Sunday, November 15, 2015

Singapore Shipping Corporation -- Pure Car and Truck Carriers

Business model

This company operates in two segments. Via its shipping segment it is what is known a "gross tonnage provider" for major car and truck carrier operators. That's just what it sounds like: SSC buys ships that it immediately leases to, for example, Wallenius or NYK Line for fifteen year terms or longer. These operators in turn carry Toyotas, Mazdas and the like from the places where they are manufactured to the places where they are sold. 

The gross tonnage provider -- SSC in this case -- benefits by locking in stable, long term cash flows albeit at lower average daily charter rates than it could command in the short-term charter market. This allows it to finance the purchase of the ships using lots of very low cost debt.  The charterer, in turn, benefits by earning a spread between the rates at which it charters the ships from SSC and the rates that it charges the auto manufacturers in the shorter term (usually one year or two year) market. 

Relationships between charterers and PCTC ship owners tend to last for decades and ships are often chartered for back-to-back 15 year terms. Entering the market in the absence of such a relationship is unlikely to succeed.

SSC also has an agency and logistics segment that I won't be discussing here (though I'll address any questions in the comments).

Earning power








The above values are in US dollars, SSC's operating currency. Capricornus, Centaurus and Taurus Leader are new enough acquisitions that their impact on SSC's earning power has not yet been fully felt.  





So the market's valuation of SSC is offering what looks like a 15% earnings yield when the weighted average cost of SSC's debt is in the 2% range and the equity risk premium for the SGX composite is ~6%. On that basis alone, SSC is trading at half its value.

SSC is an 80+ year old company now chaired by the second generation and managed by the third, and it prides itself on returning cash to shareholders -- $200 million since 2008, 5.5c per share over the last ten years and so on.  If it were not for its growth plans the year ahead dividend yield would be 15% -- attractive when adjusted for the risk, which is far below average.

Growth

SSC's owner managers have also earned a reputation for doing what they say they will, and what they have been saying over the last year is that they are committed to doubling their fleet within three or four years. 

I think that SSC can pay out roughly 1/3 of free cash flow in this period as dividends and will use 2/3 to provide the equity portion of its investments in new PCTCs. If so, it can buy one $US 80 million ship per year. Again, these purchases are made once under contract to the charterer and use very low cost debt financing. Taurus Leader, SSC's latest purchase was financed by >96% LTV debt at sub 2% interest rates. I am modeling 80% debt financing at 2% interest. 

In any case I think it reasonable that the earning (and value) progression should look something like this:


and therefore

Risks

The principal attraction of this idea is on the risk side of things. The upside is fine -- the stock is, in my view, worth north of $0.60/share today and will likely be worth ~$1/share in two or three years. But is the relative brevity of the list of things that can go wrong that stands out most. 

These are quality owner managers running a company contracted to receive  fixed, multiyear cash flows from blue-chip counterparties and who have made credible promises to return excess cash to shareholders.

The one wrinkle that one ought to think about is the recent price-fixing charges brought against a number of players in the RORO charter industry. If price fixing were a necessary part of the charterer's business models then SSC's growth beyond the immediate 3 or 4 year period may not be all that it could have been.

Summary

The no-growth scenario implies a value in excess of $0.60/share.  As a point of reference, the present value of the contracts in place and the residual value of the ships at the end of these contracts is in excess of $0.40/share when discounted at 8%.

The no-growth scenario may notbe fully appreciated because the full impact of the recently acquired ships is not reflected in SSCs trailing 12 month results.

The growth scenario implies a valuation in the $1/share range.

Disclosure: I own some shares in SSC

65 comments:

  1. Hi! Have you looked at SSC's peer - Seaspan Corporation? The yield is 10%...any thoughts?

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    1. I have. I think I remember that the weighted average time to lease expiration is 5 or 6 years which is too short for me since the enterprise value exceeds the FCF runoff from the contracts currently in place. These are containershps so renewal demand and/or disposal values are going to be determined by how the business cycle plays out over these next few years.

