Singapore Shipping Corp - RHB Invest 2015-11-12: Call Of Conviction

Singapore Shipping Corp (SSCL SP) - Call Of Conviction SINGAPORE SHIPPING CORP LTD S19.SI 

Singapore Shipping Corp (SSCL SP) - Call Of Conviction 

  • SSC delivered a stellar set of 2QFY16 results that beat our expectation by 20%. 
  • Maintain BUY with a DCF-derived SGD0.67 TP (from SGD0.59, 123% upside, WACC: 10%, terminal growth: 0%), implying 11.7x FY17F P/E. 
  • Most notably, we are encouraged by its bullish outlook statement, which implies that a new vessel acquisition (with favourable contract terms in-built) is on the horizon without an equity-raising exercise. 

 2QFY16 (Mar) results beat estimates. 

  • Beating our estimates by 20%, Singapore Shipping Corporation (SSC) delivered stellar 2Q results with net income surging 136.4% YoY and 36.5% QoQ to USD4.2m. This was due to the absence of several one-off items such as: 
    1. a vessel that was off hire for dry-docking (likely to be one of the smaller vessels), and 
    2. one-off crew hiring and training costs for the newly-delivered vessel (MV Taurus) that occurred in 1QFY16. 

 Promising outlook looks set in stone. 

  • As we pointed out previously, SSC’s ship owning business is extremely safe (>10 years contract with the customer bearing most of the variable costs). Without factoring in any new vessel acquisitions, 2QFY16 provided a very good indication of what SSC can and would likely deliver every quarter. Hence, we raise our FY16 and FY17 earnings estimates by 14.2% and 12.7% respectively to account for operating costs that came in lower than expected. 

 Strong operating cash flow powers new vessel acquisition. 

  • Key to the 2QFY16 results is a very bullish outlook statement indicating that SSC is operationally and financially ready to undertake new vessel acquisitions with satisfactory terms. 
  • In 1HFY16 alone, SSC generated USD12.6m of net operating cash flow, equivalent to around 2/3 of the cost of a second hand vessel. Hence, this justifies our thesis that SSC can purchase new vessels without raising any equity. 
  • Also, as management had previously indicated that new vessel purchases would come with favourable contracts terms like: 
    1. long-term charters, 
    2. bluechip customers, and 
    3. solid returns comparable to current vessels, 
    we can expect a new vessel with favourable terms on the horizon. This would make our base case of one new vessel per year well-founded.

Edison Chen RHB Research | Goh Han Peng RHB Research | http://www.rhbinvest.com.sg/ 2015-11-12
RHB Research SGX Stock Analyst Report BUY MAINTAIN BUY 0.67 Up 0.59