Singapore Shipping Corp Limited

Introduction

Per Google Finance, Singapore Shipping Corporation Limited is an investment holding company. The principal activities of the Company consists of investment holding, ship owning and ship management.

The Company approximately has four car carriers, with total capacity to carry 22,819 units of cars. The Company’s ship management services include technical management, which include maintenance and repair of equipment and machinery; maintenance of shipboard management system and arranging for maritime insurance coverage; dry docking; procurement, which include ship stores and spares; crew procurement and management, and others, which include ship inspection and new construction consultancy.

Ow Chio Kiat: Intelligent Capital Allocators?

Long time player in the shipping business. Have always been conservative but have managed their fleet of ships well in the shipping boom from 2004 to 2008.

Shrewdly sold off majority (10) of their ships at the height of the shipping cycle, returning vast amounts of cash to their shareholders.

In addition, spun out the logistics business (which this year they bought back) as Cougar Logistics, gave shareholders shares, which in turn realized the value of property assets, giving even more dividends.

Over time they have shown

• Expertise in their area of competence (ship management, logistics, hotel)
• Acquisition of ships and immediate charter to quality charterers, creating a higher cash flow predictability and lower risk
• Conservative in decision making
• Prudent financial management
• Not afraid to go against the tide
• Judicious acquisitions
• Making shareholder accretive decisions

Here is a good read on Mr Ow’s beginnings and an account of the decisions that he made up till 2009:

‘Every man and his dog can start a shipping company, due to its low entry barrier,’ Mr Ow says. ‘My strategy has always been to buy into distressed assets, as long as they are cashflow positive and show potential to improve their performance.’

In 2006, Mr Ow decided to hive off SSC’s thriving logistics, agency and terminal operations businesses into Cougar Logistics Corporation – which became his third listed vehicle. In the process, he enriched SSC’s shareholders, giving them one Cougar share for every four SSC shares.

Between 2005 and 2006, Mr Ow had also started disposing of 10 of his bulk carriers, supertankers and container ships, raising some S$300 million in cash. The remaining ships are currently on long lease to the end of their lifespan.

‘The high tide which has lifted all boats cannot last forever,’ he told BT at the time. ‘Ship prices have reached dizzying heights. There are 4,000 new vessels on order globally and this will impact the balance of demand and supply.’

Cashed up, Mr Ow launched a takeover for SSC and Stamford Land. The offers failed because they were below market prices. Nevertheless, Mr Ow managed to buy back Mitsui’s 4.6 per cent stakes in each of the companies – raising his personal stake in SSC to almost 40 per cent and Stamford Land to 42 per cent. ‘As the market was not waking up to the group’s real worth, I decided to raise my stakes,’ he says.

– A Journey marked by tenacity, common sense

Purchase and charter of MV Boheme and MV Sirius Leader in 2010/2011

SSC have owned RoRo carriers of Pure car and Pure trucks vessels in the past. Perhaps they really know the segment very well and have indicated that  they are going to build up a specialized fleet of them.

This is the first time I came across a shipping company with that train of thought.

MV Boheme

• Built: 1999
• Capacity: 7,200 cars
• SSC Purchase price: USD $50 mil
• Revenue: USD $10 mil
• Chartered to: Wallenius Lines of Sweden
• Independent director Mr Bengt Chister Olsson was President o f Wallenius Lines for 15 years and still is Vice Chairman
• Chartered duration: 15 years
• Charter commences: 2010
• Active duration left (from Jan 2014): 12 years

MV Sirius Leader

• Built: 2000
• Capacity: 5,190 cars
• SSC Purchase price: USD $16 mil
• Revenue: USD $5 mil
• Chartered to: NYK  Lines of Japan
• Chartered duration: 15 years
• Charter commences: 2011
• Active duration left (from Jan 2014): 13 years

Why RORO Pure Car and Pure Truck Carriers

In SSC’s FY2005 report, there was mentioned about SSC’s forecast of charter freight rates, the supply and demand (great foresight btw!), but more importantly their aim even as early as then to focus on this segment:

In its FY2005 annual report, the Chairman of SSCL reported that there were more than 4000 new ship buildings coming on-stream in response to higher freight and charter rates since calendar year 2003. These new ship buildings would eventually soften freight and charter rates when they come on-stream and also the selling price of older vessels. SSCL has therefore been divesting and selling its existing fleet.

In May 2005, SSCL sold two of its container ships (MV HSH Ubin and MV HSH Kusu) for S$96.8 million with a gain of S$47 million.

In June 2005, it sold off two of its multi-purpose vessels (MV Chekiang and MV Clipper Stamford) which resulted in a gain of approximately S$18.5 million.

In August 2005, the Company had also announced the sale of its 20% interest in Aries Carriers Pte Ltd which is the vessel owner of Bright Artemis. The gains would be recognized in financial year ended 31 March 2006. The divestment of vessels is also part of SSCL’s strategy of refocusing its business of a diversified ship owner to a specialist ship owner specializing in car and truck carriers. Such vessels have less volatile charter rates and are also able to secure longer term time charters of up to 15 years.

