CH Offshore is an offshore shipping stock that I wrote about paying a good dividend on a good payout ratio. A blogger just highlight a potential bugbear for the stock.
My original report on CH Offshore can be viewed here. Addition to that report is that 2 of the 12bhp AHTS vessels were not renewed and if they are renewed they might not be at a good rate.
This week, Donmihaihai over at I’ll do it myself highlighted what reader Freedom brought up on the high accumulated trade receivables:
But it is interesting to think about why CH Offshore is having problem with their receivables. That is charterer rate, contract and cyclical nature of the industry.
An offshore vessel has a lifespan of about 25 years.
Offshore industry has a long cycle which mean each vessel has the chance of securing one cycle of good charter rate, I think the maximum are 2 cycles.
Having long term contract at above market rate is good but like buying market bottom, it is only after that we know the rate is good. Still remember the party where the fashion was announcing how big is the contract and how long is the duration. Where are they now?
The problem CH Offshore is facing look precisely CH Offshore locked in super good rate and their customer is having problem paying at that rate. With that CH Offshore is facing the problem of walking away from the contract or continue.
The concern here is that customers are not able to pay the high rates, which will make the customers having negative profitability. Why isn’t CH Offshore impairing this receivables?
40 mil of receivables not converted to cash is more than 2 years of dividends. To be fair, if you look at the cash flow statement, the net profit for the past 5 years are higher than that of the operating cash flow.
To maintain these ships require little capital, but shipping companies do sell and buy vessels a fair bit, which account for CH Offshore’s huge capex 2007 to 2010.
If those two 12 Bhp ships have not expire, the EBITDA should be able to fund the dividends (for those that care about that).
Writing off these receivables impacts the balance sheet, but does not impacts profitability, but the problem is that this receivables may just keep accumulating.
In the end CH Offshore, like all shipping stocks perhaps are best invested as a play on the shipping cycle and not so much as a high dividend play.