Swiber posted a strong headline PATMI of US$13.5m (+93.1% YoY) on the back of US$137.7m. Excluding the exceptional items, however, it would have reported a net loss of US$0.3m. Going forward, despite record order wins providing good revenue visibility, we remain doubtful over the group’s abilities in keeping costs under control in order to generate profitability.

In view of the 1) falling gross margin and 2) rising administrative costs, we have slashed our FY11 and FY12 core PATMI estimates by 52.2% and 33.2% to US$9.9m and US$16.9m respectively.

Earnings distorted by exceptional items. The 25.3% fall in Swiber’s average share price of S$0.78 in 2Q to S$0.58 in 3Q had resulted in a 9.1% reduction in fair value of convertible bond owed by company, boosting the bottom line by US$9.4m. Meanwhile, the sharp appreciation of the USD against the Asian currencies had also contributed to a US$4.4m forex gain. If these exceptional items were to be removed, the group would have reported a net loss of US$0.3m.

Record order wins provide healthy revenue visibility. YTD, Swiber had bagged a record number of contracts worth US$758m. 3Q outstanding order books stood at US$965.1m (1.6x of FY11F revenue), providing healthy revenue visibility. Moving on, we expect the group to add another US$129m before year end, as tendering activities remain robust in the Southeast Asia region.

According to Upstream, Swiber is currently in line for the offshore installation project for Shell’s E-8 and F-13 fields off Sarawak, Malaysia.

Gross margin and admin costs unlikely to improve. Despite revenue growing 49.5% YoY, gross margin fell sharply by 5.9 ppts to 15.8% for 9MFY11. On the other hand, administrative expenses surged to a record high of US$13.0m in 3Q, representing 9.5% of the revenue. We believe that management currently has no feasible measures in cubing costs, and expect net margin to fall below 3% for the next two years.