Ezra - 1H FY 2008 Results Review and Analysis (Part 1)
Ezra released their 1H FY 2008 financial statements on April 8, 2008 after calling for a trading halt at 2 p.m. that day. I shall be reviewing their financials in three parts as I had done with Swiber. The first will touch on their Income Statement, margins and expenses as well as their Balance Sheet. The second will talk about cash flows as well as prospects. The third will comment on the general climate and how it may affect Ezra's business, and also discusses some of their plans for expansion based on their powerpoint presentation slides.
Income Statement Review
For 2Q 2008, revenues rose 92% as a result of 2 additional vessels, Lewek Kestrel and Lewek Kea, being delivered during 1H 2008 as well as the additional vessels contributing for 1H 2008 as mentioned in Ezra's press release. However, this was offset by much higher costs which rose 122% year-on-year, thus eroding gross margin and causing only a 53% rise in gross profit from S$15.8 million to S$24.3 million. Gross margins contracted from 43.8% in 2Q 2007 to just 35% in 2Q 2008, but note that 43.8% is uncharacteristically high for Ezra as their gross margins have usually hovered around 35-38%. If we look at 1H 2008 versus 1H 2007, the gross margin was 38.4% against 38.3% respectively, which is an insignificant difference. Of course, it can be argued that higher costs incurred in SGD have caused the fall in margins as most of their revenue is understood to be denominated in USD (the USD has been depreciating against the SGD, hitting a low of about 1.351 to the SGD recently).
For 1H 2008, core net earnings came up to about S$35.6 million (S$16.6 million as reported by the company for 1Q 2008 + S$19 million for 2Q 2008), while core net earnings for 1H 2007 came up to about S$15.4 million (net off exceptionals). This represents a 131% increase in core net earnings. Net margins for 1H 2008 stood at 26.0% against net margins of 22.5% for 1H 2007 (using core net profits). This shows a slight improvement over the previous year but do note that part of this was due to Ezra's sale of EOC in order to "lighten" its balance sheet and take a lot of debt off its books. EOC contributed about US$5.5 million (around S$7 million) in net profit to the Group for 1H 2008, and is expected to be a more significant contributor moving forward. Also, admin expenses increased by just 47% for 2Q 2008 although revenues rose 92%; but for 1H 2008 admin expenses actually increased by 225% against a 101% increase in revenues. This can be attributed mainly to a one-off provision for staff incentive scheme (announced in 1Q 2008) and also higher staff costs as a result of recruiting more personnel for Ezra's new divisions and to spearhead their expansion plan(s).
Overall, there was nothing particularly outstanding or poor about their performance and I would say things are on-track. However, a close watch on 3Q 2008 financials is necessary to determine the extent of the currency depreciation on Ezra's costs, and whether admin expenses do indeed increase less than revenues (implying economies of scale). Financial expenses for the next quarter are also expected to increase as Ezra's MD has mentioned taking on more bank loans to finance the construction of the 4 new MSFV instead of relying on sale-and-leasebacks. In addition to all these, there will also be expenses incurred in relation to the setting up of their new Energy Services Division (more on this in Part 3) which will impact margins. Thus, in the short-term, I do not see margins improving much.
Balance Sheet Review
Ezra's Balance Sheet has undergone significant change after the sale of EOC, as they now do not have to consolidate EOC into their Group (EOC used to be 100% owned but was divested by Ezra in FY 2007 through a share placement to 88% and subsequently to 48.9% through a listing on Oslo Bors). This has resulted in numbers which are not very comparable, but I will nevertheless touch on a few key numbers which I feel summarizes the current financial position for Ezra.
Current ratio for Feb 29, 2008 stood at 1.64 versus 1.43 for Aug 31, 2007. This was mainly due to the monetizing of EOC into cash as Ezra had sold off a portion of it to institutional investors via a listing on Oslo Bors. This had substantially improved their cash position and allows them to use the cash for growing the business further. A receivable still sits in Ezra's books for about S$45.7 million due from EOC which is classified as "Long-term", I think this receivable will remain there for some time as EOC may need the cash flow and hence may not pay back this amount to the Group any time soon. (Readers should note that for Aug 31, 2007, various assets and liabilities of EOC were classified as disposal group assets and liabilities in accordance with FRS requirements, thus any ratios computed based on Aug 31, 2007 figures may not be directly comparable with Feb 29, 2008).
Note that the Balance Sheet also reflects higher bank term loans (under current liabilties) which have increased by 92.7% from S$59.9 million to S$115.4 million. According to the company, they have reduced their net gearing from 0.9 times to 0.4 times, largely due to the increase in equity base from S$424 million to S$527 million. Bank term loans are used to finance their expansion and this will lead to higher interest costs and eventually, gearing will increase. Several research reports have also speculated that Ezra's gearing could rise in the next few financial years as it has resorted to using debt financing rather than sale-and-leaseback financing. This could be due to the fact that interest rates for borrowing are becoming attractive in light of the sub-prime crisis.
