Singapore Shipping Corp is a shipping company I covered a fair bit in the past. For the history of write-ups, readers can review at the bottom summary of this article. Yesterday the company announced their 3rd quarter results.
First Contribution from Capricornus Leader
In this quarter results, what made me most anticipate about the results was the maiden contribution of the first second hand PCTC ship purchased for a total of US$33 mil. In the annual report, the chairman’s message indicate that over the life time of the charter (15 years), these 2 ships will earn US$188 mil in revenue, or what we anticipate to be US$12.5 mil per year.
Since the charter rates (revenue) should stay largely the same, not to mention costs, we should be able to extrapolate the full year earnings for 1 ship based on the quarter results. This is done by comparing to the last 2 quarters, where there weren’t any exceptional sales, dry dock to distort the figures.
(click to view larger image)
Capricornus Leader was delivered in mid September 2014 and as such we believe that Q2 2015 would contain 2 weeks of the result. Whether Capricornus is a better performer than the existing 2 ships, Boheme and Sirius Leader can be appreciated from the EBIT margin.
The difference in revenue between Q2 2015 and Q1 2015 was 285k and EBIT was 145k. If you compute the EBIT margin its 50.8%. That looks much higher than the existing 2 ships at 38%. This ship looks a splendid purchase but honestly I refuse to do a post on this since this difference between quarters might be just noise from differentiating costs.
That is why we are more anxious about Q3 2015, where the only difference is a full quarter contribution from Capricornus Leader. If you compare Q3 to Q1, the difference in revenue was US$1.28 mil and EBIT was US$829k. The EBIT margin computed here was 64%.
Wait. Something isn’t right there. The EBIT margin should differ from the original 2 ships to be THAT much. If the data doesn’t lie, then then only reason Q2 and Q3’s EBIT margin showed a much higher improve has to deal with that one ship.
If we project a full year revenue and EBIT, they are US$5.12 mil and US$3.32 mil respectively. The figures are questionable in that we are anticipating one ship revenue to be US$6.25 mil instead of US$5.1 mil. The explanation here might be the second ship, which will be delivered in January 2015, have a higher revenue (although they are the same size) or that there are some weird explanation.
If the EBIT of 2 ships are US$6.6 mil, this would mean that the 2 new ships will double existing Boheme and Sirius’s EBIT of US$5.6 mil. I think these 2 deals are too good to be true. I hold a theory that, although the charter rates are higher, the cost to operate the ships do not vary that much from the other 2 ships Boheme and Sirius Leader. If SSC have secured good rates, then they have a larger margin to work with.
The caveat here is that perhaps there are some cost that are not accounted in the EBIT (which i find it hard to be consider this is accrual accounting). Also, each ship contract are typically negotiated independently, so the margins might be different.
The full year 2014 net profit, if we backed out the exceptional sale of Singa Ace is US$7.2 mil. Given that we project a more conservative quarter EBIT of 700k for Capricornus, the full year EBIT would be US$2.8 mil ( for reference, I believe current Sirius Leader, bought for the same price and of the same size earns US$1.3-1.4 mil). If Centaurus Leader earns the same calibre as Capricornus, then its EBIT is estimated to be US$2.8 mil (we will know more about this next quarter).
Centaurus will be debt funded and would incur likely US$0.6 mil in interest on the $16 mil 3.6% loan.
The net profit would work out to be $5.6 mil (boheme+sirius EBIT) + $2.5 mil (cougar logistics EBIT) –$1.6mil (existing interest + corporate cost) + $2.8 mil + $2.8 mil – $0.6 mil = $11.5.
The new US$80 mil ship will be delivered in March 2015, and taking reference from Ocean Yield, a Norwegian PCTC bareboat charterer’s average EBITDA margin of 11% for their 3 new PCTC. Perhaps the EBITDA of the ship will be $80 x 11% = $8.8 mil. A 30 year depreciation would deduct US$2.67 mil. Since it should be 90% funded by debt, a 15 year loan at 3.6% interest $2.6 mil per year. The net profit for this ship is projected to be $8.8 mil – $2.67 mil – $2.6 mil = $3.53 mil. Let’s take it conservatively at $3 mil.
The net profit would estimate to be US$ 14.5 mil. At the current exchange rate of 1:1.35 USD, the EPS is SG$0.0449. The current dividend is SG$0.01.
At current price of SG$0.30, the earnings yield is 14.9% (put this in perspective, this is not a one off but backed by assets on a 10 yr, 11yr, 15 yr, 15 yr and 20 yr charter duration).
