Singapore Shipping Corp Ltd

RHB Research analysts: Edison Chen & Goh Han Peng


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 1) securing a decade-long profit visibility through its
long term charters to blue chip clients and 2) enjoying quality growth
with its fleet expansion plans.


 Close relationships secure decade of profit with long term charters.
In the oligopolistic PCTC industry, SSC‟s close relationships with its
customers helped it secure decade-long profitable charters with blue
chip majors like NYK Line and favourable borrowing rates due to its lowrisk
profile. Together with a minimum forex and oil price exposure, SSC
has its profits virtually protected for the next 15-20 years.


 Quality growth ahead, supported by robust operating cash flow.
Through its existing charters, we estimate that SSC will generate a
robust operating cash flow of c. USD22.8m in FY16. This means that
SSC will have 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.


 Excellent track record of capital allocation and treating minority
shareholders well. SSC‟s management disposed of its shipping fleet
before the peak of the cycle in 2008 and has since distributed more than
USD200m in dividends. The company embarked on a fleet expansion
programme last year, doubling its fleet to six vessels. Management plans
to double the fleet again in the next 3-5 years. We believe that once the
fleet expansion completes, the group can raise its dividend payout to
50% in FY19, implying 10.2% yield in a best case scenario.


 DCF-derived TP of SGD0.59. With 1) safe earnings for the next decade,
2) quality growth ahead and 3) high FY19 dividends, we initiate coverage
on SSC with a BUY and a DCF-based TP of SGD0.59 (WACC: 10%,
terminal growth: 0%), representing 100% upside and implying a FY16
P/E of 13.5x.
 Key risks: decreasing profits from agency business; counterparty risk
from blue chip clients, particularly NYK Line.


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. 



'via Blog this'