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Samudera Shipping Line 1H 2021 Results

The 1H 2021 results for Samudera Shipping Line came in this week. Luckily the results supported the analysis made on the parent company in the Q1 update that was written some time back.

And let’s dive straight into the results. As per expectations, the company has benefited immensely from the skyrocketing freight rates. Profit attributable to owners of the Company has increased by 413.3% from US$7.156mil to US$36.729mil. Cash balance has ballooned to US$108.6mil while paying down lease liabilities and bank loans. The company’s balance sheet looks stronger than ever and proves to be a cash churning machine in the past 6 months. P/B Ratio currently stands at 0.728, way below where industry counterparts are trading at. And for the first time ever in the past 16 years (2005 Annual Report was as far as I went, I believe this is the first time in its history actually), an interim dividend was declared of 0.5 cents. That’s half of the full year dividend announced for FY2020.

So, what’s next?

Let’s assess the ongoing situation before looking at what’s likely to happen come year end. As always, the first gauge to look at is the freight rates. I have always been looking at the China Containerized Freight Rates as a proxy to how Samudera Shipping Line might be performing. Along the way, fellow investors have put forward other proxies such as the Drewry World Container Index that is updated weekly. Both reflects a surge in freight rate starting from mid Jun with the Drewry World Container Index at $6,700+ region right up to the current $9,330.28 as of 29 Jul 2021.

Source: Shanghai Shipping Exchange

Source: Drewry

So how high are the rates going? That’s probably on the minds of many. As per prior article that was shared before, the surge in rates have been due to two simple factors – demand and supply. Demand wise, there has been an unprecedented demand for imported goods from China during periods of lock down. Supply disruptions due to Covid-19 port shutdowns and the occasional jamming up of the Suez Canal has been prime reasons behind vessel scarcity.

The Delta Variant

Everyone has probably seen the frequent write ups of the Delta variant. This variant has wreaked havoc on countries that have historically been able to quash any transmissions in its infancy. And this has started its round in China, reaching nearly half of China’s 32 provinces in just 2 weeks.

With the zero tolerance to transmission held by China, this would inevitably lead to more lockdowns and disruption to the supply chain. Remember back when Yantian was locked down? With the transmissive nature of the Delta variant and the rise in cases due to said variant, port disruptions would likely happen on a global scale.

On the demand side, we are coming up to Christmas which is traditionally the peak shipping season. Retailers would be stocking up on inventory during this period which inevitably leads to higher demand for container shipping.

What to Expect for 2H 2021

The base assumption with the above factors in mind is 1) the company’s results have yet to factor in and reflect the spike in freight rate since mid-June, 2) it seems likely that the freight rate would at least stay at the current rates, if not higher.

Here’s where I make an outlandish expectation on the company. Only this time, it’s actually based on historical patterns and not an out-of-the-blue proclamation earlier that SSL’s profit would hit multiples of 2020’s.

To illustrate what I think will come next, let’s put on a conservative assumption that the 2H 2021 earnings for Samudera Shipping Line is the same as 1H 2021 earnings. The company has made US$0.0683 per share in 1H 2021 and doubling it would result in US$0.1366 per share for FY2021. At the latest FX rate of 1.35, that would mean SGD$0.18441 per share. Below, you would see the historical payout relative to earnings.

The only reason 2016's payout ratio went negative, was due to SSL giving out dividends even though it’s making a loss! For the past 7 years (excluding 2016), the company has on average paid out 56.29% of its earnings as dividends. Assuming SSL stays the course and pays out 50% of earnings in 2021 based on the above assumption, that would be a full year payout of SGD$0.092. Deducting the interim dividend of 0.5cents, this would mean dividend yield on the current ex div price of $0.435 would be 20% on the final dividend! If this really comes true, an extraordinarily high special dividend payout would likely benefit share price, and result in even lower price to book ratios come ex dividend. To illustrate the point on even more attractive price to book ratios. At end of year, the book value would be US$0.4241 + US$0.0683 – (SGD$0.005 / 1.35) = US$0.4887 = SGD$0.6597 according to the above assumptions. At the FX rate of 1.35, the ex-interim-dividend price of SGD$0.435 would be about P/B of 0.66. If the special dividend does happen the P/B ratio would drop to ex dividend price of SGD$0.348 / SGD$0.5727 = 0.608. And that’s on a balance sheet dominated by cash!

I believe the bumper special dividend will happen due to various reasons. The parent company has been steadily planning expansions in port and terminals business. The dividend would come in handy for those expansion plans. The company has not done any share buybacks as well, which leads me to believe that the cash is set aside for a bumper special dividend.

Lastly, a piece of good news that might bring about higher volume to SSL’s business. PSA Corporation and PT Samudera Indonesia has signed a Memorandum of Understanding to develop cargo solutions and logistics. Whether this piece of development would sit in the SILkargo Logistics (Singapore) Pte Ltd subsidiary under SSL remains to be seen, but this would definitely benefit the thriving shipping business.

Disclaimer: All posts on The Squirrel's Drey are for informational and discussion purposes only. This is not a recommendation to buy or sell securities discussed. Please do your own due diligence before investing.

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