Singapore Shipping Corporation (SSC) is an SGX-listed company that operates in two segments: shipping activities (70% of revenue) and agency services (30% of revenue). In its shipping segment, the company purchases pure car & truck carriers and leases them out to blue chip charterers on long term contracts. SSC’s agency segment provides a range of services including terminal operations, logistics, warehousing as well as other support.

In its shipping segment, SSC has a high degree of visibility into future revenue streams as a result of its fixed, long term lease contracts with blue chip charterers. Management recently indicated that it plans to double the company’s fleet size from 6 to 12 vessels over the next 3-5 years. The economics of this intended fleet expansion are attractive as it can currently finance the purchase of new ships at ~3% p.a. and lease them out at significantly higher net operating yields.

On the other hand, the agency segment has been subject to the broader headwinds currently facing the shipping industry. Management doesn’t expect operating results to deteriorate significantly, but they remain cautious in their overall outlook for the business. In my valuation analysis, I assume there will be no improvement in operating results for the segment over the next few years.

At its current price of SGD 0.26 per share, SSC offers investors an attractive risk/reward proposition. Even under a no-growth scenario, the company is likely worth at least ~SGD 0.45 per share. In a base case scenario, where the company add to its fleet at a conservative rate of one second-hand vessel per year for three years, the company could be worth ~SGD 0.65 per share or 2.5x its current price.

Industry
The pure car & truck carriers sector is a relatively attractive niche within the broader shipping industry. It has not been as drastically affected by the oversupply issues facing other sectors within the industry and broadly tracks the growth of the global automotive market. The majority of the global pure car & truck carriers fleet is run by just a few shipping companies – these are predominantly the blue chip shipping majors, although there are some dedicated operators.

More importantly, in the context of SSC, the industry has significant barriers to entry in the form of both the expertise and industry relationships required. SSC has built long term relationships with charterers that would be difficult for another player to replicate. As an example, Pacific Basin tried to enter the broader roll-on/roll-off sector in 2008. Their timing was admittedly terrible, but they were also unable to form the close relationships required with the blue chip shipping majors and eventually exited the market in 2012.

Valuation
Below is a snapshot of the current fleet and charter terms (thanks RHB):

As you can see from above, the majority of SSC’s contracts are fixed at 15 years. I also expect the charter for the MV Cougar Ace to be extended beyond 2016, but even if it is not, the earnings impact to SSC should be relatively small given the size of the contract and its minority ownership stake.

Below are the 2016 results for SSC by segment. By the way, do note that SSC adopted “straight line” revenue recognition over the entire period of a charter starting the financial year 2016. Now, if we assume no improvement in the operating results of the agency segment as well as no growth in total fleet size, we have have a pretty good sense for steady state earnings given the duration of the existing charter contracts. 

When discounted at 9% (SGD 27.9m / 0.09), the present value of the charter contracts already in place is ~SGD 0.47, which represents 80% upside to the current market price. This excludes any upside to the scrap value of the vessels at the end of their useful life. Discount rates are always a point of debate, but 9% seems at least reasonable given SSC’s average cost of debt is 3% and the equity risk premium for a developed equity market such as Singapore should be in the 5-7% range.

In a base case scenario, I would expect SSC to add one second-hand vessel per year over the next three years. The industry trend is towards bigger capacity ships that drive economies of scale, so SSC is likely to invest in larger carriers (6,000 to 8,000 CEU) over time. The unit economics of recent deals have been attractive: the company can finance its purchases at minimum 80% LTV with an all-in fixed cost of ~3% per year and then lease them out at significantly higher net operating yields.

Here are some illustrative numbers: for a ~USD 16.5m acquisition (e.g. the MV Centaurus Leader), SSC would need to put in equity of up to ~USD 3.3m (maximum). In turn, the company can lease the vessel out for ~USD 6m per year. Operating margins are typically stable at ~30% as SSC only provides crew members during a charter contract and is not exposed to either oil prices or currency risk. So, it would earn ~USD 1.8m per year, which is a ~10% net operating yield.

I suppose a natural question that arises from the above is why the charterers don’t own the vessels. I don’t know the answer, but it probably comes down to their risk and liquidity preferences in order to manage across business cycles. Anyway, I’m not particularly worried about the upside for SSC if management can source and execute on deals like the above, but they will need to be very disciplined (their track record to date suggests that they are). I ran some back of the envelope numbers for the base case and came to a share price of ~SGD 0.65, which is nearly 2.5x the current price.

If management can’t find attractive deals, I expect they will continue operating as is and return excess capital to shareholders in the form of dividends. Assuming a 50% annual payout, SSC can return at least ~SGD 4.8m per year, which represents a 4.2% yield on the current share price.

Management
SSC is run by the third generation of the Ow family. Under the direction of CK Ow, who currently serves as executive chairman, they have proven to be shrewd owner-operators with a long term orientation. They have also treated minority shareholders very well over the years, regularly returning excess capital when they don’t have compelling reinvestment opportunities.

To cite one example, they disposed of 10 container ships from their fleet at the peak of the market in 2007, ensuring they had ample liquidity during the financial crisis. They also returned the capital raised from these disposals back to shareholders via ~SGD 0.30 of special dividends that year. 

Since the financial crisis, management has been very patient to get back into the game. In fact, the three acquisitions they made in 2014 and 2015 represent the first sign of significant activity for the company in nearly 6 years. While they remain generally cautious in their outlook, they do see an opportunity to step up and invest heavily over the next 3-5 years as competitors continue to struggle as a result of the broader industry shakeout.  

Risks
For the sake of completeness, I have outlined some key risks below. My view is that SSC’s current valuation mitigates these risks to a large extent, so investing in SSC is a “heads I win, tails I don’t lose much” type of bet.

• Counterparty risk – historically, SSC has mitigated this by partnering with blue chip charterers. Given the industry is going through a difficult period, however, it’s something to keep an eye on.
• Lack of acquisition discipline – management has expressed an interest to grow its fleet but needs to be disciplined when making acquisitions. I would prefer they stick to the pure car & truck carriers sector versus expanding into other sectors. 
• Further deterioration in agency segment – this is not a significant driver of value for the business but further headwinds could prove a distraction for management.