In a recent interview with The Edge magazine, Mr. Lionel Lee mentioned that Ezra did not have any problems thus far obtaining financing for their new vessels and so far all their newbuilds have adequate financing. In the event that the Group wishs to order new vessels for delivery in FY 2010 and beyond, they will probably resort to more debt financing as the market turmoil has caused their share price to plunge, thus making equity financing unattractive.
I will continue with the Cash Flow Statement and Prospects and Plans review in Part 2.
Friday, April 11, 2008
Wednesday, April 09, 2008
Approaching Investing in a Business-Like Manner
I've been rather busy the past few days, which explains the lack of posts. Anyhow, today I will be exploring how one should view investing, with regards to value investing in particular. Investing is actually part and parcel of growing our wealth, albeit slowly and steadily instead of instantly. Thus, the attitude one should take when approaching this important activity should be one of utmost seriousness, which is why the title mentions "business-like manner".
So what exactly does business-like manner mean ? This means observing a company as if you are a stakeholder who wishes to do business with the company, or acquire the company. Think of the company as a business and examine all facets of it. First of all, one should apply what I call a "common-sense" view of a business, by examining the nature of its principal activities. Companies which are in "commodity" businesses or those with a weird business model (a.k.a. something overtly innovative and which has no history of commercial success) should be shunned because it is unlikely that they can sustain increased earnings or ensure steady and predictable profits.
This is what I consider the “raw filter” for assessing companies for investment purpose. By using common sense to review whether a business has endearing characteristics or not, one can then make a conscious decision to pick and select the better businesses to drill down in detail. The SGX has over 700 companies listed on it and it will be impossible to drill down into each one as it would be too onerous and impractical. Finer filters can then be applied to assess the fundamentals and prospects of each individual company so as to ascertain its merits and demerits. One can then apply Phil Fisher’s 15 basic criteria as well to ask oneself if a particular company is investment-worthy. I shall be starting a new series soon on each of Phil Fisher’s tenets to elaborate and give examples, so watch out for it !
By adopting a business-like attitude towards investing, one can approach companies from a more practical stand point to see if their business will be viable and sustainable in the near to medium term. Of course, any events may occur which may cause our initial assumptions to be invalid, but detailed research and in-depth reading about the company’s industry and the company’s financials should mitigate such risks. Still, there will always be residual risk in any investment which cannot be eliminated, such as Acts of God (e.g. fires, floods, earthquakes and typhoons) and also deliberate and pervasive fraud. This is why the margin of safety concept always applies to protect the investor from massive losses, and how it will always remain a central concept in value investing.
Note: Ezra has just released their 1H FY 2008 results yesterday (April 8, 2008). I will be doing a 3-part review of their financial statements and ppt presentation in my subsequent posts.
I've been rather busy the past few days, which explains the lack of posts. Anyhow, today I will be exploring how one should view investing, with regards to value investing in particular. Investing is actually part and parcel of growing our wealth, albeit slowly and steadily instead of instantly. Thus, the attitude one should take when approaching this important activity should be one of utmost seriousness, which is why the title mentions "business-like manner".
So what exactly does business-like manner mean ? This means observing a company as if you are a stakeholder who wishes to do business with the company, or acquire the company. Think of the company as a business and examine all facets of it. First of all, one should apply what I call a "common-sense" view of a business, by examining the nature of its principal activities. Companies which are in "commodity" businesses or those with a weird business model (a.k.a. something overtly innovative and which has no history of commercial success) should be shunned because it is unlikely that they can sustain increased earnings or ensure steady and predictable profits.
This is what I consider the “raw filter” for assessing companies for investment purpose. By using common sense to review whether a business has endearing characteristics or not, one can then make a conscious decision to pick and select the better businesses to drill down in detail. The SGX has over 700 companies listed on it and it will be impossible to drill down into each one as it would be too onerous and impractical. Finer filters can then be applied to assess the fundamentals and prospects of each individual company so as to ascertain its merits and demerits. One can then apply Phil Fisher’s 15 basic criteria as well to ask oneself if a particular company is investment-worthy. I shall be starting a new series soon on each of Phil Fisher’s tenets to elaborate and give examples, so watch out for it !
By adopting a business-like attitude towards investing, one can approach companies from a more practical stand point to see if their business will be viable and sustainable in the near to medium term. Of course, any events may occur which may cause our initial assumptions to be invalid, but detailed research and in-depth reading about the company’s industry and the company’s financials should mitigate such risks. Still, there will always be residual risk in any investment which cannot be eliminated, such as Acts of God (e.g. fires, floods, earthquakes and typhoons) and also deliberate and pervasive fraud. This is why the margin of safety concept always applies to protect the investor from massive losses, and how it will always remain a central concept in value investing.
