YANGZIJIANG and SWISSCO: What analysts now say

CIMB confident of Swissco's "ability to secure new rig contracts at an accelerated pace"

Analysts: Lim Siew Khee & Yeo Zhi Bin (picture, left)

 ADD - Maintained | S$1.00 /TP S$1.44 

Swissco has announced plans to raise a total of US$42.847m through the issuance of 43.95m redeemable exchangeable preference shares to several private equities and individuals. The proceeds will be used to fund two new rigs, and an announcement of the contracts should follow. The formation of four new subsidiaries, by the names of Supreme Excellence 1-4, is also a big giveaway that two other rigs could be added soon. This further affirms our confidence in management’s ability to secure new rig contracts at an accelerated pace. Pending the announcement of contracts for the rigs, we keep our EPS and target price, still based on 9x CY16 P/E (29% premium over the simple average P/E of Singapore OSV owners). Our target price could be diluted by 4.7%. Maintain Add, with contract wins as potential catalysts.

What Happened  Swissco has announced the issuance of 43.95m (comprising two sets of 21.975m) redeemable exchangeable preference shares (REPS) to raise about US$42.847m. The REPS are raised via two of its investment entities – S&E Offshore Investments and S&E Offshore Investments 2. The investors are similar to those from Ezion’s REPS exercise in Jul 13, including UVM2 Venture Investments, Evia Growth Opportunities, Venstar Investments, 3VS1 Asia Growth Fund, Griffin Prive Fund, WPC Corporation, Goh Lam Wee and Chong Chin Cheong. The investors are able to convert 50% of the REPS after 12 months, with another 50% after 24 months from the issuance. The conversion price is at S$0.8732. 62.709m new shares could be issued upon full conversion, or 9.35% dilution. The proceeds will be used to fund the equity of two rigs.

What We Think  This is just the beginning. We are not too concerned about the dilution given the exponential EPS growth expected from these rigs. We believe the first two rigs will be on a JV basis. Assuming a 70/30 debt/equity funding structure, each rig could cost US$70m. This could be matched by a charter contract that yields annual revenue of US$20-25m and profit of US$8-10m (100%-owned basis). We assume that Swissco will invest four rigs by end-14 via three JVs and one fully-owned rig. Our target is achievable given the hint of four subsidiaries to be formed. With net gearing less than 0.5x currently, we see room to gear up for the subsequent rigs.   What You Should Do  Accumulate. Capital raising and contract wins are two key share price drivers.

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