Singapore Shipping Corp

[Nick]

From the latest result, it seems that the cougar assets are generating additional US$1.2m NPAT semi-annually, the potential loss of profit from the expiring of charters with Mitsui is estimated to be US$1.5m annually. Assume that the 2 vessels did not contribute any revenue or profit in FY2015, I still expect a US$900k increase in the NPAT, not yet counting the contribution from the new vessel which scheduled to deliver next year. I do worry about the lower charter rate that it might secure for the new vessel because of the current gloomy shipping market. I am not sure if these specific vessel are affected but I guess the charter rate will be definitely much stable comparing to container ship charters.

Unless I am mistaken, the car carrier (RoRo) vessels operate in a very niche segment with few operators and newbuilding vessels. So I don't think we are experiencing the over-supply malaise in the dry bulk and container sector currently.

There are 2 vessels leased to Mitsui - Singa Ace and Cougar Ace of which the latter is 30% owned and accounted for as an associate. Cougar Ace contributed 26k NPAT in the past 2 years so its contribution is minimal. I suspect scrapping the vessel post-contract and repaying debt will be more accretive. Singa Ace is an issue since it contributed US$4.8 million revenue in FY 2013 and US$1.98 million revenue in 1H 2014 (charter hire reduction). Being an old ship, I don't think the margins will be necessarily high though. I think the vessel acquired next year will be more than sufficient in replacing this income stream.

On another note, last year, Ship Finance acquired 2 car carriers with 5 year charters - http://www.shipfinance.bm/index.php?id=4...51888.html - based on my rudimentary calculations, I think the 2 vessels cost US$80 million and each vessel generates US$8.5 million revenue p.a.

Cougar Logistic assets generated EBIT of US$1.95 million in 1H 2014 compared to EBIT of SG$4.4 million and SG$4.3 million in FY 2012 and FY 2013 respectively. I suspect it enjoys higher margin as a private entity since there is no need to pay listing fees, directors fees. Moreover, since the shipping division doesn't pay tax, the US$57k tax must be attributed to Cougar Log which is quite low compared to its listing days. This is looking to be a really attractive buy. Granted, in a recession here, earnings are likely to fall.

Don't really see much catalyst unless dividends are raised or the Management acquires more vessels. Hopefully more details on the vessel acquisition will be revealed in the upcoming quarter.

(Vested)

[valuebuddies]

The US$1.5m is derived based on the average net margin of 30% on estimated charter revenue of US$5m from Mitsui, just to be prudent. But I am surprise to know that Cougar Ace is only contributing 26k NPAT a year!! I always thought that the associated company is something else which is not significant.

Anyway regarding the new carrier, I really doubt that SSC would aim for price tag that beyond US$50m, if it does then some sort of private placement or right issue would follow. I don't expect it to raise dividend in view of this commitment.

[Drizzt]

it wont be a stretch for them to up the dividend. they probably have much room and hope they up the dividend to 1.5 cents

[Nick]

SALE OF CAR CARRIER - MV SINGA ACE

http://infopub.sgx.com/FileOpen/SGX_OwBr...eID=272211

The fate of Singa Ace has been revealed. US$5.1 million proceeds could be used to finance the equity portion of the new vessel. A good outcome IMO.

(Vested)

[Nick]

SSC released their 3Q 2014 results yesterday - http://infopub.sgx.com/FileOpen/SSC31121...eID=274271

1) SSC has 2 core operations - ship owning and logistics. The former performed within expectations since the vessels were on long term charters till 2025/26. However, as previously disclosed, operating results took a near term hit due to scheduled dry docking resulting in 9M 2013 EBIT falling by 25.7% to US$5.0 million. The logistic division continues to generate US$0.9 - 1.0 million EBIT quarterly which exceeded my initial expectations. In all, I expect the normalized annual EBITDA (no one off itemsor dry docking) for the 3 vessels + logistic to be approximately US$13 million.

2) The 10 years old vessel recently acquired on a long term charter is fairly larger with car capacity of 6,200. This means it is larger than Sirius Leader (5,190) but smaller than Boheme (7,200) so it could generate charter revenue between US$5 - 10 million annually. This will fuel growth in FY 2015 and its FY 2016 will benefit from the full year effect. The purchase price and the charter terms was not disclosed. The vessel will only be delivered in 2Q 2015 ie half a year time.