      Plus, it's a yield vehicle so one has to be satisifed with the current yield and not mind capital depreciation (aka share price declines) as rates rise. I find that easier to do woth 20%, 30% yields than with 10% yields. I don't think 10% is adequate compansation for the risk of owning equities but that is a minority view.

      Also, I think I remember that there was some dilution hapening via the preferreds (I may be misremembering or misunderstanding this so forgive me if I am).

      It's a better than average at idea at 10%, truthfully, but it's a worse than average idea at 6% so the room for capital appreciation is modest and fraught imo.

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  2. Hey Red,

    Have you looked at all in the solar yield vehicle or MLP's for similar types of opportunities re runoff value? TERP/GLBL seem interesting at these prices relative to runoff of current portfolios, but the Vivint acquisition seems pretty value destructive at TERP.

    Thanks for the idea, and all the other recent ones.

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  3. Hmm I've collected some reading materials but haven't been through them yet. Hedge fund hotels = brain damage + crap shoot. lately (or maybe always). I will, though. Where should i start? How would you rank them if management quality were the decisive factor?

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  4. Ah I seenow that Chatila has changed tack. I'll look at SUNE. Thx Ruby

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  5. Don't have any opinions on management quality, besides the combined management/core shareholders at Cheniere. Looks like a 6-7% discount rate to the current valuation using only contracted cash flows and residual train value. Can get an idea of the upside from presentations. Management has been focused on low risk cash flows until more recently, but I expect Carl/Baupost/Pointstate to keep them in line. Another hedge fund hotel tho obvs.

    TERP's current portfolio seems to be priced at a 10% discount rate assuming zero residual value after the avg 16 year PPA expiry. The pending acquisitions don't look very pretty tho. GLBL seems similar but without the acquisition overhang. Not sure how to think about renewal/residuals as I am new to the solar space, hesitant to invest.

    Planmaestro is also onto a few interesting MLP's discussed briefly in his twitter feed. Just beginning to look at those.

    Best of luck with SUNE - I've given it a shot and didn't get far. Seems like it requires a bit of faith in management and their guidance.

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    1. Ah ok, I'll look into some of Plan's names, Thx again

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    2. SUNE complex (SUNE,TERP, GLBL etc): Had a look. Too many contingencies and uncertainties in each name for me.

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    3. contingencies
      https://www.moodys.com/research/Moodys-downgrades-Terraform-Power-and-Terraform-Global-to-B2-CFR--PR_339505?WT.mc_id=AM~WWFob29fRmluYW5jZV9TQl9SYXRpbmcgTmV3c19BbGxfRW5n~20151123_PR_339505

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    4. I really appreciate this feedback Red - you've kept me out of two value traps this year- RCAP and now these yield vehicles. Working on CEQP this weekend- distribution is kinda unreal at this point.

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    5. Very pleased to see you in CEQP - as a Canadian investor I sincerely hope they consider buybacks in lieu of distributions. Lack of long dated/inexpensive derivatives is a pain too.

      On an unrelated note, I've noticed significant institutional selling in Flybe- do you think this setup is similar to HA? I don't usually chase short term returns, but find it useful to have some perspective on multiple time frames. Also looking to hedge additional long oil exposure. Also curious if you have ever looked at Olin? -seems like an interesting way to partially hedge long natural gas exposure.

      Cheers

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    6. Well, I think Flybe ought to generate at least ~55 and ~80 in FCF in 2016 and 2017 so in that sense it looks like HA in 2012 -- you can see 1x FCF coming if you cares to look. But US investors are more likely to anticipate results whereas UK investors are more likely to overweight trailing results. So there might be some time slippage: it may pay off on 2017 rather than in 2016.

      Still, it is my preferred short term play which is why it is oversized. (I think Paradise, Future Bright, Texhong, and Haichang are cheaper than Flybe but it may take a little while for those names to play out than it should take for Flybe to re-rate. I see that someone has written up Flybe on VIC in the past week though I haven't read it. Strong dollar is bad for Flybe but lower oil is good and they should cancel out at worst. If there's institutional selling then I suspect its dollar strength fears that's causing it.

