Singapore Shipping Corp–How much returns can you get from a ship

We did some prospecting of SSC not too long ago here at Investment Moats. [Analysis here]

This time round it is more of a note to self. I ever wonder every time they went to acquire a ship what it actually entails.

Might as well get it over with and do it once and for all here.

So it seems a typical ship acquired by SSC fits the following profile:

1. It WILL come with a long charter typically 15 years
2. It’s a time charter. Charterer directs where the ships are suppose to be at and which destination it is suppose to go to. SSC maintains the ship
3. Charterer is a blue chip car and truck charterer. This ensures very low probability of charterer default
4. With 1 –3 in mind, you can match it with the lowest form of financing
5. This becomes very predictable. As a purchaser, you can calculate your ROI, cash flow yield on it

The question is can we give a fair estimate based on the data we have?

What if we were to estimate the return we can get on purchasing a 20 mil pure car and truck carrier

What goes into a ship are as follows:

• +EBITDA
• – Dry Docking Maintenance (every 3 to 5 years)
• – Taxes (Singapore ships seem to be tax free)
• – Interest Expense

The lifespan of a ship would probably last for 30 years. If its 10 years old there is probably 20 years of life more. Since 15 years is chartered out, the last 5 years will have a much lower EBITDA margin.

On an average the EBITDA margin of the 3 SSC ships, Singa Ace, Boheme and Sirius is 57%. We can assume for a normal charter the margins are as such. The last 5 years margin possibly is less or around 30%.

The revenue is 19.9 mil in total.  We know that Boheme costs 50 mil, Sirius 16 mil, and assuming Singa Ace have a scrap value of 4 mil that is a total of 70 mil.

The EBITDA for the first 15 years will be 19.9 x 57% x 20/70 = 3.24 mil

The EBITDA for the last 5 years will be 19.9 x 30% x 20/70 = 1.7 mil

Considering Singa Ace’s profit contribution is around 1.3 mil, I think we are not too far off.

The rest of the information is as follows:

• Dry Docking Maintenance first 15 years 3 years once at 600-700k which will be 0.250 mil per year. Last 5 years 2 dry docking of 1 mil each since its older, coming up to 0.400 mil per year
• Borrow up to 70% of the ship’s purchase value, paying off in 8 years at 1.5% 4% interest (avg interest expense currently 3%). The initial outlay will be 6 mil with 14 mil borrowed paid back 1.75 mil per year with 0.56 mil interest expense

Cash flow for

• first 8 years: 3.24 – 0.560 – 0.250 – 1.75 = 0.68 mil
• next 7 years: 3.24 – 0.250 = 2.99 mil
• last 5 years: 1.7 – 0.4 = 1.3 mil

We arrive with the following XIRR for the 6 mil invested:

The leverage return is rather good. There are much assumptions here:

1. Charterer makes this investment predictable
2. Rates remain low, even if it doesn’t, when interest is hedged or swapped with fixed rate at 4%
3. Dry Dock maintenance cost is realistic (This may not be the case, more unfavorably than favorable)
4. EBITDA realistic. Based on working backwards depreciation and earnings, they should be quite close

Summary

It would cost 6 mil to acquire a ship and each ship acquisition looks like a leverage bond. SSC EBITDA sans Singa Ace would probably be 10.5 mil and given the 1 SGD cent dividend will take away 3.5 mil, there is 7 mil to pay back debts or acquire a new ship.

The question is whether they can frequently engineer such a deal. The likely hood is not.