The financial results for Singapore Shipping Corporation (SSC) full year have been out some time ago but I refrain from sharing some of my thoughts as I felt its better to see whether there are more things that can be clarified from the annual reports. Since the annual report is out this morning, thought I will do a bit of a recap.
I won’t be repeating much of what I already gone through, but if you are interested, do take a look at the following:
- Singapore Shipping Corp
- Sells MV Singa Ace
- How much returns can you get from a ship
- Singapore Shipping Corp sells Nanyang Maritime
Financial Results Review
The full year results have been rather positive. This was due to a full year of contribution from the re-purchase of Cougar Logistics assets. This boosted contribution of around 3.2 mil USD. In the same financial year, a change in depreciation also resulted in lower depreciation expense. SSC stop chartering out Singa Ace, their old vessel and sold the 29 year old ship (quite amazing that it still can be sold) to realize a profit of 0.9 mil.
This offset the opportunity cost and expenses for dry docking their 2 RORO carriers Boheme and Sirius. We should be expecting dry docking to take place every 3 to 5 years depending on the condition of the ships.
A lot of one off item but this resulted in a net profit growth of 25%. ROE improved steadily over the years as well.
SSC continued their yearly repayment of debt, not reflected above. You would observe a healthy improvement from 20 mil to 1.2 mil, indicating that, unlike shipping trusts, the flexibility not to be focus on dividend pay out allows more sustainable capital management.
I want to put some extra focus on the ships. Shipping revenue, EBIT and operating profit all decline in large due to two factors. Firstly, Dry Docking in 2014 play a part. Secondly, the revenue contribution of Singa Ace have been falling and as it eventually was sold off, these 2 factors contribute to the decline.
Its rather hard to trace the EBIT contribution of Sirius and Boheme individually, but we have the revenue provided in the annual report. If we compare the EBIT from 2011 to 2010, we can estimate that the EBIT of Boheme to be 4.1 mil. If we compare the EBIT from 2012 to 2011, we can estimate that the EBIT of Sirius Leader to be 1.9 mil.
We know that Boheme was purchased for 50 mil and Sirius leader 15 mil.
The Revenue Margin for the 2 ships is as follows
Boheme: 10.5 / 50 = 21%
Sirius Leader: 4.3 / 16 = 26%
Looks like Boheme wasn’t that great of a deal at all. Sounds to me they rushed this one.
The EBIT Margin for the 2 ships is as follows:
Boheme: 4.1 / 10.5 = 39%
Sirius Leader: 1.9 / 4.3 = 44%
Note that these are ships that are tied to 15 year long time charters, so baring unknown risks, these are really predictable EBIT.
The reason for computing these margin is that, future acquisitions will be based on these estimates.
The figures could even be higher, as Singa Ace actually contributed less and less through the years. So the combined EBIT may be estimated to be closer to 6.5 mil
New Ships and Weaker Agency Logistics
The annual report gave more details on the two ships purchased one in the second quarter and another in the third quarter. These ships will be delivered in August 2014 and November 2014 respectively.
For FY 2015, one will contribute 3 quarters and another half a year. Oh joy, more uneven EBIT to deal with.
In Mr Ow’s update, you can see again him stressing the two ships were chartered to long term 15 year charters. The potential revenue over the expected life (15) of this charter is 188 mil. That brings the amount to 12.5 mil per year. If you would like to compare this is much more than the 4.3 mil of Sirius Leader. Based on the purchase price, the revenue of these 2 ships is also higher than Boheme.
The unfortunate news here is that the agency logistics are not expected to do as well.
At the Capital Commitment (Page 97), provides the total amount of the purchase, coming up to 33 mil.
If we compute the Revenue Margin then,
2 New Ships Rev Margin = 12.5/33 = 37.8%
Assume that the 2 ships matches the EBIT margins of Sirius Leader,
2 New Ships EBIT Margin = 12.5 x 0.44 = 5.5 mil
Depreciation (20 years) = 33/20 = 1.65 mil
It is likely that SSC would borrow 20 mil to finance the 33 mil purchase, paid off over 7 years at floating rates, averaging 3.5% interest.