Note: Ezra has just released their 1H FY 2008 results yesterday (April 8, 2008). I will be doing a 3-part review of their financial statements and ppt presentation in my subsequent posts.
Friday, April 04, 2008
Investment Sins Part 4 - Lust
In the fourth installment of the investment sins series (which is taken from the book "The 7 Deadly Sins of Investing" by Maury Fertig), we take a look at Lust. The word lust is defined as "to have a yearning or desire, have a strong and excessive craving". The important words to take note of within the definition are "excessive" and "craving". Lust essentially stems from uncontrolled desire for something which overrides normal judgement and thinking. In relationships, lust has been known to result in cases of marital breakups as third-parties come into the picture. Lust usually has a negative connotation associated with it which implies a loss of control over one's faculties or objectivity; thus succumbing to their object of desire.
So after the English lesson, how does this all tie in with investing ? In investing, lust can manifest itself in various ways. Some examples of different types of lust are provided in Mr. Fertig's book, and I will detail each one briefly with an example:-
1) Holding on to a beloved investment much too long - This is a fairly common phenomenon for many investors and occurs when an investment that used to be a high performer starts to exhibit signs of deterioration. Remember that share prices are correlated to the earnings of a company; thus if a company can manage to grow or maintain earnings consistently into the future, there is no danger of gradual share price erosion. This case arises when one can only see good years ahead for his investment and fails to realize that the company has lost its competitive edge or perhaps its product is now "commoditized". As a result, margins begin to erode and profit begins to decline, leading to a drop in the value of the company. The lustful investor mistakenly believes that Mr. Market is mis-pricing the value of the company and continues to hold on even though it may be clear that fundamentals are decaying. Eventually, the share price will end up as a mere shadow of its former glory and the investor will be sitting on substantial paper losses; his dream and bubble pricked as if a child had pricked a balloon.
2) Becoming infatuated with an investment's surface looks and buying too soon - This is actually also a sign of sloth (not doing enough research) which I shall touch upon in a later part of this investment sins series. When one does not assess the risk/reward ratio of a potential investment and is attracted merely by the "sales talk", then it is also a sign of lust. Lusting after attractive products that is ! Most fund managers and those in the business of promoting alternative investments such as wine investing and land banking will come up with elaborate brochures (wuth large font sizes) as well as a mountain of positive data to support their claims of exceptional returns. It is all part of the sales tactics used by such individuals to generate more revenue and fees for their company. While I am NOT saying that all such investments are bad and that the salespeople are trying to con, one must be ever wary of tactics which may create an image of good returns while masking the true returns for an investment product. Sometimes, people may be lying by not telling the whole truth; or it may be a grey area. As an investor, we should NOT be too turned on by a product which appears to be appealing (and which seems to attract many "prominent" clients) and to compromise on your criteria for investing.
3) Developing an obsession with Plain Jane investments - This essentially means that one can lust after less "risky" investments in money-market funds which typically pay only about 1-2% return per annum; not even enough to cover out high inflation rate of 6.5%. Some people are obsessed with "safety" and refuse to place their money in unit trusts or equity markets for fear of losing everything; they thus become a lustful victim of the fallacy that fixed income securities are always "safer". On the contrary, being paid 1-2% by the bank or fund while inflation is 6.5% means that the real rate of return is a negative 4.5% (at best); thus your money is eroding away even as you feel secure that it is "safe". I have seen this happen with some of my friends and have been advising them to at least consider an index fund which gives market rates of return; instead of leaving their money in a fixed deposit (current rates are about 1.7% for 24 months and 1.9% for 36 months, and your money is locked in).
4) Lusting after gurus or certain fund managers - This is a particularly dangerous form of lust which involves the worship of one or more "gurus" who seem to know all about how markets move and what is best to invest in at any given point in time. There will always be talking heads on television and the news proclaiming that bear markets have arrived, we are in a recession or that commodities will enjoy a 10-year bull run. The lustful investor will latch on to one particular guru whom he/she adulates, and follow his/her recommendations blindly and without thinking. This can result in a lot of bad decisions beause failure to think about your investments usually gets one into big trouble. Thus, do NOT lust after a particular celebtiry (no matter how influential he may be). Instead, use your own logic and objective thinking and avoid those lustful thoughts !
In the next segment on investment sins, I will be touching on Avarice or Greed; one of the most pervasive investment sins ever !