      I've run out of cash, unfortunately, but if you're looking for names I think Houghton Mifflin and FMC Corp are worth the time it takes to study them. (They've both been written up on VIC in the past year and both write ups do a good job ofoutlining the basic theses). Their payoffs are likely 2+ years away but they look good enough value that the wait would be worth it.

      I think I remember Olin as the "speciality" chemical biz that wasn't so special but hadn't thought of looking at it from the perspective of a nat gas hedge. Thanks for the tip, Ruby. I'll look at it again.

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    7. I'm always looking for more ideas- thanks! Regarding Flybe/HA, I was more referring to the presence of a large volume seller keeping the price down in HA. As soon as he stopped, it went ballistic. Hope we see something similar in Flybe :)

      Spent a fair amount of time on PAH so FMC seems right up my alley. Olin's merger with Dow seems to put them in a pretty advantaged position, but I agree there isn't much there beyond a low cost commodity producer. Some short oil exposure there too due to transportation costs.

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    8. Ah, I see. I hadn't given that any thought until you mentioned it, tbh, but it sounds like a more than plausible theory.

      As an aside, HA went through three or four spurts in the time that I held it. Two of those 4 times were, I think, related to its market cap: once it reached 500M and 1B then various categories of funds were allowed (or allowed themselves) to buy it and they did. No idea whether this is also applicable to UK institutional investors but may explain why it went from 140 to 50 in a jiffy. that phenomenon would also explain (for example) why Dart Group was stuck at 1x EBITDA for a long time but gained favour as a function of its market capitalization rather than as a function of its results or valuations.

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  6. In the container space, I have been looking at GSL. Same caveats as with SSW (~5 year lease terms). Plus it's smaller and junkier and has, I'd argue, worse counterparty risk than SSW. On the flip side, management laid out a post-crisis roadmap and has pretty much followed it (albeit rather more slowly than some optimistic holders would have liked) without too much dilution, which gives me some small degree of confidence in them. Yields a bit more than SSW (40 cents/year on $3.40 current price) currently, and management has signaled pretty extensively that this is going up (to 50 cents/year) next quarter. It requires only a minimal expenditure of imagination to see that climbing to 60 cents a year by the end of 2016, getting you to a high-teens yield, though that's the sort of imagination that can get an investor in trouble...

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    1. Had a look at this too. I see what you like about it. Interesting situation

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    2. Am still looking at this. I'm by nature a nibbler, but trying to run simpler/more concentrated book. Hard to handicap what effect, if any, rumored/potential consolidation in container space will have for them. Have also looked at Danaos, who first went onto my "potential good operator" list when they sold out of drybulk near the peak and went into container. Hard to know whether that was lucky or good. They guide to total FCF over the next 3 years that's ~50% higher than the current share price and have a longer lease tenor than GSL, but so much of this is about understanding management facility, counterparties and non-apparent levers of value creation/destruction--something at which I daresay you're better than I...

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    3. FYI DAC is a circumstance where cash from remaining contracts (by my very crude current mental calculation) approximates EV. No yield at present, so you're not paid to wait. Forward-looking appreciation story they tell is: 1) Swaps expiration 2) Deleveraging 3) Opportunistic acquisitions, probably via JV 4) No/minimal dilution. All can be checked, at least.

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    4. Super interesting name. I ought to give this a thorough once over -- e.g. who owns the warrants, I wonder? -- after the thxgiving break. Also have to think about the possibility that Greek shipping co.s get taxed at some point. etc. First read through materials is ncouraging, though. Thanks. I'll post some notes here when I've gone through it ptoperly.

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  7. Just looking at the 2 ships they bought in 2014: so they paid $33m for assets that earn $12m per year? And levered them up so $6.4m paid for earning $12m? I haven't looked in at all, these just seem crazy for a shipping business. Why not just buy more ships like this instead of the larger, more expensive, newer ones? Playing Devil's advocate.

