SINGAPORE SHIPPING CORP LTD
S19.SI
Growing a Cargo Of Secured Profits
- We initiate coverage on Singapore Shipping Corp Ltd (SSC), the only listed “pure play” Pure Car Truck Carrier (PCTC) company in the world, with a DCF-derived SGD0.59 TP (implying a FY16F P/E of 13.5x), representing 100% upside and recommend BUY.
- SSC is a rare gem that offers both safety and growth in the highly-cyclical shipping sector.
- Operating in the highly oligopolistic PCTC sector, SSC carved a profitable niche by
- securing a decade-long profit visibility through its long term charters to blue chip clients and
- enjoying quality growth with its fleet expansion plans.
Investment Merits.
Close relationships secure decade-long profitability through long term charters.
- In the oligopolistic PCTC industry, SSC's close relationships forged with its clients helped it secure decade-long profitable charters with blue chip majors such as NYK Line. These charters, along with its close interactions with the banks, has allowed it to obtain favourable loans on a project basis (with fixed interest rate swaps); together with terms that exclude oil price fluctuations and minimise forex exposure, this virtually safeguards SSC's profit for the next decade.
Quality growth ahead, supported by robust operating cash flow.
- Through its quality charters, we estimate that SSC can generate a robust net cash flow of USD22.8m in FY16F. Thus SSC could be able to generate sufficient resources internally to support its expansion plans, allowing its profit to grow at a CAGR of c. 21.8% from USD9.3m in FY15 to USD20.5m in FY19F under our base case scenario.
Most vessels have decade-long profitable charters with blue chip majors.
- SSC owns a total of six vessels, with the majority holding decade long charters. Other than a single vessel whose charter has been continuously extended upon expiry, all other vessels are chartered out to blue chip clients for contracts with at least 10 years remaining. SSC management was able to achieve this thanks largely to the close relationships that they have forged with their clients over many years.
Superior to its peers with a forward P/E of 6.7x.
- SSC is the only listed “pure play” PCTC company in the world. If we were to compare it to its SGX-listed shipping peers, SSC operates in a more favourable niche space with higher barriers of entry (PCTC vs Containership, Dry Bulk etc.).
- Currently, it trades at a significantly higher ROE to its peers. Going forward, gearing should increase but ROE could further improve.
The right market: stable PCTC supply and demand dynamics.
- PCTC is a niche industrial shipping sector requiring a high degree of specialization where oversupply is a far less serious issue. Going forward, demand and supply is expected to grow at the same rate. RS Platou Economic Research estimates fleet growth at 2.8% and automobile export demand around 3%. Clarksons Research forecasts a 4.5% fleet growth and 5% seaborne car trade growth.
Canny management, who kept minority shareholders in heart, signals return.
- SSC's Executive Chairman, Mr C K Ow, showed uncanny timing in disposing of its vessels before the downturn and subsequently distributed capital back to shareholders as special dividends. Now, Mr C K Ow has led SSC back in the game with the delivery of three new vessels in 2014 and 2015, marking a return from its hiatus. Upon the completion of the expansion phase, we expect SSC to start dishing out generous dividends (50% payout ratio) just like in the past which implies an attractive FY19F yield of 10.2%.
- Since the company first listed in 2000, it has dished out more than SGD200m worth of dividends and has never raised any equity.
Financial Forecasts & Valuation
DCF-derived TP of SGD0.59 with 10% WACC.
- We initiate coverage on SSC with a BUY and a DCF-based TP of SGD0.59, representing 100% upside potential return and implying a FY16 P/E of 13.5x. We corroborate the result from the DCF method with a peer-group valuation approach.
- Using a two stage DCF model, we assume USD16.5m of capex from FY16 to FY18F to be used for the company expansion phase. We derive our terminal value based on a 0% rate of growth and a WACC of 10%.
- We include further assumptions under the base case scenario. A sensitivity analysis, varying the terminal growth and WACC shows a potential range of values from SGD0.43 to SGD1.18.
Bull case TP: SGD0.72, Bear case TP: SGD0.45.
- Our base case scenario results in a TP of SGD0.59 with the expectation that SSC would have added a PCTC vessel per year for the next three years.
- In a bull case scenario the management fulfils its expansion plan to the fullest, adding 2 PCTC vessels per year until they double the fleet to 12 vessels, resulting in a TP of SGD0.72.
- A bear case scenario would see existing fleet size maintained, with a 50% dividend payout and a resulting TP of SGD0.45.
1QFY16 results provide good indication of future earnings.
