SSC delivered a stellar set of 2QFY16 results that beat our expectation by 20%. Maintain BUY with a DCF-derived SGD0.67 TP (from SGD0.59, 123% upside, WACC: 10%, terminal growth: 0%), implying 11.7x FY17F P/E. Most notably, we are encouraged by its bullish outlook statement, which implies that a new vessel acquisition (with favourable contract terms in-built) is on the horizon without an equity-raising exercise.
2QFY16 (Mar) results beat estimates
Beating our estimates by 20%, Singapore Shipping Corporation (SSC) delivered stellar 2Q results with net income surging 136.4% YoY and 36.5% QoQ to USD4.2m.
This was due to the absence of several one-off items such as:
i) a vessel that was off hire for dry-docking (likely to be one of the smaller vessels), and
ii) one-off crew hiring and training costs for the newly-delivered vessel (MV Taurus) that occurred in 1QFY16.
Promising outlook looks set in stone
As we pointed out previously, SSC’s ship owning business is extremely safe (>10 years contract with the customer bearing most of the variable costs). Without factoring in any new vessel acquisitions, 2QFY16 provided a very good indication of what SSC can and would likely deliver every quarter. Hence, we raise our FY16 and FY17 earnings estimates by 14.2% and 12.7% respectively to account for operating costs that came in lower than expected.
Strong operating cash flow powers new vessel acquisition
Key to the 2QFY16 results is a very bullish outlook statement indicating that SSC is operationally and financially ready to undertake new vessel acquisitions with satisfactory terms. In 1HFY16 alone, SSC generated USD12.6m of net operating cash flow, equivalent to around 2/3 of the cost of a second hand vessel. Hence, this justifies our thesis that SSC can purchase new vessels without raising any equity.
Also, as management had previously indicated that new vessel purchases would come with favourable contracts terms like:
i) long-term charters,
ii) blue-chip customers, and
iii) solid returns comparable to current vessels, we can expect a new vessel with favourable terms on the horizon.
This would make our base case of one new vessel per year well-founded. (Read Report)
Source : RHB Research