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    1. Thanks for looking into this name. Three reasons why not:

      1) Those kinds of bargains don't com along very often;

      2) The PCTC industry is moving up from 4,000-6,000 CEU capacity ships to "post-Panamax" 7,000-8,000 CEU capacity ships. It's an economies of scale issue and the smaller ships won't survive the car transportation economics of 2045

      3) SSC buys what its charterers demand. If you look at NYK Line's 2015 annual yearbook they lay out their PCTC needs over the next few years. More 7,000 CEU carriers.

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  8. ps One attractive feature of this stock is that these owner-operators have always been on the attractive end of deals-- both buying and selling. They used to be in the container business, for example, and sold those ships at the peak in 2007 because they knew that the peak had arrived (see statement in 2005 Annual Report). etc

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  9. Hi red, thanks for all these fantastic write-ups. Seem like you have found quite a few nice picks listed on SGX.
    I just wonder if you have any recent/updated view on Ezion - its share price has almost dropped by >c50% since beginning of the year.

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    1. Hi -- Everything in O&G has falen by a smilar amount this year so I think the thing to do is to privilege unlevered equities over levered ones. At $80 crude Ezio is worth, what, $3? So there's time to collect winnings from unlevered (and therefore safer) investments first and then recycle those winnings into something like Ezion.

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  10. What do you think of gear energy as a O&G play at some point. Or do you strictly avoid E&P's?

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    1. I don't do banks & life insurance but I'm game for anything else. Just spent 10 minutes on GXE, enough to decide to look at it at some point. Thanks (and sorry that I don't have anything informed to say about it),

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    2. You might find bellatrix interesting as well then, regarding their low cost spirit river assets.

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  11. I'm interested in your take on GSL. I must be looking at it too simplistically, but it looks to me like nearly all of the dividend and cash flow represents depreciation of the ships. And that's real depreciation, not some kind of non-economic amortization. So, how is GSL going to pay off its debt if it's paying out all its cash flow as dividends?

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  12. Good question, thanks

    Start with an estimate of how much it would cost to reproduce the fleet.
    Using Ningbo as a guide, Cost per TEU = $6,650 & scrap value = $1,000/TEU so Net = $5,500/TEU
    x 82, 312 TEUs in GSL's fleet = $465 million

    20 year useful life implies maintenance capex = 465/20 = $23M per year

    Now start with 2016 EBITDA of $113M
    Minus interest = 69 = cash available for MCX and dividends

    Debt principal payments of 28 in 2016 = accelerated MCX (if 2/3 of the financing for the assets is debt then 2/3 of MCX = debt principal payments)

    Normal year MCX reserve, as we said = 23

    So normal cash available for distribution = 69 - 23 = 46

    And GSL is therefore planning a payout ratio of ~50% of this amount
    48 million A shares x $0.50/share = 24 million


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    1. Thanks for the response. Three follow ups:

      (1) Is your 20-year remaining useful life based on the 30-year useful life estimate in the disclosures less average fleet age of 10 years?

      (2) Are you lowballing MCX by relying on trough values for ships? Management would like you to think they're getting great deals and that ship prices will increase in the future. Or is it that ship values are correlated with prevailing charter rates, so if ship prices (and thus MCX) increase, so will EBITDA?

      (3) In general, how do you account for the fact that the economics of containerships degrades over time as they age and presumably become relatively less efficient and thus worthy of lower charter rates, while, overtime inflation should increase the costs of construction for newbuilds? Or is this more than provided for by the fact that GSL is only plans to pay out around half of your estimate of distributable cash flow?

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    2. (1) 20 years is what I've seen. I don't know what they say in the notes, honestly speaking, nut I wouldn't be surprised if they said 25 or 30 years. From what I've seen, 20 yr old ships have a hard tome finding work. They may find months long time charters or try theor luck in the spot market after that but it usually doesn't work out for long and they are usually scrapped.

      (2) One way to sort out which is what is to look at the gross PP&E values per TEU across the containership space -- Seaspan, DC, Costamare etc. I don't think you're going to find many outliers. Ships are acquired in a downcycle because they're cheap and they are acquired in an upcycle because charter rates are attractive. it evens itself out.

