At 76% of our full-year forecast, Swissco’s 1H15 core net profit of US$30.8m exceeded our expectation. The positive variance stemmed from stronger contributions from its two wholly-owned drilling rigs. Meanwhile, contracts for two of its Ensco rigs set to come off-hire in 2H15 have been rolled-over by 2-3 months. We raise our FY15 EPS by 18% to incorporate the earnings beat and lift our FY16-17 EPS by 2-3%. Given its current 0.5x CY15 P/BV valuation, we believe the market has priced in the cancellation of all its nine rig contracts, which we deem too bearish. We maintain Add, with a lower target price, now based on 1x CY15 P/BV, Ezion’s past one-year average valuation (prev. blended valuations). Renewal of the four Ensco rigs could catalyse the stock.
A solid 1H15…
Propelled by two wholly-owned rigs which commenced charter from 4Q14, Swissco generated an EBITDA of US$24.9m in 1H15. Its OSV fleet incurred small losses in 1H, with a fleet utilisation of c.50%. However, this business arm broke even, thanks to disposal of three vessels (gain of US$3.3m). Associates’ contributions jumped 1.5x to US$23.6m in 1H15 due to the commencement of two drilling rigs in 3Q14, one accommodation rig in 1Q15 and another accommodation rig in 2Q15. In total, 1H15 had contributions from seven jointly-owned rigs vs. three in 1H14. These and the two wholly-owned rigs accounted for the US$30.8m core net profit in 1H.
… but a more uncertain 2H
As the group focuses on the renewal of its four Ensco rigs, it is indeed “squeaky bum time” for Swissco – the term was coined by Alex Ferguson in reference to the tense final matches in a race to a league championship. Owing to Pemex’s US$4bn-budget cut, the first of Swissco’s four rigs up for renewal this year was not extended. The rig is now hot-stacked in Texas as it eyes a longer-term job in the Middle East (commences end-2015) or a short-term one in Mexico. As Swissco is not the first victim of the oil price rout (i.e. jack-up rigs of US drillers Diamond and Paragon were also terminated by Pemex), we had conservatively factored in a pessimistic scenario whereby all four rigs would not be renewed meaningfully. Hence, we are anticipating a weaker 2H and 2016.
Worst-case scenario priced in
That said, given its current valuation of 0.5x CY15 P/BV, we believe that the market has priced in cancellation for all of Swissco’s nine contracts, which we deem too bearish. Net gearing has improved to 0.7x (end-14: 0.8x), thanks to US$25m proceeds from vessel sales, US$17.5m repayment from a JV and operating cash inflow of US$18m. With a decent cash position, we believe that its DPS of 2Scts should be kept intact (~8% yield), at least for FY15. (Read Report)
Source : CIMB Research