Projected Free Cash Flow
Over more readings I learn that I should not look at ships the way we look at conventional business. They do have an end life and as such the way to look at them is as if you are buying an investment property. They have a fixed land lease, you borrow a percentage of the price and you pay back an amortization loan in principal and interest.
What is left over after expenses, principal and interest payment is the free cash flow you earn.
In a way, to know whether SSC have the ability to jack up their dividend to 2 cents, we need to find out if the free cash flow amounts to that in the first place.
In terms of amortization loan we know that
- Boheme + Sirius Leader loan should be for 4 more years amortizing an estimated of $4.5mil
- Centaurus Leader’s loan was recently announced and should be a 16 mil loan for 7 years. Assuming a 3.6% interest, the annual estimated amount should be $2.63 mil
- The $80 mil ship should loan a huge $72 mil, and the tenure can be speculated to be for 15 years (hard to believe they would try to clear it in 7 years) . II estimate the amortization to be $6.3 mil
The amortization includes interest, so we need to back out some of the interest later.
The depreciation of all 5 ships should be $7.6 mil.
The free cash flow, I estimate to be US$14.5 mil + US$7.6 mil – (4.5+2.63+6.3)[debt amort] + (0.6+0.6+2.6)[interest,which is suppose to be in debt amort] = US$12.47 mil. At the same exchange rate, this translate to SG$0.038 free cash flow per share. The free cash flow yield comes up to 12.6%.
That looks enough to pay more than 2 cents.
Those are some sick projections of the future full contributions from the 5 ships. Call me a sceptic but I cannot believe the EBIT margin for the 2 PCTC ships are that good. I believe my projections of the $80 mil ship are in line with markets. We are estimating the future interest expense of the loans and that we cannot be 100% sure they won’t be financing the $80 mil ship with a 15 year loan.
Whichever way I look at it, a 12.6% free cash flow yield provides ample room for safety. And its even better for me since my average price is at SG$0.24 cents.
We look forward to next quarter results where we will see Centaurus Leader and the $80 mil ship’s contribution. If the management really pull of the 2 PCTC with that great of a margin, then we should really thank the chairman and the team for doing such a splendid job.
My past write-ups on this company can be found below:
- Singapore Shipping Corp
- Sells MV Singa Ace
- How much returns can you get from a ship
- Singapore Shipping Corp sells Nanyang Maritime
- Singapore Shipping Corp Full Year Results and Details of New ships
- Blaze acquisition trail with US$80 mil purchase New Build PCTC
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Friday 13th of February 2015
Thanks for the detailed analysis Kyith. Always like reading your blog. Must admit that I have trouble understanding your deep analysis sometimes, but this one I can understand with some effort. I think the reason SingShipping is a relatively easy to under business, compared to other business.
The two risk I find more significant with SingShipping is the counterparty risk, and accident risk.
-Counterparty: The major counterparty is NYL. Looking briefly at their past 10 years, I think they are unlikely to default. So perhaps not that big a worry.
-Accident: Sometimes this worries me. Sinking has happened before, such as what happened to the Cougar Ace in the past. With SingShipping getting more leveraged moving forward, any sinking could cause significant problems. Wonder what is your take on this?
Friday 13th of February 2015
Some of my posts are made deliberately cryptic so that only the guys who are willing to try a bit will understand whether this is a good deal or not. Its not going to be mainstream but for those who are looking for such deals i think is more helpful.
you are right that the thread tying all together is the counterparty risk. for that one advice is to go NYK's website gran 10 years or 13 years of their report and read through to have an understanding of their logistics business.
as for leverage, think about it as singaporeans buying this condo. what could go wrong? they might buy a really bad development, that is as if they bought a ship that is poor. they might not rent it out well lucrative wise. that is like charter rate. they might not rent to a tenant that is able to pay. that is like chartering to a shipper that is not strong.they might bought overleverage on the condo on a floating rate, just like a ship. this is akin to you have a connection to a big boss, and this big boss wants you to buy these properties and rent to his senior management workers. you know they are not going anywhere so you can take the maximum loan tenure.
it feels dangerous to the outsiders, but an owner operator may look at it in a totally different light. as with all things, u can see the weakest link is the big boss
Friday 13th of February 2015
Thanks for the write-up.
I didn't break down the numbers so finely, and you have me the numbers that I thought I should work on over the weekend.
Friday 13th of February 2015
Hey silly investor, no worries. Posts like these are a bit cryptic for most and meant for numbers guy like u. I hope I raised enough optimism and skepticism about my interpretation.