      (3a) Is it true that the cost of newbuilds rises over time because of inflation? There are a lot of other intervening variables that are as/more important: where the ships are built, technology, charter rate inflation, laddering of ship sizes etc. E.g. Made in Korea in 1995 v made in Vietnam in 2025 -- which will be lower cost?

      (3b) Paradoxically, the knock against GSL (in the mind of the market) has been -- and is -- that it does not pay out enough of its CAFD as dividends. There's a singnificant stigma attached to it because of that. It can afford to pay out $1/share as it did before the GDC so if we get back to that 100% payout ratio -- i.e. standard practice -- we might see the stigmata heal over time.

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    3. Following up on your response to (1), if the real useful life of a ship is 20 years from when it was built, then why are you using 20 years for the remaining life of GSL's fleet when that fleet is already, on average, more than ten years old?

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    4. We were talking about annual MCX reserve, no? I used Ningbo as cost standard. It is less than 10 years old so should be a more than fair basis upon which to build a model of a 20-year MCX reserve.

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    5. I get your point that your MCX reserve represents that amount of capital that is used up by running 82,000 TEUs for a year, and so if you put that amount aside, you should be able to maintain your fleet.

      What is tripping me up is that looking solely at your MCX reserve analysis seems to ignore the existing asset base and capital structure. For example, your calculation of distributable cash flow -- and I think value of the business -- would be the same, regardless of whether the average age of GSL's ships was 5 years or 15 years. How can that be right?

      Maybe what's tripping me up is that I'm thinking the existing ships must pay off the existing debts. Perhaps that's not true, and the company can simply carry some amount of debt forever.

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    6. Oh, I see. I think that's the right way to think about it. Don't forget, too, that debt principal repayments also count as maintenance capex in an economic sense.

      But yes, these "long-term" fixed price charter business models are supposedly stable and therefore they become yield vehicles that rest on a permafrost of debt.

      If you run the business right growth is never too fast, debt never exceeds acertain multiple of EBITDA, and charter expirations never arrive at the same time. Incorporate in a tax free place and 90%+ of EBITDA becomes distributable. Dividend-lovers accept 5% yields; you have the financial strength to buy ships when you want (when they're cheap and/or when they come prepackaged with a long-term charter), and everything ticks over nicely.

      That's the idea, anyway. Obviously from a value investing perspective the idea is not to held them for a full cycle or for 20 years etc. Instead one is trying to size up the risk of loss if things go badly wrong and to make one's bets (or not) accordingly.

      At a dividend payout ratio of 48C/share all but 17c/share of one's investment will have been recouped by the time the charters are up for renewal and, at that time, the stub of one's investment will be $0.17c against $10 in book value.

      So the focus is all about the next 36 months rather than the next 10 or 20 years:

      1a) Does CMA CGM live?
      http://www.boerse-berlin.com/index.php/Bonds?isin=XS1005207961

      1b) Does it honor the contracts if it does not live?

      2) Does CMA CGM, seeing the spread between what it pays GSL and the rates available on the spot market, sit down with a calculator and decide that it is cheaper to buy GSL than to pay the difference?

      3) Do GSL's auditors insist on a write down of some/all of its ships? If so, does that trip covenants?

      4) It has debt with variable LIBOR+ rates. What happens to solvency/liquidity/CAFD if US LIBOR rises by 2% over the next three years

      and so on.


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    7. Hi red, thanks for sharing your thoughts. A basic question, could you please explain what you mean with "that debt principal repayments also count as maintenance capex in an economic sense" ? This is more or less what I understand: That is the same to buy a ship with equity and reserving an amount (depreciation) in order to maintain your earning power at the end of the life of your boat or to buy it with debt financing and pay the principal annually so at the end of the life of loan (matched with the life of the boat) you will be able to obtain financing again to acquire a new boat and maintain your earning power?
      Is there any difference with an energy Yieldco?