Time Charter

A time charter is the hiring of a vessel for a specific period of time; the owner still manages the vessel but the charterer selects the ports and directs the vessel where to go. The charterer pays for all fuel the vessel consumes, port charges, commissions, and a daily hire to the owner of the vessel.

Typically a long term charter indicates the owner’s preference for predictability and conservative nature.

Pros to Singapore Shipping Corp

• Control over the maintenance of the ships enable them to ensure the quality of their ships and maintained the golden goose
• Fixed Price = Predictability
• Time chartered market, unlike spot prices, reflects the economic situation on a longer term perspective
• Long term contract protect owner (SSC) in periods of decreasing spot rates
• Long term charters secure cash flow  for building programs with the stable revenues (not applicable to Singapore Shipping Corp)

Cons to Singapore Shipping Corp

• Failure to value the fixed charter rate well could result in missed opportunity costs
• During dry docking (as is the case this year), maintenance fees need to be paid by ship owners (SSC) and during this period there is a loss of income as well
• Severely impacted if charterer is a suspect, which may result in the ship owner being saddled with ships not earning them hires

Ship Charter Cash Flow

It is only in 2011, when both MV Boheme and MV Sirius starts contributing that we see better EBIT. FY 2012 shows that the 2 ships contribute 70% or revenue.

The EBIT moving forward will likely be that from the 2 main ships.  Since Cougar Ace is likely to contribute negligible  EBIT to the bottomline, it automatically gets taken out from the equation.

Singa Ace, when scrapped should take 1.3 mil away from FY 2014 EBIT, which we forecast to be 6.8 mil.

FY 2014 cash flow looks lower than that of FY 2013, this is due to lower margins from Singa Ace as well as the 2 ships taking turns to go into Dry Docking, which means they are not spending time generating cash flow

Acquisition of Cougar Logistics Assets

Acquisition Details Here.

In January, 2013, Singapore Shipping, through the connections of Mr Ow, acquired the productive entities that Mr Ow listed in 2006 from Singapore Shipping as Cougar Logistics:

• Singapore Shipping gets HPTL, ISPL, NYML and SSPL for a total consideration of SGD $15 million
• MYR gets Cougar Log as a vehicle for a RTO

Through this acquisition, Singapore Shipping was able to re-integrate a cash generative productive asset to diversify their currency risks and business nature.

Evidence of how cash generative is that since its listing in 2006, Cougar Log have been consistently paying good dividends.

HPTL

HPTL, an associated entity of the Vendor, was incorporated in 1984. HPTL is owned by the Vendor and Poh Tiong Choon Logistics Limited in equal shares. It provides stevedoring and other port services to a major car carrier operator.

• NTA: SGD $0.8 mil
• Net Profit Attributable Then: SGD $0.5 mil
• Acquisition Paid Attributable: SGD $1.5 mil
• ROIC: 33%

ISPL

ISPL, a wholly-owned subsidiary of the Vendor, was incorporated in 1994. ISPL handles strategic projects and provides logistic services. It is also a member of the Singapore Logistics Association.

In addition to providing transportation, warehousing, distribution, transshipment and installation services, ISPL also provides specialist logistics services and solutions for niche markets (such as shipments of hazardous materials and shipments for military and classified uses) and other cargos and equipment that require special handling such as elevators and escalators.

• NTA: SGD $0.9 mil
• Net Profit Attributable Then: SGD $1 mil
• Acquisition Paid Attributable: SGD $2 mil
• ROIC: 50%

NYML

NYML, an associated entity of the Vendor, was incorporated in 1988. NYML is 49% owned by the Vendor and 51% owned by ISK Singapore Pte Ltd. It provides distribution, warehousing and other support services and is also in the business of port operations.

• NTA: SGD $1.8 mil
• Net Profit Attributable Then: SGD $0.178 mil
• Acquisition Paid Attributable: SGD $1.5 mil
• ROIC: 11%

SSPL

• NTA: SGD $6.6 mil
• Net Profit Attributable Then: SGD $2.4mil
• Acquisition Paid Attributable: SGD $10 mil
• ROIC: 24%

Historical Profit and Cash Flow

We won’t know how much these acquisition will contribute, but if the produced Cougar Log’s profit in the past, the historical listed profit history can be use as a guidance.

As shown, net profit have been consistently positive amid a shipping downturn. While it does fluctuate in the past, the average  profit is 3 mil SGD or 2.5 mil USD.

We are optimistic that as an unlisted asset, the tax and finance savings will yield a much higher profit. Indeed from the first half 2014 result there seem to be some tax savings.

The first half net profit is 1.8 mil USD or 2.2 mil SGD. Indeed 2014 may well shape up to be an optimistic year.