- The latest 1QFY16 results provided the first snapshot of the group's performance after two new vessels were delivered, showing a profit of around USD3m. Ship owning business now represents the key performance driver, contributing 76.2% of revenue and more than 90% of the profits.
- The company's ship owning business was operating at close to its full potential except for
- a vessel that was off hire for dry-docking (likely to be one of smaller vessels) and
- a one-off crew hiring and training costs for the newly delivered vessels which we estimate to be around USD0.5m.
No taxes applicable.
- According to the Section 13A and 13F of the Income Tax Act, shipping income of a shipping enterprise is exempt from tax. This means that SSC does not pay any taxes and it has no tax liability.
Decade long charters ensure ship owning business earnings visibility.
- Underpinned by SSC's ultra-safe ship owning business model, we expect SSC to continue to produce results similar to the first quarter. Except for MV Cougar Ace (30% owned), all other five wholly owned PCTC vessels are on a decade long charter contracts to blue chip majors that will not expire in the next 10 years.
Minimum variance in profitability
- Minimum variance in profitability during the course of business as SSC only provides crew members during the chartering terms and bears no fuel costs. As for the 30%-owned older vessel the MV Cougar Ace, we expect the contract to be extended as the useful life of the vessel is 30 years. Even if it would be sold, the impact to the earnings would be minimal given its small contribution (~3% of revenue).
Agency business to recover.
- SSC's agency and logistic business suffered from volume decline and margin pressure as a result of the weak macro economy. We expect this situation to persist and agency revenue to decline by 25% this year but subsequently pick up again from next year onwards and grow at 20% per annum as the macro outlook improves. Gearing level manageable and planned to be paid down from FY17 onwards. SSC's robust expected cash flow will be more than sufficient to both finance expansions and pay down its debt. As such, we foresee that net gearing level will likely peak at current levels of 150% until FY16 before subsequently paring down to a healthier 60% by FY19F.
Dividends expected to be attractive post expansion phase.
- Due to the expansion plan, management shared that they are more likely to retain the profits for the next few years therefore the dividend yield is likely to stay subdued. But by FY19, once the high growth phase completes, the company could probably distribute 50% of earnings which we estimate at around USD9.2m or SGD3 cent per share, translating into an attractive yield of 10.2%.
Superior to its peers.
- SSC is the only listed “pure play” PCTC company in the world thus it does not have any other similar peers. However, we compared it to several Singapore-listed shipping companies even though SSC operates in a more favourable niche sector with higher barriers of entry (i.e. PCTC vs Containership, Dry Bulk etc.). The resulting average multiple of the peers (of 9.6x P/E) corroborates our valuation conclusion derived from the DCF method.
Key Risks
Decreasing profits from agency business.
- While SSC's ship owning business is doing well, not the same can be said of its agency business. Increasing competition in the market has resulted in challenging headwinds for the agency arm. However, SSC's agency business does offer unique value add to its clients such as the quick turnaround of vessels, good connectivity and flexibility of cargo, which helped avoid cargo shut-out and unnecessary charges.
Counterparty risk of blue chip shipping majors, particularly NYK.
- While SSC is unaffected by the general decline in global trade (due to its long term charters with blue chip majors), it is still affected by the global crisis that could potentially bankrupt any of its blue chip majors. This is due to its counterparty exposure to its clients. In particular, NYK Line charters four out of six vessels. However, NYK Line is a blue chip major with around USD5bn in market cap and SSC has expressed full confidence in its client.
Minimum forex exposure.
- As the USD currently is the common denominator for global shipping trade, SSC derives its ship chartering revenue in USD with the exception of a small SGD portion derived from ship agency services. Also, most of the company expenses are in USD meaning that SSC faces minimum operational forex risk. However, as USD is the reporting currency of SSC, a weaker USD would mean that SSC could experience a lower SGD profit. However, this is unlikely in the short and medium term given the current macro backdrop. With the Fed rate hike expected, our house forecasts the USD to remain strong against the currencies in ASEAN.
Fixed interest payments mitigate volatile interest rate environment.
- Ship owning is a capital intensive business and loans form a crucial part of it. The interest costs are fixed for a long period of time, meaning that the debt repayment is matched with fixed receivables (from charter income) and the company's only risk remains the counterparty risk.
Low impact of oil price volatility
- While the impact of higher oil prices on SSC is nearly negligible as charterers pay for fuel costs, there is still some impact as lubricant costs for the shipboard running machineries will increase.
Edison Chen
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Goh Han Peng
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http://www.rhbgroub.com/ RHB Securities
2015-08-31
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