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    8. That's the idea, yes. No real difference with energy yieldcos or with aircraft leasing businesses like AYR. Whether it works well in practice is going to depend on how stable the cash flows in fact are. So demand and supply outlook; length and terms of contracted cash flows; counterparty health; etc

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    9. GSL's dividend elimination is a frustrating turn of events. The idea that you can focus on the next 36 months is no longer true. Are you going to ride along with management's capital allocation decisions or are you getting out?

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    10. All else being equal, I'll wait and see what they do with the retained cash. As long as it is used to enhance value I'm okay with the cut in dividends.
      So:
      Acquisition of 2,500 to 3,000 TEU ships
      At distressed valuations
      Chartered for 3+ years to entities other than CMA CGM

      or
      Pay down high rate debt

      On that note, t's possible that the spread between the common and the preferred compresses. If so, since the preferreds are the highest cost debt tranche they may be taken out first and therefore represent an attractive IRR, more attractive than the common.
      There's going to be

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    11. Hi Red,
      Thanks for sharing your knowledge. What do you think about the governance of GSL? See: http://adventuresincapitalism.com/post/2016/02/25/A-Crisis-In-Ponzi-Land-(The-Drop-Down).aspx . I have problems with sponsor and yieldco structures ( May be GSL is not a pure yieldco they don´t even pay dividends.)
      At the current cost of debt it seems who are really benefiting are lenders (may be Gross?) and CMA via Drop downs. I believe my thinking is flaw . Assets seem to have a current ROA of 7% ((ebitda-capex)/Gross Ship value) and debt and preferred ~ 10% and 50/50 capital structure, who is bearing the difference? why did they initiate a dividend in Aug 2015 to stop now, they mentioned that nobody saw the activity decrease coming..

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    12. Well that blog post is talking about the exact inverse of the situation with GSL. In this case, GSL is cutting the dividend because they believe that it will enhance long term value. They initiated a dividend when the outlook for charter rates in 2017 & 2018 looked okay and they cut the dividend when the outlook doesn't look so good. Now, there are 3 questions

      1) what is the liquidation value assuming that the current contracts run their course and the ships are sold for scrap when the charters run out? That's an extreme scenario. The liquidation value is $1.10/share

      2) what is the minimum going concern value assuming that instead of scrapping the ships when the contracts run out they re-charter them at current time charter rates? The minimum going concern value is $2.94/share

      3) what is the going concern value if the money that would have been paid out in dividends is instead reinvested to buy cherter-attached ships at distressed prices? That value is above $2.94/share, obviously, and probably closer to $4.50/share.

      Outsude these parameters are the following scenarios:

      1) CMA CGM goes bust AND they break the GSL charter agreement. I think this is a very low probability scenario since the GSL charters are the last that CMA CGM would break, for obvious reasons; and

      2) charter rates improve to historical (2009-2015) averages, in which case GSL can pay out $1/share in dividends when it has delevered.

      The alternative is the cumulative preferred shares which are yielding 20% today. If I were running things at GSL they would be the first securities that I would redeem.

      Governance: I don't see a governance problem. They are / have been using their judgment as to the safest way to navigate through this environment and I think that, although not all shareholders would choose this path, it is a reasonable course of action. Contrast this with whatever it is that Angeliki thinks she's doing at Navios Maritime -- her behavior is not reasonable and I would worry a lot about governance there.

      I hope that helps & thanks for reading.

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    13. Hi Red your thoughts always help.

      The scrap valuation would be great as an anchor valuation but I think it is negative if we assume strictly scrap. Rev 791m Ebitda 68% Interest payment (included preferred) and no capex assumed => CAFD 5years ~251 Net Debt 450m Debt-CAFD=200m Scrap value estimated based on 1000$/TEU x82312 TEu =82.2 Millon. Net scrap 82-200= -118m

      I have been listening to 3rd quarter conference call, and I think is going to be difficult for board to rebuild their credibility.

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    14. You're double counting the debt. Use CAFD for equity valuation and use EBITDA for enterprise valuation.

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    15. Do the covenants on GSL's debt permit it to repurchase preferred shares?

