Price (06 Jan 14 , HK$) 2.87
TP (prev. TP HK$) 3.30 (3.00
New orders at a discount...and more to come
● Sinotrans Shipping (SS) has placed orders for four panamax vessels for US$26 mn each from a shipyard owned by its parent, which offered a 6% discount relative to prevailing newbuild prices.
● The orders will help SS lock in a daily cost of only US$8,500/day, 31% below the current spot rate of US$12,250/day and 11% lower than SS' average cost of US$9,500/day for its existing fleet. More new orders will be announced in the coming months.
● With a recovering dry bulk market, investors are likely to be upbeat on SS' upcoming acquisition of Sinochart, a dry bulk chartering business, from its parent company. We expect the deal will also be priced at a discount, with estimated valuation between US$70 mn and US$100 mn (c4 - 6% of SS' market cap).
● The newbuild order is the first in four years, sending a strong signal that SS' fleet expansion is no longer stalled by its parent restructuring. A stronger-than-expected spot market in 4Q13 to be reflected in 1H14 results and rising vessel values prompted us to raise 2014 earnings by 10%, lifting NAV-based TP to HK$3.30.
Leveraging family ties
Sinotrans Shipping (SS) is ordering four 65,000 dwt panamax dry bulk vessels for US$103 mn from Sinotrans & CSC Shipbuilding Industry, a yard owned by its parent. The new vessels represent 9% of SS's existing tonnage and appear to be a bargain - the vessels are worth US$110 mn based on Clarksons’ newbuild estimates, but the ships have been priced at a 6% discount to this. The deal should further enhance SS's status as a cost leader among the listed dry bulk players. With a cost base of only US$8,500/day and a fuel efficient design, the vessels are expected to be very competitive in the charter market.
Sibling acquisition viewed positively
With the industry substantially improved and the parent's restructuring plan becoming clearer, SS is finalising the acquisition of sister company Sinochart, which has been delayed for six years. The deal is likely to be perceived positively, as SS is expanding its dry bulk business during an early phase of sector recovery. Without owning any vessel, Sinochart's business model is primarily the chartering-in of ships from third parties and the provision of voyage charter or time sub-charter services, making a profit through a mark-up on charter costs. The scalability of the business is Sinochart's key strength and it could easily expand its fleet by chartering in more ships in a rising dry bulk market. Based on an average number of 90 vessels, an average rate of US$14,000/day and a targeted mark-up of 1.5%, our estimated profit excluding intra group charter in 2014 is US$6.5 mn. Today's global valuation of profitable dry bulk stocks is c15x P/E, but an intra-group transaction of this nature is usually priced at a discount of up to 30% based on previous experience. We expect Sinochart's valuation to range between 10.5x and 15.0x P/E, or ~US$70 mn to US$100 mn. SS can fund the business without raising any new debt.
The most attractively valued dry bulk stock in Asia
SS is the most attractively valued dry bulk stock in Asia, trading at a 28% discount to its cash plus vessel values. As we see more evidence that it is accelerating its business expansion, shareholder returns should grow, reducing the discount attached to its cUS$900 mn cash reserve. We lift our target timecharter rate by 5% to US$16,250/day and our 2014 earnings forecast by 10%, to factor in a stronger-than-expected dry bulk market in 4Q13, which will be reflected in 1H14 results through new contracts. 2015 NPAT has been raised by 2% to take into account the earnings contribution from new vessels to be delivered in 2H15. The recent increase in vessel values prompted us to lift our NAV–based TP to HK$3.30/share from HK$3.00/share.
Source/Extract/Excerpts/来源/转贴/摘录: Credit Suisse
Publish date: 08/01/14