Singapore Shipping Corp

[Boon]

Report from L&T this morning.

Singapore Shipping Corp ($0.34, unchanged) 4Q to Mar’15 profit excluding
year ago’s one-time disposal gain of US$936,000 surged 92% to US$2.7mln
on the back of 28% yoy rise in sales to US$10.4mln, coming in above
expectations. As a result, full year to Mar’15 operating profit (excluding last
year’s one-time disposal gain) rose 22% to US$9.3mln.
The robust performance reflects additional contributions from 2 additional
RoRo specialized fleet of Pure Car and Truck Carriers (PCTC) that was delivered
in Aug and Nov 2014. Both sister vessels are 10 years old and increased SSC’s
PCTC vessel fleet from 2.3 to 4.3 vessels and total carrying capacity from
14,052 to 24,894 cars, representing a growth of 77% yoy.
The 2 additional vessels helped propel the ship-owning division sales by 63%
yoy to US$6.7mln and profit by 53% to US$1.9mln. Also helping bottomline
was the agency and logistics business segment which saw profit surging
135% yoy to US$0.8mln due to improved operating effi ciency and economies
of scale. This signals a strong turnaround from the past year’s declining profit
trend due to margin pressures.
Amidst the uncertain macro climate and recent slew of disappointing
results and outlook from numerous companies in Singapore, we find SSC
management’s confidence in their outlook comforting. Management
expects to not only perform better in the year ahead but with the complete
delivery of 3 additional vessels backed by 10-15 years of long-term charters
to reputable customers such as Mitsui OSK Lines, Nippon Yusheng Kabushiki
Kaisha and Wallennius Lines AB they are in fact expecting to provide a secure
base of recurring income and growth for the next 10 years or even longer.
SSC took delivery of Capricornus Leader (5,415 PCTC carrier in Sept’14),
Centaurus Leader (5,427 PCTC carrier in Jan’15) and fi nally the brand new
US$80mln Taurus Leader (7,000 PCTC carrier in Mar’15), raising their total
fleet from 2.3 to 5.3 and total carrying capacity from 14,052 to 31,894,
representing a solid capacity growth of 127%. These niche and specialized
PCTC carriers are chartered out for as long as 15 years to blue chip customers
mentioned above, giving SSC solid visibility going forward.
And with the recent appointment of Chairman and Founder CK Ow’s son YH
Ow as the new CEO, the company has committed to new growth plans to
double their current fleet size over the next 2-3 years to scale new heights.
Given the long term charter contracts to solid blue chip customers we would
not be too concerned with its current debt to asset ratio of about 64% as we
believe that as long as SSC is able to continue to lock in long term charter
contracts with reputable blue chip customers going forward, banks would be
more than comfortable to grant them collateral loans close to the full value of
the vessel value. This is because the fi nanciers will have the fi rst charge over
the cash fl ows which are backed by these blue chip customers as well as the
good track record and reputation of SSC.
Final dividend was maintained at 1 cent a share, translating to a payout ratio
of 40% and yield of close to 3%. We believe with better profi ts ahead, higher
dividends can be expected going forward.
We are expecting Mar’16 and Mar’17 profi t to grow another 30-35%
to US$12mln and US$16mln after last year’s 22%, translating to an
undemanding forward and prospective PE of 9x and 7x. Assuming their usual
40% payout ratio, forward yields would be an attractive 4.3% and 5.6%, up
from 3% currently.
We maintain BUY.

It seems to me that the two sister vessels had been delivered twice......ha-ha!..........where did they get so many delivery dates?

[Nick]

Strangely, the shipping division EBIT actually fell slightly from 3Q 2015 figures. I wonder is this due to a mismatch in revenue and cost due to the delivery of Taurus Leader (a newbuild) only at the last few days of the quarter ?

Capex seems to have been reduced from $113 million to $110 million. Debt levels look manageable with the substantial cash-flow locked in for the next decade.

Looking forward to 1Q 2016 which will be a 'truely representative' quarter where all vessels are chartered out for the full quarter. Management looks bullish in their outlook. It will be interesting if they intend to leverage the cash-flow to acquire more vessels with a bond-like income stream. Hopefully more details will be released in the Annual Report about the charter rates and duration for the 3 vessels.

(Vested)

[Contrarian]

At US$50 to 80M per ship, this can amount to > US$300M in funding needed.

With bank generous financing of 90%, this means US$30M needed over 3 years.

The cashflow of US$12.30M is on the low side, hopefully can reach US$15M+ FY2016.

Maybe only the Jap banks dare to lend so much :-)


Vessel Capacity
Boheme =7,200 cars
Sirius Leader = 5,190 cars
Cougar Ace = 5,540 cars (30% = 1662 cars)
Capricornus Leader = 5,415 cars
Centaurus Leader = 5,427 cars
Taurus Leader = 7,000
Total capacity = 31,894 cars

To roughly double the fleet capacity => SSC needs to buy 4 to 5 more vessels with about 7,000 cars capacity.

If all future deals could be structured in exactly the same way as Taurus Leader - with only USD 3 million of equity needed for each vessel – then total equity needed is only about USD 12 to 15 million………ha-ha!

(vested)
[/quote]

Our debt to equity will be over 400% !
[/quote]

[Boon]

(USD)

Here are some guess works..........

With the drawdown of the two new loans in 4Q2015 , of 16.5 m + 77 m = 93.5 m, amount of yearly loan repayment (principal only) has increased from 4.520 m to 12.188 m per year.

