Singapore Shipping Corp

[Contrarian]

> if ssc can deploy the earnings at > 20% roic

How to do so using same business?

[Drizzt]

> if ssc can deploy the earnings at > 20% roic

How to do so using same business?

Its a rhetoric question and i think it is conservative they can do that. Just whether you like the risk that comes with the leverage.

[Drizzt]

Like what Nick says, the earnings will improve over the next 2 years at least. The rerating of the stock, however, IMHO, need the increase in dividends. I think there is enough cash flow for increase of dividend to 1.5 cents conservatively and depending on the details pending of the last acquisition, even 2 cents dividends.

Hope Ow choose to take this route rather than more acquisitions through gearing to boost earnings without increasing dividends

(Vested)

i have a question. if ssc can deploy the earnings at > 20% roic, is it better for them to give us the dividends?

Hi drizzt,

I am not sure which is better. But I do know my reason for investing is I believe with the acquisitions, SSC is in a better position to give higher dividends, he has been fair to shareholders in that sense that when he sold the vessels in the past, he return the profits to shareholders and had maintain a good dividend record.

Of course, perhaps you are right, with good allocation of capital, the capital appreciation will more than offset possible dividend gains. But personally, company profits growth is meaningless to me if it does not translate to either capital gain or dividend growth.

Capital gain can be milked by selling, but I cannot be sure if I sell at the right price, of course, a over-valued price is a no-brainer, but I prefer dividend flow and modest capital gain than high capital gains but no dividends..
?

Perhaps u can share your answer to your question?

there is a balance to everything. but the answer to the question is whether by doing all this are they allocating capital better. how do we determine the hurdle rate.

[Nick]

I was simply amazed by this deal.

1) Announcement mentioned the deal will be financed entirely with internal proceeds ie combination of cash and new debt. This means it is likely the acquisition will be financed largely with debt as SSC do not have a large cash pile at the moment.

Cash: US$20 million
Debt: US$18 million
Capital Commitments: US$33 million + US$80 million.

If SSC uses US$15 million to finance the equity portion of the 3 new vessels, the LTV required will be approximately 85%.

Is this possible ? I believe it is likely since debts taken will have high LTV covenants as the charter duration is sufficiently long. Previously, Pacific Shipping Trust did manage to obtained loans at 85% LTV to acquire 9 vessels post GFC - http://www.valuebuddies.com/thread-154-p...ml#pid7362

Again, this is my speculation. Maybe they will find 100% gearing hahaha ! Or do a placement !

2) So what does leverage do ? It magnifies returns ! Assuming the new vessel is acquired at 85% LTV and it generates a measly EBIT return of 5% (vs 8% of the existing 2 vessels) and the debt cost 3%:

Acquisition Price: US$80 million financed by US$68 million debt and US$12 million equity
EBIT: US$4 million (5% of 80 million)
Interest: US$2 million
NPAT: US$2 million
ROE: 17%

I am not forecasting returns. I don't even know the revenue. Just highlighting how even at 5% EBIT return, this deal looks very promising.

3) Once the 3 vessels are delivered and chartered out, I expect earnings to exceed US$12 million or 3.4 SG cents EPS.

4) Too little information to make any forecast for the new vessel. I prefer to just use low returns estimate to verify if the deal looks promising even at that levels. It can be useful technique.

(Vested)

[Nick]

WARNING: LONG AND SPECULATIVE POST.

I have been reading up on the PCTC industry and noticed a few companies have been building up their PCTC fleets - even NYK Lines have recently received a newbuild eco friendly vessel ordered in 2012. This is still a tightly held and niche industry so information on rates and newbuild prices isn't as widely known as those from the dry bulk and container industry. Relationships with your customers seems to be the main edge.

a) Ocean Yield - a diversified ship owner and financier listed in Oslo - have been busy building a fleet of 6 PCTC vessels.

1) In 2012, it acquired 2 x 6,500 CEU PCTC newbuilding (to be delivered in 2014) for US$134 million (70% financing) and leased to Hoegh Autoliners for 12 years bareboat charter at EBITDA of US$173 million or US$14.4 million p.a

2) In 2013, it acquired 2 x 8,500 CEU PCTC newuilding (to be delivered in 2016) for US$137 million (70% financing) and leased to Hoegh Autoliners for 12 years bareboat charter at EBITDA of US$190 million or US$15.8 million p.a

3) In 2014, it acquired 2 x 4,900 CEU PCTC vessels (built in 2010) for US$90 million and leased to Hoegh Autoliners for 8 years bareboat charter at EBITDA of US$78 million or US$9.7 million p.a

http://www.oceanyield.no/Investor-Relati...ly-Results [1Q 2014 Report]

b) We can study these transactions to estimate the returns SSC could be getting from the recent newbuilding acquisition which is quite likely to be in line with the market returns.

Transaction 1

Vessel Size: 6,500 CEU
Acquisition Price: US$134 million
EBITDA: US$14.4 million
Asset EBITDA Yield: 10.7%

Transaction 2

Vessel Size: 8,500 CEU
Acquisition Price: US$137 million
EBITDA: US$15.8 million
Asset EBITDA Yield: 11.5%

Transaction 3

Vessel Size: 4,900 CEU
Acquisition Price: US$90 million
EBITDA: US$9.7 million
Asset EBITDA Yield: 10.8%

The Asset EBITDA returns are fairly close at around 11% for long term charters contract concluded by Ocean Yield.