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    16. Not sure I understand the question. It was planning on paying $25 million in annual dividends to the common.

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  13. ps
    Singapore Shipping > GSL
    Their EV/contrated EBITDA ratios are similar (and far below comps) but SSC has better counterparies, better debt terms, longer contracts, in a better subsegment of the shipping business, and better managers. It's just better all round.

    But SSC is also a bit obscure and while its payout ratio = 100% over time, it varies from year to year according to the opportunities that management finds.

    GSL's only advantage is that it is traded in the US and may therefore be discovered/redicovered by institutional managers more quickly.

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    1. I hear you. Based on what I've read from them and their past actions, I actually like the management at Singapore Shipping, which, given the average shipping company management, is a remarkable thing to say. But I'm in the US and, for various reasons, it is much easier for me to invest in securities, particularly dividend paying ones, that are listed on a U.S. exchange. That being said, I'm still thinking about it, and, for that matter, Keck Seng and Future Bright.

      Unrelated: Elsewhere you mentioned that you wouldn't invest in any enterprise backed by the Dhoots. Can you provide any color on that?

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    2. For many years -- and still, I think -- major Indian the major brokerage houses wouldn't cover the Dhoot conglomerate because of a high level of skepticism about corporate governance. It surprises me not one bit that they listed in the US.

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    3. You might find RDY interesting. Best way in is via Pabrai's write up on VIC

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  14. Great idea, very hard to see the downside case so trying and failing to poke holes in the thesis.

    The economics of owning the vessels seems quite good, what are your thoughts on why the charterers don't own them?

    Also, is maintenance the responsibility of the charterer? Very small capex and dry docking expenditure relative to depreciation, or is this just the nature of the assets?

    Cheers

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    1. Well there's only really one way that leasing makes sense for transportation companies: you're in a cyclical business, you don't know how long cycles last, so you lease your assets with staggered expiration dates. When a downcycle arrives, you return excess capacity (say 20% of the ships) back to the lessor. You benefit, the industry benefits, and you benefit even more because the industry as a whole is well-positioned rather than desperate.

      Is that, in fact, what happens? Not on your life. The liner companies lease willy nilly, 10 years at a time, and all at once. They shop when hungry. And they shop because they can -- leasing is much easier to accomplish than buying. So, pronounced cyclicality, chronic overcapacity, etc.

      Therefore leasing makes no sense from a long-term economic health perspective.

      But, because of this cyclicality, chronic overcapacity, and so forth, the liner companies cannot really afford to buy instead: their own cost of capital is too high, and if they don't commit to asset growth they might lose market share to the next fellow and therefore place themselves at an economies of scale disadvantage, thereby pressuring their margins and ROICs even more. So they lease because they have to. And they have to because of the deeply flawed game they are playing.

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    2. thanks for blogging.

      why does a PCTC ship owner enjoy these high returns and such favourable terms? is it because the customer(NYK) wants to encourage more investments(atleast for now)? do you have data doing back, to see if this was always the case? given the customer concentration of SSC(NYK being very large client), i would have expected NYK to exert more pressure and keep the returns low on the SSC side.

      it somehow seems to me that SSC needs NYK more than the other way around. but, the returns tell a different story. so wondering if you have some insight as to why this might be. thanks.

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    3. Well, leasing companies -- aircraft leasing, ship leasing, equipment rental -- are trying to solve two problems. On the one hand they are taking on residual value risk, i.e. the risk that, at the end of the life of the lease, the equipment will be worh less than book value. on the other hand, they are trying to please the charterers by taking on as much of this risk as these charterers want to offload. So, the lease rates are supposed to reflect residual risk and relationship tenure and asset size are, in theory, supposed to reflect the ability to handle volume while properly managing risk.

      You can imagine how this can blow up when not done well so the challenge for an investor is to focus on (1) management quality as demonstrated by past behaviours; (2) price, as reflected in the ratio between the present value of contracted cash flows on the one hand, and enterprise value on the other; and (3) counterparty solvency/liquidity without which the DCF analysis is meaningless.

