SINGAPORE (July 7): Following a turnaround from the losses of FY13, Samudera Shipping Line has posted record earnings for FY14. The shipping company, which focuses on feeder services, is seen to further extend its gains with another record year this year, states KGI Fraser Securities analyst Joel Ng.
 
“We see Samudera benefiting from the influx of mega container ships that are leading to higher demand for feeder services,” writes Ng in a July 7 note initiating coverage on the stock with a “buy” call and target price of 37 cents.
 
“Hence, we believe Samudera to be a well-positioned ship to ride this wave of upswing in the feeder services segment, more so given its undemanding valuations compared to peers,” he adds.
 
The company, 65.3%-owned by PT Samudera Indonesia, is in business for more than two decades already. It owns a fleet of 26 vessels and has another 19 on charter, which gives it the flexibility to make changes to its fleet size in response to market conditions.
 
The bulk of the fleet is made up of 28 container vessels. However, the company also runs two oil tankers, seven chemical tankers, two gas tankers, five marine offshore support vessels and two dry bulk carriers. The group sees growth opportunities in other segments such as LNG shipping in the region and may look to expand its services in the future.
 
Samudera’s fleet of smaller vessels is its competitive advantage, says Ng, as it gives the company the reach to operate easily in smaller ports that the mega container ships will not go. The on-going trend of launching mega container ships – with capacities of some 18,000 TEUs – will create more demand for Samudera’s feeder services, provided using its 1,000 to 2,000 TEU vessels.
 
Furthermore, the bigger trends, such as the 3.8% growth in global economic growth come 2016, are in the company’s favour. Ng observes that container shipping market is now showing some signs of improvement. Ship broker Clarksons estimates that global seaborne trade will grow at 1.13 times that of world economy.
 
Ng also sees container shipping industry benefiting from favourable supply and demand balance of vessels. “Ordering of new container ships is slowing down while demolition of old vessels is increasing. This is a positive trend that may eventually lead to a better supply-demand balance in the container shipping industry,” he writes.
 
The company, points out Ng, has thus far chalked up a good operational record. Over the last two decades in business, it was in the red in FY2009 and FY2013 only – years when broader economic factors spared no one. Samudera was able to steer back into the black quicker than some others by ditching loss-making routes. “Its quick turnaround back to profitability after a year of loss highlights the group’s key strength of being able to quickly adapt to changes within the shipping industry,” writes Ng.
 
In FY2013, the company was in the red with 0.4 US cents negative earnings per share. The following year, EPS has improved to 2.7 US cents even with a 6.9% decline in revenue to US$364.2 million. For FY15, Ng sees Samudera posting EPS of 3.4 US cents on revenue of US$368.5 million.
 
The company has a decent track record in paying dividends, with a policy of giving out at least 20% of its earnings. Last year, it paid 1.75 cents, which gives it a yield of around 6% on current prices. However, that bumper payout was to partly make up for not doing so in the previous loss-making FY13.
 
“We estimate that the group can pay out at least 30% of net profits based on its healthy balance sheet, strong cash flows and track record of 30% payout ratio. This would imply a decent dividend yield of 3%, with upside potential when the container shipping industry improves,” states Ng.
 
The company is now trading at 0.4 times price to book, versus Neptune Orient Line’s 0.6 times. Its net gearing of 35% compares favourably with the 60 to 200% of its peers, while its forward price earnings ratio of six times is half that of other shipping companies.
 
“With all the right ingredients in place including improving profitability, healthy balance sheet and earnings to book multiples at deep discounts to peers, we see Samudera as an attractive and stable ship to sail with,” states Ng.