthy profit, with good margin.

Barring unforseen circumstances, I expect Swiber to win several other contracts, as their contract with Shell has really put Swiber up a few levels in its industry. Other large oil companies may now have more confidence in Swiber, and award them with more contracts this year.

Maintain BUY, with target of $1.95

Buy: Swiber

I apologise for the lack of updates for the last few days. CNY and work has been taking a toll on me for my trading job.

I had taken notice on Swiber immediately after Swiber announced their US$146.6 M contract.

Swiber_clinches_record_USD146.6_million_from_Shell_in_Brunei_13Feb2007_.pdf

Told my friend to add it into his watch list (it was already on mine), saw the price increase 20% in Friday, and than up further on Wednesday. Thinking a small correction was coming on Thursday, I saw the price at $1.21 in the morning, and half hour later it was $1.3++. Immediately put my trade for it.

I did my analysis on Wednesday night, that assured me about entering at the stocks price high. I apologise again for informing you all about my trade, but my blog is meant to "teach" my stock pick technique, not for you to mimic my trades.

If you look at the financial statement for the 9m 2006, they only have a 43,196 M revenue. Consistant with the boards expectations, they expect $70M from the Shell contract in FY2007.

Mind you, the company was trading at the range of $0.9 to $1.0, thats the price the market was willing to pay for its current financial performance. However, with this new contract, expected to increase the company's revenue by another 100%, if the company is able to keep its cost down, we could see the company share price double.

"In the medium to long term, share price growth almost always mimic the company's profits growth"


Already, Swiber has already been climbing at a good pace up to that "double" point.

Whats the risk? Swiber needs to keep its cost under control. There is no use of having that $70M contributed on FY2007, but seeing cost increase $70M. However, the company has been showing their ability to keep their financial records strong.

Looking forward to FY 2007, at $1.35 close on 23 Feb 2007, that stock price is still cheap. Although WestComb has set a target of $2.03, I'm not that optimistic. Unless Swiber shows it has the ability to win more of this kind of contracts, the P/E Ratio is definitely going to drop as the share price climbs. Thats why i'm not that optimistic on a $2.00 target, unless more contracts comes its way (which i think its possible)

BUY Swiber, target of $1.90.
Vested on 22 Feb 2007 at $1.30

Updates

China Hong Xing will be announcing their FY06 on the 26th Feb 2007.

Sino-Env will be announcing their results on the 28th Feb 2007.

Stay updated. I'm expecting results that meet, or exceed expectations.

Quick Lesson: Specialisation VS Diversification

Specialisation VS Diversification. Thats the question most investors, traders, whether new or experience, ask.

Anonymous said...
"hi musicwhiz
if u look at BusinessedTimes diversification of over 10 stocks, one of the portfolio has a 300% gain over 5 yrs..."

I'll like to show everybody the insignificant of that return. "300% over 5 years". If you do your calculations, this is what you'll notice for $1 that you invest in that 10 stocks 5 years ago.

• End of Year 1 - $1.25
• End of Year 2 - $1.56
• End of Year 3 - $1.95
• End of Year 4 - $2.44
• End of Year 5 - $3.05

Impressive. Thats slightly over 300% over that 5 years. OR is it? I used 25%PA for that calculation.

"25% PA"

Thats the kind of returns you get in equity unit trusts with good historical returns (ie. Aberdeen Pacific Equity). When you invest in stocks, you'll want to be looking at better returns wouldn't you? Otherwise why would you be in the stock market? Why don't you just buy unit trusts?

"Whats the use of buying shares and achieving returns attained consistently in Unit Trust? Excitement in shares? Shares are not meant to be exciting. Its for investing."

On the other hand, I'll like to bring to your attention to the powers of compounded returns. It can really make your portfolio look really good. Imagine getting 50%PA on your portfolio in shares. It will look something like this.

