Samudera - This time is different... or is it?
Samudera Shipping Line is primarily engaged in container shipping transportation of cargo in the Asia region, connecting various ports in Southeast Asia, Indian Sub-continent, the Far East and the Middle East.
Samudera’s Container Shipping offers feeder
services between its “hub” port in Singapore and other “spoke” ports in Asia, as well as inter-regional container shipping services to manufacturers, exporters and importers. The Group serves a wide spectrum of shippers from its headquarters in Singapore, and via representative and agency offices in various cities in Asia.
The Group is also involved in Bulk and Tanker shipping, Logistics Services and Solutions to customers (including warehousing, freight forwarding and cargo handling services).
Breakdown by Segment and Country
According to its preliminary FY2020 results, majority of the group’s revenue is derived from Container Shipping at 95.3% of total revenue.
The country exposure is spread out within the Asia region as follows.
The attention-grabbing headline
In recent months, shipping lines around the world has been breaking new highs amidst the surge in container shipping rates. If you are not caught up with what is happening, the following article gives a really good overview of what is causing the spike in container freight rates, especially in the China to North America routes.
This has led to a huge spike in China Containerised Freight rate in the last quarter of 2020 and sustained high rates up into Q1 2021.
Source: Shanghai Shipping Exchange
In the following months, the Suez Canal incident added on to the supply disruption in global trade.
How has this affected major container shipping companies in Asia?
As you can see, using 31 Dec 2019 as a base price, shipping companies’ share prices have been on a tear. Samudera Shipping Line has gone up by 100% to $0.32 at the time of writing, while the others have appreciated between 200% to 550% from the base line. The question therefore is whether Samudera Shipping Line is a laggard playing catch up? Or is the current run up is reflective of the proximity to the most lucrative trading lines in the container shipping business.
In assessing the attractiveness of Samudera Shipping Line as an investment, I would like to draw attention to the following financial ratios in the comparable basket of companies. Its really apparent from here that Samudera Shipping Line boasts a very strong balance sheet and low gearing. Many would though find that this is not a sufficient reason to invest in the company.
From here on, I would then map out my investment thesis.
As of 31 Dec 2020, the Group has a total of US$80.8m in cash as per preliminary financial statement.
In Mar 2021, the disposal of vessels (Sinar Sabang US$6.75m, Sinar Sumba US$6.75m, Sinar Ambon $0.709m) would increase the cash hoard by an additional US$14.2m, adding up to US$95m.
08 Mar 2021 – Disposal of Vessels (Sinar Sabang, Sinar Sumba)
08 Mar 2021 – Disposal of Vessel (Sinar Ambon)
According to the latest FY2020 Preliminary Financial Statements, operating cashflows before working capital changes reached US$31.8m for the full year. I am of the opinion that the first half operating cashflow before working capital changes will be much much higher. That belief stems from both the article on Samudera Shipping Line on Business Times and the recent Cosco Shipping profit guidance with Q1 2021 earnings set to exceed full year 2020 earnings and increase to 2.5 times of Q4 2020 earnings. Mr Mulia commented in the article that "It became a seller's market for us, a very rare seller's market. It's always been cyclical, but at the moment it's a seller's market." Conservatively, I would add another US$20m to the cash pile for 1H 2021, adding up to US$115m.
This derived cash hoard is the highest in history of the company and has exceeded even the cash held in 2005. And this is barring additional disposals of Sinar Agra and Sinar Busan from the prior disposal mandate.
When faced with a cash hoard, what can the Group do that can boost shareholder’s value? There are some very straightforward ones.
1) Special Dividend – the company has historically given out special dividends in good years to reward shareholders. This is the most straightforward way but also the least likely method of increasing shareholder value.
2) Share Buyback – in 2005 as per previously mentioned, Samudera Shipping Line accumulated significant cash on the balance as well. In that year, they commenced share buyback up to a total spending of circa S$5.08m. This translates to about 3% of the current market capitalisation.
From the prior article on Business Times, “Mr Mulia said: "We were given the mandate to do some (share) buybacks, and we haven't done so. This is something we're exploring. We don't want to be too impulsive and (adopt) the wrong strategy, but we know we have the capability to do so. At the moment, we're sitting on a strong cash position."”
3) The last and actually most desirable outcome for long term investors, is to invest into more vessels and equipment, increase gearing on the business and in turn improve returns.