      As for loan terms - the counterparies are Japanese, they have long-term, Kaizen-type relationships with Japanese banks, and Japanese banks have few high yield, low risk opportunities available to them.

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  15. Hi red, just curious, how did you arrive at the dividend figures for 2013 - 2015 (4.9 / 4.8 / 4.2 SGD cent)? I have tried to verify your calculations and could only find them at 1 cent (http://singaporeshipping.listedcompany.com/dividend_history.html).

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    1. The dividend figures in my post above are $SGD millions not cents/share

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  16. "what they have been saying over the last year is that they are committed to doubling their fleet within three or four years":

    Where have they actually said this? I have read in their reports that they would continue to look out for opportunities to expand their fleet. But it sounded rather conservative and I have not got the impression that they would want to double their fleet in the medium term. Thanks.

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    1. It's what they have been saying to the anaylists that cover them
      http://sbr.com.sg/shipping-marine/more-news/tpp-set-jolt-singapore-shipping-corp%E2%80%99s-earnings

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  17. Hey any thoughts on the results? Looks like they changed some accounting treatment of revenue recognition. The charter revenue is comparatively high in earlier years and then goes down in the later years. In this case, they made it so that it's straight line which probably makes sense if the ships are depreciated in straight line as well.

    Seems like the market didn't like it and sold off a bit.

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    1. Add change in deferred revenue to "revenue" and we're back to where we were. Same business as before. Same value as before. This is not the type of business whose results will surprise unless its counterparties go bust. The only thing to look for, really, is whether they stick to PCTC or whether they think this is the right moment to branch out into other types of shipping. I would be happier if they stuck to PCTCso that I can continue to not think about these shares until it is time to collect.

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  18. Uncle Red lah what is your take on the merits of the last purchase: Taurus for $80m. Several things I dislike: contrary to previous twin purchases of Capricornus and Centaurus, they did not disclose the expected potential charter life total gross revenue, neither the duration. Why such cageyness? What are they hiding? any theory? You assume 10.8 annual revenue (.9 monthly), how do you derive this please if I may? If I take your number gross rev margin is 10.8/80, then assuming ebitda margin is 40% (ballpark), that bring us to a ROA of 5%...far lower than the 5 previous vessels... Then I read that weighted average effective interest rate per annum at FY 16 reporting date is 3.04%....5.4% ROA -3.04% cost of financing =2.3ish% that's a rather poor spread and a massive leverage on top...(77/80!) ! For me SSG is like a bank: it earns a carry (Net Interest Margin) between the yield of its assets and its financing, all nicely matched fine and dandy, with some residual credit risk on the car carrier, here almost entirely this Japanese Nippon Yusen KK wich is being convicted of cartel price fixing.....thoughts?

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  19. Well, let's see, I estimated revenue (under the old accounting system by pegging it against the rate for the Boheme and adjusting slightly for capacity, age and inflation. So $1389/car for the Boheme --> $1538/car for Taurus Leader. More or less.

    So -- again under the ancien accounting regime -- Revenue of 10.8M less 15% vessel opex and crew cost, 23% other opex, and 18% depreciation -->
    $4.77M unlevered return on an $80M asset --> 6% ROA & 3% spread.

    I agree with you that the business model is analogous to a bank. This is a secured loan, after all. So the thing that matters is the relationship between the net interest margin and quality of the counterparties. NYK line is now rated Ba3 so you can judge from that whether a 3% spread is sufficient.

    As far as charter length goes, I don't really see a reason for these folks to hide anything. They don't need us. I think one can back out the incremental interest expense attributable to the Taurus term loan, calculate the interest rate on that loan, and infer from that the length of the charter agreement. It seems to me highly unlikely that the term lengths of the loan and of the charter would be mismatched -- I have not ever seen that in the PCTC space and it would not make much sense.

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  20. "Lower income from ship owning segment due mainly to off-hire of a vessel for dry-docking"...this stock is definitively testing our patience but i guess the delay in revenue growth is creating a good entry point

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