In the fourth installment of the investment sins series (which is taken from the book "The 7 Deadly Sins of Investing" by Maury Fertig), we take a look at Lust. The word lust is defined as "to have a yearning or desire, have a strong and excessive craving". The important words to take note of within the definition are "excessive" and "craving". Lust essentially stems from uncontrolled desire for something which overrides normal judgement and thinking. In relationships, lust has been known to result in cases of marital breakups as third-parties come into the picture. Lust usually has a negative connotation associated with it which implies a loss of control over one's faculties or objectivity; thus succumbing to their object of desire.
So after the English lesson, how does this all tie in with investing ? In investing, lust can manifest itself in various ways. Some examples of different types of lust are provided in Mr. Fertig's book, and I will detail each one briefly with an example:-
1) Holding on to a beloved investment much too long - This is a fairly common phenomenon for many investors and occurs when an investment that used to be a high performer starts to exhibit signs of deterioration. Remember that share prices are correlated to the earnings of a company; thus if a company can manage to grow or maintain earnings consistently into the future, there is no danger of gradual share price erosion. This case arises when one can only see good years ahead for his investment and fails to realize that the company has lost its competitive edge or perhaps its product is now "commoditized". As a result, margins begin to erode and profit begins to decline, leading to a drop in the value of the company. The lustful investor mistakenly believes that Mr. Market is mis-pricing the value of the company and continues to hold on even though it may be clear that fundamentals are decaying. Eventually, the share price will end up as a mere shadow of its former glory and the investor will be sitting on substantial paper losses; his dream and bubble pricked as if a child had pricked a balloon.
2) Becoming infatuated with an investment's surface looks and buying too soon - This is actually also a sign of sloth (not doing enough research) which I shall touch upon in a later part of this investment sins series. When one does not assess the risk/reward ratio of a potential investment and is attracted merely by the "sales talk", then it is also a sign of lust. Lusting after attractive products that is ! Most fund managers and those in the business of promoting alternative investments such as wine investing and land banking will come up with elaborate brochures (wuth large font sizes) as well as a mountain of positive data to support their claims of exceptional returns. It is all part of the sales tactics used by such individuals to generate more revenue and fees for their company. While I am NOT saying that all such investments are bad and that the salespeople are trying to con, one must be ever wary of tactics which may create an image of good returns while masking the true returns for an investment product. Sometimes, people may be lying by not telling the whole truth; or it may be a grey area. As an investor, we should NOT be too turned on by a product which appears to be appealing (and which seems to attract many "prominent" clients) and to compromise on your criteria for investing.
3) Developing an obsession with Plain Jane investments - This essentially means that one can lust after less "risky" investments in money-market funds which typically pay only about 1-2% return per annum; not even enough to cover out high inflation rate of 6.5%. Some people are obsessed with "safety" and refuse to place their money in unit trusts or equity markets for fear of losing everything; they thus become a lustful victim of the fallacy that fixed income securities are always "safer". On the contrary, being paid 1-2% by the bank or fund while inflation is 6.5% means that the real rate of return is a negative 4.5% (at best); thus your money is eroding away even as you feel secure that it is "safe". I have seen this happen with some of my friends and have been advising them to at least consider an index fund which gives market rates of return; instead of leaving their money in a fixed deposit (current rates are about 1.7% for 24 months and 1.9% for 36 months, and your money is locked in).
4) Lusting after gurus or certain fund managers - This is a particularly dangerous form of lust which involves the worship of one or more "gurus" who seem to know all about how markets move and what is best to invest in at any given point in time. There will always be talking heads on television and the news proclaiming that bear markets have arrived, we are in a recession or that commodities will enjoy a 10-year bull run. The lustful investor will latch on to one particular guru whom he/she adulates, and follow his/her recommendations blindly and without thinking. This can result in a lot of bad decisions beause failure to think about your investments usually gets one into big trouble. Thus, do NOT lust after a particular celebtiry (no matter how influential he may be). Instead, use your own logic and objective thinking and avoid those lustful thoughts !
In the next segment on investment sins, I will be touching on Avarice or Greed; one of the most pervasive investment sins ever !
Wednesday, April 02, 2008
First Ship Lease Trust - AGM Highlights
I attended FSL Trust's first AGM for unitholders held at Marina Mandarin Capricorn Ballroom today at 2:30 p.m. There were about 30 or so shareholders and quite a few proxies appointed to vote on behalf of shareholders as well, and the atmosphere was relaxed. The Board of Directors consisted of 5 people, of mention were the CEO Mr. Philip Clausius and the CFO Mr. Cheong Chee Tham whom I had the chance to speak to. From what I gathered, the general mood of the Management was that of optimism and confidence as they knew what they wanted, and were going to go about executing their strategy to ensure yield-accretion for shareholders.