3) The key question is whether can SSC finance this deal without turning to new equity or cutting dividends. Personally, SSC has low gearing with net debt of US$7 million with net debt / ebitda = 0.76. Using the prices paid for Boheme and Sirius Leader as a gauge, the new vessel could cost around US$30 million. I think this can be easily financed with bank borrowings without stretching the gearing too much. Moreover, such assets are highly cash generative. I won't be surprised if more vessels were acquired in the coming years to rejuvenate its fleet.

4) With this acquisition and the integration of the logistic division, I expect continued growth in profits over the two years barring unforeseen circumstances. The advantage of investing in a small company is the leverage of scale. At the moment, there are fixed corporate overheads in terms of listing expense, head office admin fees, salaries etc. The company doesn't need to invest substantially internally to manage another vessel. For instance, the largest cost faced by SSC is the staff and crew expense. In FY 2010, it only had 1 fully owned vessels and it reported revenue of US$7.9 million with staff cost of US$3.7 million. In FY 2013, it operated 3 wholly owned vessels which helped grew its revenue by 2.5 times to US$19.9 million yet its staff cost grew by only 1.4 times to US$5.2 million. This highlights the margin appreciation when scale is used appropriately.

(Vested)

[Nick]

I decided to speculate how the latest vessel acquisition will impact SSC results in the years to come. Post acquisition, SSC will compromise of the current logistic ops and operating Boheme, Sirius Leader, Cougar Ace (associate) and the new vessel.

In 9M 2014, the Group reported net profit of US$6.2 million. This takes into account of approximately US$0.6 million losses from dry docking. Considering that in future years, Singa Ace will not be contributing to the Group, we can assume that the normalized shipping returns will be similar to current year since the non-recognition of Singa Ace contribution will be offset by the lack of dry docking expenses. This also assumes the logistic division continues to generate US$0.9 million EBIT on a quarterly basis. Hence, the annualized normalized profits will be US$8.3 million. Nevertheless, the logistic division is the 'black box' here. We will have a better idea of the value of Singa Ace contribution in 4Q 2014 results. Again, this is just my speculation here.

I suspect the new vessel will cost approximately $40 million. This is similar to the price Ship Finance paid for 6,500 capacity vessel in 2012 which came with a US$8.5 million annual charter contract. It also compares well to the US$50 million paid for Boheme. There are no revenue figures given yet but we can attempt to guess:

MV Boheme
Cost: US$50 mil
Charter: US$10.5 mil
Revenue Yield: 21%

Sirius Leader
Cost: US$16 mil
Charter: US$4.5 mil
Revenue Yield: 28%

New Vessel
Cost: US$40 mil (assumption)
Charter: US$8 mil (assuming yield of 20%)

The question therefore is the financing of this acquisition. Currently, the Group US$13 million cash and US$20 million debt. The sale of Singa Ace will contribute US$5 million cash. I think it is possible that the vessel will be acquired at 60% gearing implying cash out-flow of US$16 million. Historically, SSC interest cost has been around 3.5%. The EBIT margin from the Boheme and Sirius Leader has been around 40% historically (double check yourself). Personally, I suspect margins could be higher due to the benefits of scale as explained in the earlier post.

Revenue: US$8 mil
EBIT: US$3.2 mil (40% margin)
Interest: US$0.9 mil
NPAT: US$2.3 mil

Adding this to the previously estimated annualized profit of US$8.3 million gives a full year figure of US$10.6 million which translates to EPS of 3.0 SG cents. Again, this is primarily my speculation and I could very far off (positively or negatively). If the EBIT margin is higher or the actual revenue is higher, the new vessel contributions to the NPAT will be much larger. I will adjust the figures when more details are revealed. I stress again, this is just my speculations and no official numbers have yet to be given ! It could be a case of buy low, charter low - in this case, the sale price is low but so too are the charter rates. But returns should be similar. I await more details from the Annual Report. Personally, a buy low, charter low model is more palatable.

(Vested)

[Nick]

DISPOSAL OF SHAREHOLDING INTERESTS IN NANYANG MARITIME (S’PORE) PTE LTD

http://infopub.sgx.com/FileOpen/SGX_SSC_...eID=291226

SSC has disposed its stake in its logistic associate for S$1.261 million. The logistic associates generated an unprecedented loss of US$0.3 million in 9M 2014 so I suspect this disposal was timely. This coupled with the disposal of Singa Ace for US$5.1 million will probably be channeled towards financing the vessel acquisition in 2H 2014.

