Sunday, 4 June 2017

Comparison of Singapore Shipping Corp with Shipping Trusts

Shipping trusts are not the only stocks that buy and rent out ships for recurrent income. There is another stock that does so -- Singapore Shipping Corp (SSC). I used to own this stock, and unlike the shipping trusts, I have fond memories of it. What are the similarities and differences between SSC and the shipping trusts like First Ship Lease Trust (FSL) and Rickmers Maritime and will SSC face similar difficulties as the shipping trusts in future?

First, a brief introduction of SSC. SSC has 2 business segments, namely ship owning and agency & logistics. The bulk of the revenue and profits are generated from the ship owning segment. The company owns a fleet of 6 Pure Car and Truck Carriers (PCTC), which it leases to shipping majors like Mitsui OSK Lines, Nippon Yusen Kabushiki Kaisha (NYK) in mostly long term time charters of more than 10 years. Thus, its business model is similar to that of Rickmers Maritime.

Rickmers started off in May 2007 with a fleet of 10 container ships leased to shipping majors in time charters of 8 years. It had a stable recurrent income from the charters from which it could pay good distributions to shareholders (USD5.64 cents in 2007). It also had low levels of debts (debt/equity ratio of 58% in 2007). However, over the next 2 years, it added more ships and more debts. The debt/equity ratio reached 196% in 2009. Unfortunately, the shipping industry then went into a downturn from which it has not recovered. As the long term charters expire, Rickmers had difficulty renewing the charters at the good rates they used to command. This resulted in inability to meet the debt obligations to banks. Eventually, Rickmers had no choice but to wind up.

SSC is also in a fleet expansion path currently. Prior to 2010, it had disposed most of its ships before the shipping downturn. It added 1 PCTC each in 2010 and 2011, 2 PCTCs in 2014 and another 1 more in 2015, making a total of 6 PCTCs. Debt levels followed similar trajectories, rising from debt/equity ratio of 0% in Mar 2010 to 161% in Mar 2015. The expansion plan has probably not ended, hence, we might potentially see debt levels increasing further.

Will SSC face similar difficulties as Rickmers when the long term charters expire? It is difficult to tell in 10 years' time whether SSC can renew its charters at good rates when they expire. However, one advantage that SSC has over shipping trusts is that it is a company and not a business trust. A company can only pay dividends out of accounting profits whereas a business trust can pay distributions out of operating cashflows. In other words, asset depreciation, which reduces accounting profits but not operating cashflows, reduces the amount of dividends a company can pay but not the amount of distributions a business trust can pay. Thus, SSC is restricted from paying out all its operating cashflows as dividends. Since 2009, it paid a constant 1 cent per share every year, translating to a dividend yield of only 3.6% at the current share price of $0.275. The cashflows retained are used to pay down debts, which SSC has done at a rapid rate. From a debt/equity ratio of 161% in Mar 2015, the debt/equity ratio has fallen to 97% in Mar 2017. At this rate, before the charters expire, SSC would have fully paid down the debts. Thus, based on this key reason, SSC would not end up being wounded up.

Nevertheless, 1 key risk that SSC faces is the ability and willingness of its customers to honour the charters if the market charter rates were to decline significantly. Its customers are NYK, Mitsui OSK Lines and Wallenius Lines. FSL, which deals with smaller shipping companies, had encountered several customer defaults in the past. Rickmers had no such problems with its customers, which are shipping majors. Nevertheless, it narrowly avoided the bankruptcy of Hanjin Shipping. A container ship leased to Hanjin expired in early 2016, just before it went into receivership in Aug 2016.

Finally, SSC had in the past sold ships when times were good and returned handsome dividends to shareholders. Between Aug 2005 and Dec 2007, SSC returned a total of 46 cents per share to shareholders. While it is not certain that market values for ships will recover to previous peaks for SSC to pull off this trick again, any special dividends from asset sales would be a bonus.

P.S. Currently not vested, but might consider.


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2 comments:

  1. Hi,

    Mind if i ask if you invest in any reits? If so, which ones?

    Thanks.

    ReplyDelete
    Replies
    1. Hi,

      I don't own any REITs currently, although I own some business trusts like HPH and FSL.

      Delete