Below are the highlights and snippets from the AGM which I managed to gather (some from memory). Please note that this is NOT a comprehensive list of all that was discussed as there was more than one "camp" of people and many topics and issues were thrown back and forth. I am just summarizing what I can remember and what I feel is more crucial to understanding Management's philosophy for growing the trust and the DPU:-
1) The true underlying economic return on assets acquired is around 7-7.5% (i.e. IRR). This pertains to the higher depreciation charges for FSL's assets as compared to say, a ship owner. FSL uses a more aggressive depreciation policy compared to normal shipping companies and so the depreciation charge will be higher in the initial phase of the ship's lease. However, in time to come, assuming debt amortization takes place, the amount of finance costs will correspondingly decrease and profits will improve as a result. (Note: A shareholder was voicing his concern that net profit after tax was only about 1% of net asset value as at Dec 31, 2007).
2) A question was asked of PT Berlian Laju Tanker (BLT). Apparently BLT had a technical default on one of their debt covenents (unrelated to FSL Trust) and the shareholder was concerned about possible default risk of BLT with regards to the long-term leases signed with FSL Trust. Mr. Clausius replied that BLT was working on a de-leveraging plan and that it is true that there was a technical default; but they had done their due dilligence and BLT were fine before the lease agreement was signed. When asked if there was any recourse for FSL Trust should BLT default on their lease payments, the CEO mentioned that since FSL Trust had legal title to their vessels, they would proceed to re-possess the vessels according to the lease agreement. He also assured that the market value of the vessels is currently higher than its book value, which limits FSL Trust's risk exposure.
3) The BOD was also quizzed on FSL's target capital structure of 1:1 debt/equity. The CEO 's mentioned that it was not attractive to raise equity at 12% yield (FSL Trust's current yield) at the market price of S$1.12. Thus, the trust would have to rely exclusively on debt to acquire ships from ship operators and this debt was "cheap" at 3-month LIBOR + 120 bps. They could essentially borrow more as their Debt/Equity ratio is only 34% currently. There was a US$290 facility ready to be deployed for accretive acquisitions and this would bring the ratio to the eventual 1:1. Of course, the CEO admitted that the aim was to eventually rely on equity to raise funds in future for further acquisitions, and that he believed this could happen when yield compression occurred till yield adjusted to about 7-8%.
4) A point was brought up about the possibility of the market not recognizing the value of FSL Trust, thus all it could do was to just borrow more in order to acquire, which would bring its debt/equity ratio up much higher than the targeted 1:1. The CEO laughed and asked if the market would still accord the same unit price to the trust and let it trade at 16% yield ? He feels it will be a little ridiculous should that happen as the upcoming planned acquisition will increase the DPU per unit hence increase yield. Later on, he did mention other shipping trusts listed in the USA which were trading at yields of about 6-8% on average.
5) The CEO mentioned that shipping was cyclical and that certain classes of vessels were "popular" for certain periods of time; FSL Trust took on different types of vessels in order to diversify their risk and to ensure that they were not at risk of a protracted downturn in for example the dry bulk shipping sector. This is unlike other shipping trusts (e.g. Rickmers) which concentrates on specific types of vessels.
6) When asked about their payout ratio and whether it would still be 100%, Mr. Cheong chipped in and mentioned that the minimum payout ratio was 90%; but the question asked was whether any cash needed to be retained in the trust in order to pay off finance costs (interest on loans) as well as to prepare for the bullet repayment of 2014 when the current loan facility was due for full repayment. Mr. Clausius said that the Trust does not intend to actually pay down that loan in full as he believed in raising more funds along the way through more loans and even through equity. As a result, they would be able to re-finance the loan such that it could be paid down gradually in stages rather than the current arrangement of one bullet repayment. I assumed he meant that negotiations would take place to restructure the loan since it was only 2008 now (there are 6 more years till repayment).
7) Another shareholder asked how the Trust mitigated the risks of default and credit risk when selecting a potential lessee. Mr. Cheong categorically stated that FSL Trust was the only Trust which employed a full time risk assessment officer to assess the credit-worthiness of potential lessees on an ongoing basis. Most of the customers which FSL Trust transacts with need to have a relatively good credit record and also be prominent enough to be considered. FSL focuses more on small to medium sized shipping companies as the giants are all in the container shipping industry. This risk assessment can help to mitigate the risk of default. The worst case scenario (as mentioned earlier) was that the lessee went bankrupt or insolvent and FLS Trust would have to re-possess and re-deploy their vessel(s).