In my opinion, Samudera Shipping Line is going to move on all 3 fronts. Special Dividends and Share Buybacks are quite straightforward, and I wouldn’t delve further. What captures my attention is expansion of the business and how it would map out. If you look at the container shipping businesses all around, the most straightforward answer is to buy more container vessels. You can see that through increased orders on shipbuilders like YangZiJiang. Is that where Samudera Shipping Line is heading? The shipping industry has gone through boom and busts and cycled through under and over supply of vessels, claiming victims like Hanjin Shipping in the process. So, has the shipping industry learnt its lesson?
If you had looked through the NY Times article, this current heightened container freight rate will be around to stay for a while but unlikely to stay at current levels in the long term. Samudera Shipping Line though, has an attractive alternative to container shipping which we have to run through a bit of its history to understand how it got here.
Bulk and Tanker Business (Industrial Shipping)
Throughout earlier history of Samudera Shipping Line, the group has been more involved with Bulk and Tanker Business which runs domestic and international routes to Indonesia. The earnings peaked in 2008 while revenue peaked in 2011. Subsequently, Samudera Shipping Line went about rationalising and downsizing the fleet. The final nail came in the changes to registration of Indonesian flagged vessels as per explained in the 2016 Annual Report.
As per the 2016 annual report,
“Those vessels are no longer giving economic benefit to the Group, due to their age. On the other hand, the Group is unable to renew its fleet in Indonesia under our current operating structure in view of Indonesian shipping law, which mandates that only Indonesia-flagged vessels can be used in domestic shipping activities and limits the registration of such vessels to Indonesian companies or companies majority-owned by Indonesians. The Group is thus prohibited from registering additional Indonesia-flagged vessels, as our operations in Indonesia are majority-owned by the Group, which is a Singapore-registered entity. We will reassess our domestic Indonesia strategy to take into account local regulations and requirements.”
After 2016, the vessels were disposed without renewal. Recently, the group has finally called for an EGM to approve the subscription into PT SSI that was established in 2019 for the purpose of registering and holding Indonesian flagged vessels.
17 Apr 2019 – Establishment of PT SSI.
05 Apr 2021 – Circular for EGM approving subscription of Series C shares into PT SSI
So why is this important? I believe Samudera Shipping Line is prepared to expand into this business again at an opportune timing.
1) Commodity Super Cycle – Personally, I am of the view that the environment is very conducive for a commodity super cycle in the next few years. The following article about Goldman’s view is worth a read.
2) Cabotage in Indonesia – as per explained in the AR2016, the cabotage principle in Indonesia provides governmental support to domestic sea transportation. There have been also regulations to support export trade volumes for Indonesian flagged vessels. Having an Indonesian parent company makes a JV route with the Singapore listed group a much simpler solution than what other foreign companies have to do as suggested in this article on Cabotage principle and the application of JVs to comply with the regulations. More on Coal and Crude Palm Oil export restrictions as follows.
3) The company has experience in this business segment, making it easier for the expansions to happen.
One company that benefited from all this is PT Buana Lintas Lautan TBK. Even though their exposure is predominantly Oil and Gas, you would be able to see from their presentation deck (translated through Google for my own interpretation) that they have grown from strength to strength since a few years back even through the oil crash. Their presentation seems to point towards a 70% LTV on vessels purchases. For a start, the parent company has disclosed in Feb 2021 that the company is preparing a capex of US$50m, which if backed by the financing via $14.2m subscription into PT SSI, which sounds about right at 70% LTV.
With the various shareholder value boosting measures that is anticipated, expected foray back into the familiar Bulk and Tanker business at the start of a perceived Commodities Super Cycle, the current traded value is very undemanding. I would think that this company is worth at least its book value of US$0.3632 * 1.34 = S$0.487 per share. I do think that the build-up in the Industrial Shipping segment and the upcoming 1H2021 financial results are going to be interesting to watch. Will re-evaluate when the time comes.
P.S. A little tidbit for reading all the way to the end. The company purchased 3 floors of 6 Raffles Quay and sold 1 floor earlier on. The property is booked at S$20m as freehold land (not depreciated) and $7m as freehold property (straight line depreciation over 15 – 60 years). On the balance sheet, that could mean a highest depreciated value of S$25m. (There are still other factors such as USD depreciation over the years in which the FS is based in). In 2016, “the sale of the entire 13th floor of 6 Raffles Quay for $28 million ($2,764 psf)” would provide a datapoint on what the 24th and 25th floor might be worth. Whether this makes the investment thesis stronger is up to individuals.
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.