Excerpts from analysts' report

LimSK_YeoZB11.14CIMB analysts: Siew Khee LIM + Zhi Bin YEO

ADD - Maintained  | S$0.45 tp:S$0.90

Swissco reaffirmed that charter contracts for its nine rigs have been secured. The batch of four rigs chartered by Pemex (currently being operated by Ensco) will be renewed by end-Mar 15. We believe Swiscco could clinch a time-charter rate of at least US$75k-80k/day based on similar rigs operating in the region.

However, given the weak industry sentiment, we now expect only two new 50%-owned rigs to be added to its fleet in 2H15 instead of four 100%-owned rigs for 2015. Our forecasts reflect the cut in orders as well as Swissco’s change in reporting currency from S$ to US$ in 4Q14.

Maintain Add but with a lower target price, still based on 7.5x CY16 (1 s.d. below the 5-year mean of small/mid-cap oil services companies). Catalysts could come from stronger-than-expected contract wins.

What Happened

In Swissco’s 4Q14 results briefing, management reiterated its confidence that the charter contracts for its nine rigs are firm. The company’s FY14 net profit of US$15.9m included US$22.6m of non-recurring expenses (US$18m goodwill impairment for the Scott & English acquisition, US$5.3m investment impairment in Swiber and US$2.3m cost incurred to acquire Scott & English).

What We Think

Out of its fleet of nine rigs, two are for accommodation purpose and will commence operations by 1Q15 and 2Q15, respectively, providing the growth in FY15.

The remaining seven are drilling rigs contracted to Pemex. Four rigs are up for renewal in 2015-16 (Ensco 83, Ensco 89, Ensco 93 and Ensco 98). We expect to hear of the new contracts by end-Mar. These rigs are on bareboat charter currently at US$40k/day.

With the renewal, Swissco will take on the role of time charterer from Ensco, with the help of a local operator. Based on two similar rigs (250ft) operating in Mexico by Paragon Offshore, we believe Swissco could command an average time-charter rate of US$75k-80k/day for its rigs. Our forecasts only factored in bareboat charter rates.

Therefore any rate difference between the new and old rates is likely to be attributed to the rig operator and have neutral impact on our earnings. The other three rigs operated by GSP (at bareboat charter at c.US$60k/day) are unlikely to see any reduction in rates as there is presently no pressure from Pemex. Upside to our forecasts could also come from the liftboat that is currently under construction for delivery in Apr 16.

What You Should Do

Swissco is the cheapest small-mid cap O&M at 4x CY15 P/E. Accumulate.

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