Yearly principal repayment of existing old loan = 4.520 million (would be fully repaid in 2018)

Yearly principal repayment of the new 16.5 million loan (7 years) = 16.5 / 7 = 2.357 million. (would be fully repaid in 2022)

=> Yearly principal repayment of the new 77 million loan = 12.188 – 4.52 – 2.357 = 5.311 million

=> Term = 77 / 5.311 = 14.5 years (would be fully repaid in 2030)

Over the next 3 years:

Principal repayment of loan = 12.188 m
+
Interest costs = 2m ~ 3 m
+
Dividend payment = 5 m (assuming DPS= SGD 1.5 cent )
+
Equity for new acquisition = 10 m

=> Total OCF required = 30 m per year – which seems like an tall order........

I guess the incremental OCF from Taurus Leader must at least be around 8 m - enough to service the loan (principal repayment + interest payment) - otherwise, I would not consider it to be a good deal........

Over the next 3 years - if OCF could hit 20 m per year, FCF (available for dividend payment + investing) would only be = 20 - 15 = 5m.

FCF (available for dividend payment + investing) would more likely to hit 10 m only after 3 years, when the old loan is fully repaid in 2018 - unless the charter rate for Centaurus and especially Taurus Leader are exceptionally good….....who knows....…have to wait and see…….

At US$50 to 80M per ship, this can amount to > US$300M in funding needed.

With bank generous financing of 90%, this means US$30M needed over 3 years.

The cashflow of US$12.30M is on the low side, hopefully can reach US$15M+ FY2016.

Maybe only the Jap banks dare to lend so much :-)


Vessel Capacity
Boheme =7,200 cars
Sirius Leader = 5,190 cars
Cougar Ace = 5,540 cars (30% = 1662 cars)
Capricornus Leader = 5,415 cars
Centaurus Leader = 5,427 cars
Taurus Leader = 7,000
Total capacity = 31,894 cars

To roughly double the fleet capacity => SSC needs to buy 4 to 5 more vessels with about 7,000 cars capacity.

If all future deals could be structured in exactly the same way as Taurus Leader - with only USD 3 million of equity needed for each vessel – then total equity needed is only about USD 12 to 15 million………ha-ha!

(vested)

Our debt to equity will be over 400% !
[/quote]
[/quote]

[specuvestor]

Hi Boon why do you think the principal will need to be repaid?

I can see where you are coming from but in corporate world, principal repayment is usually a function of residual cashflows. Most companies don't actively reduce loans unless overleveraged... they actively increase equity/ profits. There are implicit problems with that but that's how it works. And that's why the concept is extended to Perpetual Bonds.

When the loan is up they will refinance. Very few companies have the mathematical discipline you described above, which ironically should be how it works to pay off the financing.

[Nick]

Hi Boon why do you think the principal will need to be repaid?

I can see where you are coming from but in corporate world, principal repayment is usually a function of residual cashflows. Most companies don't actively reduce loans unless overleveraged... they actively increase equity/ profits. There are implicit problems with that but that's how it works. And that's why the concept is extended to Perpetual Bonds.

When the loan is up they will refinance. Very few companies have the mathematical discipline you described above, which ironically should be how it works to pay off the financing.

The loans secured have a fixed principal amortization schedule. The loans (prior purchasing the 3 vessels) have annual repayment of $4.5 million till July 2018 (full repayment). I believe this is typically how conservative shipping companies run their financing deals since the vessels have a limited lifespan and loans tend to be ship-specific. I recall Pacific Shipping Trust used to secure loans at high LTV but with fixed amortization schedules too - enabling it to escape the GFC unscathed. The new and old loans will have a combined fixed principal amortization of $12.1 million p.a

I am expecting SSC to generate OCF (after interest payment) of at least US$20 million.

We don't know the rates of 2 out of 3 vessels. Using 1Q 15 and 3Q 15 results, one can easily estimate the revenue and EBIT for Centaurus Leader with over 50% EBIT margin ! Next quarter will confirm how lucrative (or silly) the recent expansion has been.

(Vested)

[Boon]

http://infopub.sgx.com/FileOpen/SSC_AR20...eID=360121

AR2015 is out.

Lease payments to be received for the vessels on page 111 is an interesting one.

(vested)

[Nick]

It implies the 3 new vessels will generate a combined revenue of US$22 million p.a. Not as high as I was expected.

Debt interest rates lower than I was expected.

Expecting FY NPAT of $13 million

[Boon]

From page 2 of AR:

"In addition, I am delighted to inform you that we have also acquired a vessel named “Taurus Leader”. Largest in its generation of eco-friendly and fuel efficient Pure Car Truck Carrier, “Taurus Leader” has secured an exceptionally long term charter with a blue-chip operator. Our pride and joy, we are confident that
“Taurus Leader”, like our previous Ro-Ro vessel Singa Ace (which was scrapped last year after a 30 years charter), will anchor the Group’s earnings in the coming decades."

exceptionally long term charter => 15 + 15 = 30 years ?

[Nick]

From page 2 of AR:

"In addition, I am delighted to inform you that we have also acquired a vessel named “Taurus Leader”. Largest in its generation of eco-friendly and fuel efficient Pure Car Truck Carrier, “Taurus Leader” has secured an exceptionally long term charter with a blue-chip operator. Our pride and joy, we are confident that
“Taurus Leader”, like our previous Ro-Ro vessel Singa Ace (which was scrapped last year after a 30 years charter), will anchor the Group’s earnings in the coming decades."

exceptionally long term charter => 15 + 15 = 30 years ?

In the previous year report, it was mentioned the 2 x 6,500 vessels will generate $188 million revenue over 15 years. This works out to 12.5 million charter income p.a.

This would imply Taurus Leader would be generating US$9 million revenue p.a.

Looking at the sums of the charter hire aggregating to US$450 million and deducting the US$183 million and US$154 million, we get around 12.5 years of charter ?