8) When asked about the prospects of the Trust getting good acquisitive deals, Mr. Clausius mentioned that the sub-prime crisis in the USA has tightened credit around the world, and that ship operators are increasingly turning to alternative forms of financing in order to lighten their Balance Sheet. Lease terms negotiated with FSL Trust offer flexibility with early buy-out options on some of the leases, and under lease accounting rules, the lessee can take their vessels off balance-sheet while raising the cash to fund future acquisitions (this is akin to what Swiber and Ezra have done which I have detailed in my earlier posts). But he did caution that there could also be a global recession which could also affect the ship operators and increase the default risk. Thus, the current crisis can be seen as a double-edged sword.
9) A question was also raised on whether there was competition which FSL Trust was up against in terms of getting good deals (i.e. against other shipping trusts or ship financiers) and how they would be able to distinguish themselves. The CEO said that competition was stiff in the time charter industry; but for bareboat chartering the competition was few and fragmented, thus he does not see a problem in competition. He also feels that increasing investor awareness through extensive marketing efforts by FSL Trust has also allowed corporate investors to better appreciate the way a shipping trust functions and how it can add value.
10) The CEO is all of 39 years old and he started the company (FSL Trust Management Pte Ltd) back in 2003. FSL was relocated from New York to Singapore and he said it was not even his initial intention to list the Trust on SGX. When quizzed on why he decided to list in Singapore and not New York where shipping trusts are more recognized, he said that in NYSE it was a case of "here today, forgotten tomorrow" when the next hot thing comes about (he is referring to rotational interest in different asset classes). In Singapore, he feels that shipping trusts are relatively new and that it can command attention due to its business model; and by being mid-cap (market cap of about US$500 million) it could also attract fund attention. I feel that his point was that by listing over here, he could capture and retain more focused attention on the Trust as Singapore had a smaller market, rather than listing on NYSE where the action was frantic and fast-paced (personal opinion).
11) He also mentioned that the older ships get higher leases but the problem was that older assets had the chance of going "out of fashion". If the tide should turn against older assets in the shipping industry, then the market value of those assets could plummet suddenly. He thus emphasized that it was important for a shipping company to have a very new and modern fleet so that even if the industry went into a slump, the company could still rely on their new vessels to generate some form of income. I was relating this statement to Ezra and Swiber; both companies are constantly ensuring that their fleet is new and up-to-date, unlike some companies such as CH Offshore (which is selling off older vessels to replace them with newer ones; albeit slowly) and Taiwan-based Courage Marine (which owns a fleet of old dry bulk carrier vessels).
12) A shareholder also brought up the point about the lessee not taking care of the vessel as it did not technically belong to them; thus in the last 2 years they would cut corners and cause the vessel to be poorly maintained. Mr. Clausius assured that there was a 5-year technical inspection (Mr. Cheong added that this was compulsory) for all vessels and that the lessee would have to pass this inspection before they could return the vessel to FSL Trust at the end of the lease period. Thus, this minimized any physical wear and tear or under-maintenance of the vessels (recall that under bareboat chartering, the lessee is responsible for the maintenance of the vessel at their own expense).
13) Mr. Clausius did not, however, assure that yield compression would SURELY take place; after all he emphasized that the market would determine the yield of FSL Trust and that he HOPED that yield compression would eventually benefit all shareholders, including the IPO shareholders who were "below-water" now. But he did reiterate that the 3 cornerstone shareholders had NOT sold out their stake. One had increased their stake a little, another had sold a little while the third had maintained his stake. Together with FSL Trust Management, they owned a total of 54% (30%+24%) of FSL Trust and the major shareholders were happy with the DPU thus far and see more potential ahead for DPU accretion.
14) Mr. Clausius had a possible explanation for the unattractiveness of FSL Trust at the present moment. The DPU is given out in USD currency and the USD is currently at its weakest against the SGD; this means that Singapore shareholders would receive a correspondingly lower SGD DPU as compared to their USA counterparts who were not affected as they received their DPU in USD. However, he said that even if the USD should weaken further, the current yield was still very attractive by any standard and the absolute DPU would increase further should the Trust make more acquisitions.
Candour and Disposition
The general mood that I could detect from the CEO was that he was candid and willing to take questions from all shareholders; he was also not evasive and did not deflect questions away. But he was cautious about being too optimistic about the Trust's prospects, as the unit price has thus far not done well. He was confident about the Trust's business model and also in his Management Team which had extensive experience and knowledge in structuring operating leases to maximise value for shareholders. This confidence shone through when he spoke to many of the unit-holders. He was also jovial and relaxed and was willing to stay for 45 minutes after the official business ended to take questions from unit-holders. Mr. Cheong was also very chatty and was explaining the business model of the Trust and various technical aspects to another group of unit-holders, but I did not stay to listen.