(Vested)

[learner88]

Hi,

Did some homework so I thought I would share with fellow buddies here.

Since SSC operates in the PCTC segment, here's some background.

The pure car and truck carrier (PCTC) market is dominated by five operators who operate more than 70% of the world’s fleet of PCTCs able to carry more than 2,000 car equivalent units. The WWASA group of companies (Wallenius Wilhelmsen Lines, EUKOR Car Carri-ers and American Roll-on Roll-off Carriers) is the largest operator with an operated fleet of around 135 vessels. The three Japanese consortiums MOL, NYK and K-Line follow while Höegh Autoliners takes the fifth position in terms of size.

Then there are the smaller operators which take up the remaining 30%.

SSC is a tonnage provider aka ship owner. Operators (those above) depend on a number of smaller and larger tonnage providers in addition to the capacity they own themselves. For example, of the WWASA group of companies’ total fleet of around 135 units, more than fifty vessels are chartered in from various tonnage providers. The tonnage provider sector is much more fragmented. The largest tonnage provider is Cido with 43 in its fleet, followed by Ray Cars with 41 and then a much smaller Zodiac in 3rd with just 19 ships.

SSC, of course, has just 2 (excluding Courage Ace), with 1 more on its way.

Global fleet size of PCTCs is small - just 650 or so. In the large PCTC segment (>6k ceu), there are just 290 of them. So we are buying 1 of these 290. The 6500ceu happens to be the new hot favourite of current operators/owners. In the first half of 2012, 5 new PCTCs were ordered. All were 6500 CEUs.

There isn't so much hot money in PCTCs (yet). Current order book is about 10% for the next 3 years. With scrapping/recycling considered, fleet growth of only 1.4% in 2013, and 4% in 2014 - could be more with new scrapping.

Ship - Year built - CEU - Bareboat valuation - Daily charter rate
NOCC Atlantic - 2009 - 6754ceu - USD61m - $34k/day expiring Apr 2014 (chartered out in the previous peak)
NOCC Oceanic - 2012 - 6500ceu - USD68m - $26.5k/day
Asian Emperor - 1999 - 6402ceu - USD42.5m - $24k/day
Asian King - 1998 - 6460ceu - USD40.5m - $24k/day
Valuations done in Sep 2013.

It seems like the "depreciation" is about $2m a year based on the differences.

Speculating on the new buy, the average charter rate could well be $25-26k/day. Price of the PCTC would be about USD49-51m. The annual charter revenue would be about 9.5M Assuming 50m, the revenue yield would be 19%.

Nick - not that I am checking your work, but your assumptions and guesstimates are very close to mine. Let's hope OCK can pull it off again by getting higher charter rates and paying lower than the 50m I am estimating.

Haven't looked into how SSC will finance the new ship but I am sure the man will be prudent.

Oh just for the fun of it, I am making a wild baseless guess that the new ship is Courageous Ace which is owned and operated by MOL currently.

Good luck to all vested.

[learner88]

Oh some numbers on the EPS impact:

Assuming charter cost - $6.5k/day
Nett of cost - $19k/day

Assuming $50m price tag, Cash payment of $15m, Loan $35m (70% gearing)
Annual interest $1.2m at 3.5%

Gross profit = charter rev 9.5m - operating cost 2.6m - interest cost 1.2m = 5.7m
Net profit = 5.7m - depreciation 2m = 3.7m
After tax = USD3.1m
This is a bit higher than what it would be using Nick's margins. Since I haven’t done a EBIT margin check, I will just use Nick’s 40%.

Revenue: US$9.5m
EBIT: US$3.8m (at 40%)
Interest: US$1.2m
NP:US$2.6m (before tax?)
NPAT: US$2.2m

Impact on EPS is 0.64-0.90c SGD

(edited to add in depreciation)

[Drizzt]

We can play around with 2 margin, the revenue margin and the ebit margin. if you use the two ships boheme and sirius compone revenue is 14 mil and bought for 65 mil, the revenue margin is 21%. We know somewhat that EBIT for the 2 ships is 6.1 mil, so the EBIT margin is 43%. so those are the figures we can use to project.

unfortunately we don't know how much they spent purchasing the ship. there shouldn't be much tax.

but kudos for the deep research.