Now we leave the realm of facts and venture into the great unknown world of opinions and guesswork. Note this reflects my own personal opinion and is not a pro forma statement or a forecast or indication of a buy/sell advice.

c) Let's compare with the EBITDA returns of Singapore Shipping Corp using 1Q 14 numbers:

MV Boheme + Sirius Leader

Acquisition Price: US$66 million
EBITDA: US$9.0 million (excluding corporate cost)
Asset EBITDA Yield: 9.0 / 66 = 13.6%
EBITDA: US$7.1 million (including corporate cost)
Asset EBITDA Yield: 7.1 / 66 = 10.8%

d) I am under-estimating the EBITDA since the corporate cost would also include the Agency division. However, I am under the impression that this is a fixed head office cost and wouldn't rise much as more vessels are delivered. If this is the case, then the actual asset EBITDA yields of the 3 incoming vessels will be significantly higher.

Nonetheless, let's be conservative and assume the EBITDA Asset yield remains at 10.8% with increasing corporate cost:

3 Vessels

Acquisition Price: US$113 million
EBITDA: 113 x 0.108 = US$12.2 million
Depreciation: (33 / 20 years) + (80 / 30 years) = US$4.3 million
Interest Expense: US$2.9 million (85% financing, 3% interest)
NPAT: US$5 million

This is a significant boost to the current annualized 1Q 14 NPAT of US$7 million resulting in profits exceeding US$12 million. Naturally, this is just a 'test' using an estimated return on investment. Could be very different in the end.

e) I would like to imagine that corporate cost will not increase in tandem since head office cost wouldn't rise significantly with more ships. There was no decline in corporate cost when Singa Ace was scrapped in 1Q 2014.

Acquisition Price: US$113 million
EBITDA: 113 x 0.136 = US$15.3 million
Depreciation: (33 / 20 years) + (80 / 30 years) = US$4.3 million
Interest Expense: US$2.9 million (85% financing, 3% interest)
NPAT: US$8.1 million

f) Of course, this is just very easy speculation and not well grounded in facts. Ideally, the current acquisitions would have higher EBITDA returns than the previous vessels. Interestingly, the cost price of the newbuilding vessel is a lot higher than those acquired by Ocean Yield implying either the vessel specifications are top-notch ie eco friendly or the vessel is a lot larger in terms of capacity.

I don't really wish to carry out a 'forecast' exercise as I tend to be terribly wrong. I wrongly forecast the cost price of the incoming vessels to be US$80 million (actually US$33 million) - http://www.valuebuddies.com/thread-2732-...l#pid83551 - hence, I steer clear. The only information available at this junction is that the 2 x 6,500 CEU vessels cost US$33 million and will be time chartered for 15 years at US$12.5 million p.a.

My only goal is to see at various predicted returns, how it would impact SSC profits. I think due to the leverage and sheer magnitude of the acquisitions, the impact will be significant. As always, counterparty risk remains the largest elephant in the room. However, Mr Ow has structured and timed his deals well in the past and I doubt he would commit himself to a value destroying deal of such scale at this stage of the game. I cannot safely estimate how much profit will SSC generate once all 6 ships are generating revenue but personally, I think it will be substantially more than now.

As always, this is just my speculation. Hardly anything here is facts until we get the actual numbers from the Management in the Annual Report. Definitely not a call to buy or sell.

(Vested)

[smile67]

1) from invest point: ship value will drop dramatically after 25 to 30 years, not like real estate, so I assume US113mil should get around 5% yearly return after deduct all the cost, which is US5.65mil. the total profit will be around US$12.5mil
2) The interest rate should be higher than 3%, but the new ships may get better margin than the existing one as the ships are newer and bigger

[specuvestor]

Interesting discussions. Looks like this is a major bet. Thanks

[greengiraffe]

I typical bo tuck chek... but i think for a company:

i) that has a mkt cap of S$109m;
ii) committed to vessels capex of US$113m

With a penny pincher like Ow who has a track record to return shareholders any surplus assets, the deals are likely to be so enticing that he has to take calculated risks...

Vested
GG

[gzbkel]

I was surprised to find out that Ace Cougar almost sunk in 2006.
The cars that it was carrying had to be scrapped. The ship was later salvaged and returned to operation.
The annual reports didn't seem to mention about this. Wonder if Mitsui O.S.K. Lines was responsible for the repair cost?

http://en.wikipedia.org/wiki/MV_Cougar_Ace

http://www.crowley.com/News-and-Media/Pr...Ship-Owner

[greengiraffe]

I just realised that should SSC borrow 85% of US$113m capex, its gearing would have at least be 150%...

Has the usually conservative Ow gone mad or is he really onto real D24 deals?

Looking at the annual report, I m inclined to think that he is embarking SSC on a new lease of renewal just like the corporate renewal that has seen Jr Ow slowly stepping up and stepping into his Dad's big shoes...

Vested
Minor Core
GG

I typical bo tuck chek... but i think for a company:

i) that has a mkt cap of S$109m;
ii) committed to vessels capex of US$113m

With a penny pincher like Ow who has a track record to return shareholders any surplus assets, the deals are likely to be so enticing that he has to take calculated risks...

Vested
GG