Interest expense = 20 x 0.035 = 0.7 mil
The cash flow per year is likely to be 7.15 mil per year or 6.15 mil, if the year requires dry docking, which usually is every 3 years.
Assuming no leverage, that they pay for these 2 ships in cash (not likely), the IRR works out to be 19.35%. We have not factored in more earnings in the last 5 years, but since IRR factors in time value of money, it is likely to not amount to much difference.
Borrowing 20 mil to finance the deal would amount to a 60% leverage. Not very prudent by normal standards, but for shipping it is rather normal. They could use more cash but i see them conserving some, so this looks the most likely scenario.
The XIRR is a sick 48%.
Whichever way you look at it, this looks like an Ow Chio Kiat deal written all over it.
Future Net Profit, EPS and Net Debt to EBITDA
Projecting future profit is difficult, mostly because of so much assumptions and one of items.
I made a boo boo in the past to not factored in the corporate costs and finance costs. The corporate cost at 1.6 mil is unlikely to climb drastically as owning 2 more ships does not mean a proportionate increase in corporate cost. We forecast this to grow to 1.8 mil.
Finance cost will increase to 1.4 mil by my estimation.
In total, this section should come to 3 mil.
The agency logistic contributed big this year. But in view of what Mr Ow updated, its better we moderate our projection. Looking back from their listed days, its hard to imagine them earning less than 1 mil, since the lowest was around 2mil.
To be conservative lets estimate 1 mil, and we are happy with any upsides.
The future net profit that I projected should come up to = 6.5 mil (existing 2 ships) + 5.5 mil ( 2 new ships) + 1 (agency logistics) – 3 mil (corporate and financing) = 10 mil.
The EPS works out to be = 10/436 x 1.248 (exchange rate) = S$0.028. This is lower than expected. Rather be conservative and right and take any upside from agency logistics as they come.
The EBITDA works out to be= 13 + 4.45 = 17.45 mil. This is to facilitate computing the net debt to EBITDA in the future which works out to be 35 mil / 17.45mil = 2 times. Since they are paying down debt gradually, that is rather conservative
SSC currently trades around S$0.265. This works out to a market cap of US$ 92 mil. With a future net debt of US$35 mil, the Enterprise Value comes up to US$ 127 mil.
The EV/EBITDA then is around 7.2 times. That is rather fair. I consider 6 times to be a rather good bargain. Given that there are some intrinsic value to this company, perhaps 7.2 times is not that expensive.
The PE then is around 9.46 times or 10.46% earnings yield. For a stable business with predictable earnings, its hard to find a 10% yield nowadays. This kind of PE are usually associated with risky small stocks that future earnings visibility is low, with not much competitive edge.
One thing interesting was that, SSC was at S$0.18 for some time, with their stable of 3 ships. Upon the purchase of the agency logistics, SSC starts trading at S$0.22, indicating the agency logistics business will add 4 cents without much leverage.
Discounting the 15 year cash flow to present value, we arrived at a value of S$0.145. This seem to put the back of the envelope fair value to be S$0.365.
This seem to put SSC at a very undervalued position. But we know that after all this, SSC runs a net debt of 35 mil or S$0.10. Subtracting this 10 cents from 36.5 and we arrived at $0.265, which is currently where SSC is trading at.
From the stream of cash flow, readers can see that the cash flow is finite. Whether purchasing SSC at this price depends on the extend you believe in the deal making and capital allocation ability of the management.
The deal for the 2 new ships was great, so are the agency logistic purchase. However, you somehow wonder if that are these deals exclusive to Mr Ow Chio Kiat or that competition is getting more intense. Being so leverage, it will take some time before they can make such acquisitions. By then the landscape might have change a lot. What we know is that, once Mr Ow makes a deal, it tends to be rather good value since he is so conservative in his deal making.
The Value Edge
Tuesday 15th of July 2014
Thanks for the great analysis! Never really did understand the shipping industry though.
Tuesday 15th of July 2014
I don't understand it either just more of its operating context