• End of Year 1 - $1.50
• End of Year 2 - $2.25
• End of Year 3 - $3.375
• End of Year 4 - $5.06
• End of Year 5 - $7.59

When investors diversify, they are trying to spread their eggs into several baskets. A well diversified portfolio would usually mean 15-20 stocks, but it really depends on the amount of money you have. What diversified investors get is a pretty safe annual return that generally mimic the country's stock index. And thats a very mediocre return.

What unit trusts do is just that. They diversify their funds over large number of companies in their target market. The result is the same. Almost consistant annual return that mimic the country's stock index.

"So why don't you just buy Unit Trusts if you want to diversify?"

For specialisation, investors don't like to spread their eggs. Usually, this kind of investors hold a portfolio of 1-10 stocks. This kind of investors will usually get large returns that can range from 2-5 times the general market movement, but tend to be exposed to a lot of volatility and risks. However, this exposed risk can be managed by several precautions like "cut loss of -7 to 8%", which i preach.

Specialised investors generally know more about their companies they hold. They have more time to do research for their companies, and generally are better informed compared to diversified investors who are probably overwhelmed with information, especially during financial statement season.

Here's my take. If you were to diversify your own assets into many shares, its in my opinion that you should just buy into Unit Trusts. The returns for your diversified shares, compared to returns in Unit Trusts will not vary much.

"Buy into Unit Trusts, if you are looking for safe and well diversified investments."

Do note that when you buy unit trusts, its not necessary for you to buy 10 different unit trusts. Unit trusts are already very very well diversified. I recommend for you to own only 3-4 unit trust, with each targeted to different market.

If you are looking into larger returns in excess of 30% PA or even 50% PA, the route you should take is to specialise. Buy a few stocks, and keep track of those companies like a hawk. Every financial release, every contracts won, every movement in its management (Notice i didn't say keep track of the stock charts).

My recommendation for all is not to over diversify in shares, but to specialise in some. This way, you'll be looking at returns similar to the 2nd example above.

Happy Chinese New Year to All!

Hello to all my readers,

Sorry for the lack of updates over Chinese New Year. I was too busy visiting relatives and friends, eating and laughing. But I guess so did you, readers. I saw a large drop in "readership" over CNY. =)

I'll like to wish all a Happy Chinese New Year! And may the bull run continue into the New Chinese Year!

PeHon

Quick Lesson: Cut loss, is that trading or investing, FA or TA?

I've created a controversy with some of my readers by practicing a "cut-loss" at the 7-8% point on my China Farm holding. So is that trading or investing? If the fundamentals of a company is that good, why be shocked at the 7-8% loss in shareprice?

Well, to recap. My China Farm shares were bought at $0.995, and sold at $0.915, for a 8% loss. If i was still holding on to my China Farm shares, I would be looking at a -25% paper loss, which would require a 33% rise to break even.

Emotions have to be taken out of investing. Yes, the ideal state will be to buy a fundamentally sound company and hold on to it through thick and thin. However, I wouldn't think its practical for relatively small investors like me and you (well unless you have a $5,000,000 portfolio, i'm talking about you).

When i was talking about "traders" and "investors", I'm basically talking about "traders" who practice Technical Analysis, who sits infront of a chart to find the pivot point and potential breakout point. "Investors" are fundamental analysts who look at the financial statements and research information to dictate their choise of investments.

Having a cut loss point of 7-8% does not make you a "trader". It can be a capital protection technique for "investors". Like me.

Review: China Farm

Following the fall of 7% from my purchase price of $0.995, I've cut loss at my 7-8% rule that I've always encouraged. Sold my holdings of China Farm at $0.915.

So whats wrong with China Farm? China Farm is still fundamentally strong. The cut loss rule is there to save my (and your) ass.

"Said it before, compounded returns magnifies your losses as well. a 30% loss would require a 42.8% gain before you break even. And 7% gives the share enough room for short term weakness."

Cut loss is even more important for a person like me that uses margin trading.

China Farm is fundamentally strong, but with the impending bear (or already in a bear) market, maybe the time isn't right. Will be monitoring China Farm and the market, and high posibility of reinvesting into China Farm in the near future.

Sold China Farm at $0.915, 13 Feb 2007 1140h