Still a conservative guess will be to estimate a 3 mil SGD cash flow addition to their ship chartering business or 2.5 mil USD

3 mil is SGD 0.6 cents which at SGD 23 cents share price is an earnings yield of 3%.

This acquisition itself fulfills 60% of current 1 cent dividend alone which makes it very very accretive.

The cash within the acquisition

One interesting thing that was brought to my attention was that in the latest annual report, it was shown that within the SGD $15 mil (USD $12 mil) acquisition, it comes with USD $7 mil of cash.

This means that it  will seem they effectively paid only USD $5 mil or SGD 6.1 mil for the acquisition!

At an average profit of SGD 3 mil (or USD  2.5 mil), they potentially paid 2 times PE for this acquisition, making it rather shrewd!

Cash Flow

Currently, the main bulk of cash flow comes from 2  RORO ships on long term chartered upon purchase to “blue chip” charterers. These are MV Boheme and MV Sirius Leader.

Since their charter starts in 2010 and 2011 respectively, they have 12 and 13 years of operation life span to go.

There are 2 more ships MV Singa Ace, which is 29 years old and should be scrapped any time and Cougar Ace, which is 20 years old and 30% owned by SSC.

In addition, at the start of 2013 in January, the repurchase of Cougar Logistics’ assets have provided a much needed boost to future cash flow.

In summary, the main generators of cash flow will be the 2 12/13 year RORO ships and Cougar Logistics assets.

In FY2013, a net profit of USD $ 6.8 mil was achieved or an EPS of SGD $0.019. That is rather impressive but with Singa Ace being scraped soon, the EPS will take a hit.

The masterstroke was the purchase of Cougar Logistics assets, which was able to offset the loss of income of dry docking but also possibly replace the long term loss income of Singa Ace

Mr Ow is rather confident the earnings from Cougar Log can more than offset these 2 losses.

EBITDA and Free Cash Flow looks good but factoring in working capital, FY2014 Free Cash Flow looks to be much lower than FY2013.

The unique thing about ships is the very low tax expense and that capital expenditure is low unless its an acquisition of a new ship. Capital Expenditure will be the occasional (3 or 5 years dry docking)

In terms of ROIC, the return looks respectable versus the REITs, where they are stated to hit 9-10%.

How will cash flow be conservatively used moving forward with 2 ships and Cougar Logistics assets?

• FY 2013 Ship Chartering EBITDA: USD $10.5 mil
• Singa Ace EBITDA: USD $-1.5 mil (to be scrapped soon)
• Cougar Logistics Est Average EBITDA: USD $2.5 mil
• Estimated EBITDA: USD $11.5 mil
• Interest and Tax: USD $-1 mil
• FCF: USD $ 10.5 mil

SSC would likely use USD 4.5 mil to pay off debt. This will leave, 6 mil. This will allow SSC to pay a SGD $1.5 cents dividend (6.5% @ 23 cents) with USD $5.3 mil.

This will leave USD $0.7 mil as retained earnings.

Will SSC pay 1.5 cents instead of 1 cents for the past 4 years? Your guess is as good as mine. I believe reward is down the road, whether it’s a lumpy special dividend or a bump up.

If its 1 cents it’s a comfortable USD $3.4 mil in cash flow.

Debt

The net debt of SSC is currently USD $10 mil. Debt to asset is a manageable 11%. A measure of how well a cash flow generative business is not over leveraged is whether Net Debt to EBITDA is above 4 times.

Current Net Debt to EBITDA is 0.60 times, taking into account an EBITDA of 12 mil and that net debt ends up close to 8 mil.

There are much room for SSC to leverage up, so much so that they can perhaps purchase USD $32 mil worth of vessels.

Valuation

Based on an EBITDA of USD $11.5 mil, an EV of USD $91 mil, the EV/EBITDA stands at 7.9 times. I find this a fair valuation, not expensive but not cheap either.

If we calculate the XIRR of a $91 mil asset purchased to generate 12 years of $11.5 mil cash flow, we arrive at an XIRR of 7%.

This certainly don’t look as attractive as China Merchant Pacific, but it is rather respectable.

This is basically like an equity bond that is managed by an experienced asset allocator who has been in the business for some time.

You hope for a reasonable dividend payout and at the same time let him take the cash flow to make accretive decisions.

Aging Management

One of the main risks with doing what they do, identifying ships, identifying shipping charterers to work with, assessing counterparty risks, identifying ROIC and valuation, is that the management team have build up like 40 years of experience.

Mr Ow and his bro is nearly 67-68 years old. In fact the management team is rather old.

Although the family is still holding a rather sizeable stake, you wonder how the end game is going to play out.

Investors have not seen independent deals carried out by Mr Ow’s son and enough time to assess their capital allocation capabilities.

How long would they be around to advice and check on acquisitions. In such a business (and in most business) companies live and die by business decisions.

Pteris (previously interroller) have shown how a change of guard can become very detrimental.

At the end of the day, a scale down in stake, is an indication to seriously think about exit or scale down. Each business decision will thus have to be scrutinized.