Please note that the FSL Trust website has mentioned that the forecast DPU for FY 2008 is expected to be 10.432 US Cents per unit. This translates to about 2.61 US cents per share, or about 3.57 Singapore cents using a rate of 1.37 to the USD. This would mean a potential DPU of 14.30 Singapore cents for FY 2008; implying a forecast dividend yield of 12.4% at today's closing price of S$1.15 per unit.
Overall, it was a very good experience to attend the AGM and to speak to Management about various aspects of FSL Trust. It remains to be seen if Management can successfully execute their long-term growth strategy for the Trust but thus far they have done better than the forecast DPU for FY 2007; so this could be an early indication of their ability to deliver.
I will be providing more updates of FSL Trust as they come around, but please feel free to contribute comments on the AGM and share information too.
I attended FSL Trust's first AGM for unitholders held at Marina Mandarin Capricorn Ballroom today at 2:30 p.m. There were about 30 or so shareholders and quite a few proxies appointed to vote on behalf of shareholders as well, and the atmosphere was relaxed. The Board of Directors consisted of 5 people, of mention were the CEO Mr. Philip Clausius and the CFO Mr. Cheong Chee Tham whom I had the chance to speak to. From what I gathered, the general mood of the Management was that of optimism and confidence as they knew what they wanted, and were going to go about executing their strategy to ensure yield-accretion for shareholders.
Below are the highlights and snippets from the AGM which I managed to gather (some from memory). Please note that this is NOT a comprehensive list of all that was discussed as there was more than one "camp" of people and many topics and issues were thrown back and forth. I am just summarizing what I can remember and what I feel is more crucial to understanding Management's philosophy for growing the trust and the DPU:-
1) The true underlying economic return on assets acquired is around 7-7.5% (i.e. IRR). This pertains to the higher depreciation charges for FSL's assets as compared to say, a ship owner. FSL uses a more aggressive depreciation policy compared to normal shipping companies and so the depreciation charge will be higher in the initial phase of the ship's lease. However, in time to come, assuming debt amortization takes place, the amount of finance costs will correspondingly decrease and profits will improve as a result. (Note: A shareholder was voicing his concern that net profit after tax was only about 1% of net asset value as at Dec 31, 2007).
2) A question was asked of PT Berlian Laju Tanker (BLT). Apparently BLT had a technical default on one of their debt covenents (unrelated to FSL Trust) and the shareholder was concerned about possible default risk of BLT with regards to the long-term leases signed with FSL Trust. Mr. Clausius replied that BLT was working on a de-leveraging plan and that it is true that there was a technical default; but they had done their due dilligence and BLT were fine before the lease agreement was signed. When asked if there was any recourse for FSL Trust should BLT default on their lease payments, the CEO mentioned that since FSL Trust had legal title to their vessels, they would proceed to re-possess the vessels according to the lease agreement. He also assured that the market value of the vessels is currently higher than its book value, which limits FSL Trust's risk exposure.
3) The BOD was also quizzed on FSL's target capital structure of 1:1 debt/equity. The CEO 's mentioned that it was not attractive to raise equity at 12% yield (FSL Trust's current yield) at the market price of S$1.12. Thus, the trust would have to rely exclusively on debt to acquire ships from ship operators and this debt was "cheap" at 3-month LIBOR + 120 bps. They could essentially borrow more as their Debt/Equity ratio is only 34% currently. There was a US$290 facility ready to be deployed for accretive acquisitions and this would bring the ratio to the eventual 1:1. Of course, the CEO admitted that the aim was to eventually rely on equity to raise funds in future for further acquisitions, and that he believed this could happen when yield compression occurred till yield adjusted to about 7-8%.
4) A point was brought up about the possibility of the market not recognizing the value of FSL Trust, thus all it could do was to just borrow more in order to acquire, which would bring its debt/equity ratio up much higher than the targeted 1:1. The CEO laughed and asked if the market would still accord the same unit price to the trust and let it trade at 16% yield ? He feels it will be a little ridiculous should that happen as the upcoming planned acquisition will increase the DPU per unit hence increase yield. Later on, he did mention other shipping trusts listed in the USA which were trading at yields of about 6-8% on average.
5) The CEO mentioned that shipping was cyclical and that certain classes of vessels were "popular" for certain periods of time; FSL Trust took on different types of vessels in order to diversify their risk and to ensure that they were not at risk of a protracted downturn in for example the dry bulk shipping sector. This is unlike other shipping trusts (e.g. Rickmers) which concentrates on specific types of vessels.
6) When asked about their payout ratio and whether it would still be 100%, Mr. Cheong chipped in and mentioned that the minimum payout ratio was 90%; but the question asked was whether any cash needed to be retained in the trust in order to pay off finance costs (interest on loans) as well as to prepare for the bullet repayment of 2014 when the current loan facility was due for full repayment. Mr. Clausius said that the Trust does not intend to actually pay down that loan in full as he believed in raising more funds along the way through more loans and even through equity. As a result, they would be able to re-finance the loan such that it could be paid down gradually in stages rather than the current arrangement of one bullet repayment. I assumed he meant that negotiations would take place to restructure the loan since it was only 2008 now (there are 6 more years till repayment).
