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CH Offshore exploding trade receivables

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.

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Cal

Wednesday 20th of March 2013

Hi there, Chance upon this informative blog recently.

Any idea why this company pays so little tax? For the 5.5 yr period between 30 Jun 2007 to 31 Dec 2012, Total income was around USD220M which approx same as Total Comprehensive Income. Total dividends paid USD88M Income tax paid was only USD1M. On 31Dec2012 Bal sheet, Other payables (deferred gain) is USD24M Thanks Cal : )

zz

Wednesday 19th of June 2013

The following shipping income of a shipping enterprise is exempt from tax under Section 13A and Section 13F of the Singapore Income Tax Act (SITA):

Section 13A Income

For Singapore registered ships plying in international waters, income derived from:

o the carriage of passengers, mails, livestock or goods;

o towing or salvage operations carried out;

o the charter of such ships;

o the use of the ship as a dredger, seismic ship or vessel used for offshore oil or gas activity (with effect from Year of Assessment (YA) 2007);

o foreign exchange and risk management activities which are carried out in connection with and incidental to its operation (with effect from YA 2009); or

o the provision of ship management services to any qualifying company in respect of Singapore ships owned or operated by the qualifying company (income derived on or after 22 Feb 2010).

For foreign ships

o Income derived from freight uplift from Singapore. This exemption does not cover charter fees and carriage arising solely from transhipment from Singapore or is only within the limits of the port of Singapore.

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