7) Another shareholder asked how the Trust mitigated the risks of default and credit risk when selecting a potential lessee. Mr. Cheong categorically stated that FSL Trust was the only Trust which employed a full time risk assessment officer to assess the credit-worthiness of potential lessees on an ongoing basis. Most of the customers which FSL Trust transacts with need to have a relatively good credit record and also be prominent enough to be considered. FSL focuses more on small to medium sized shipping companies as the giants are all in the container shipping industry. This risk assessment can help to mitigate the risk of default. The worst case scenario (as mentioned earlier) was that the lessee went bankrupt or insolvent and FLS Trust would have to re-possess and re-deploy their vessel(s).
8) When asked about the prospects of the Trust getting good acquisitive deals, Mr. Clausius mentioned that the sub-prime crisis in the USA has tightened credit around the world, and that ship operators are increasingly turning to alternative forms of financing in order to lighten their Balance Sheet. Lease terms negotiated with FSL Trust offer flexibility with early buy-out options on some of the leases, and under lease accounting rules, the lessee can take their vessels off balance-sheet while raising the cash to fund future acquisitions (this is akin to what Swiber and Ezra have done which I have detailed in my earlier posts). But he did caution that there could also be a global recession which could also affect the ship operators and increase the default risk. Thus, the current crisis can be seen as a double-edged sword.
9) A question was also raised on whether there was competition which FSL Trust was up against in terms of getting good deals (i.e. against other shipping trusts or ship financiers) and how they would be able to distinguish themselves. The CEO said that competition was stiff in the time charter industry; but for bareboat chartering the competition was few and fragmented, thus he does not see a problem in competition. He also feels that increasing investor awareness through extensive marketing efforts by FSL Trust has also allowed corporate investors to better appreciate the way a shipping trust functions and how it can add value.
10) The CEO is all of 39 years old and he started the company (FSL Trust Management Pte Ltd) back in 2003. FSL was relocated from New York to Singapore and he said it was not even his initial intention to list the Trust on SGX. When quizzed on why he decided to list in Singapore and not New York where shipping trusts are more recognized, he said that in NYSE it was a case of "here today, forgotten tomorrow" when the next hot thing comes about (he is referring to rotational interest in different asset classes). In Singapore, he feels that shipping trusts are relatively new and that it can command attention due to its business model; and by being mid-cap (market cap of about US$500 million) it could also attract fund attention. I feel that his point was that by listing over here, he could capture and retain more focused attention on the Trust as Singapore had a smaller market, rather than listing on NYSE where the action was frantic and fast-paced (personal opinion).
11) He also mentioned that the older ships get higher leases but the problem was that older assets had the chance of going "out of fashion". If the tide should turn against older assets in the shipping industry, then the market value of those assets could plummet suddenly. He thus emphasized that it was important for a shipping company to have a very new and modern fleet so that even if the industry went into a slump, the company could still rely on their new vessels to generate some form of income. I was relating this statement to Ezra and Swiber; both companies are constantly ensuring that their fleet is new and up-to-date, unlike some companies such as CH Offshore (which is selling off older vessels to replace them with newer ones; albeit slowly) and Taiwan-based Courage Marine (which owns a fleet of old dry bulk carrier vessels).
12) A shareholder also brought up the point about the lessee not taking care of the vessel as it did not technically belong to them; thus in the last 2 years they would cut corners and cause the vessel to be poorly maintained. Mr. Clausius assured that there was a 5-year technical inspection (Mr. Cheong added that this was compulsory) for all vessels and that the lessee would have to pass this inspection before they could return the vessel to FSL Trust at the end of the lease period. Thus, this minimized any physical wear and tear or under-maintenance of the vessels (recall that under bareboat chartering, the lessee is responsible for the maintenance of the vessel at their own expense).
13) Mr. Clausius did not, however, assure that yield compression would SURELY take place; after all he emphasized that the market would determine the yield of FSL Trust and that he HOPED that yield compression would eventually benefit all shareholders, including the IPO shareholders who were "below-water" now. But he did reiterate that the 3 cornerstone shareholders had NOT sold out their stake. One had increased their stake a little, another had sold a little while the third had maintained his stake. Together with FSL Trust Management, they owned a total of 54% (30%+24%) of FSL Trust and the major shareholders were happy with the DPU thus far and see more potential ahead for DPU accretion.
14) Mr. Clausius had a possible explanation for the unattractiveness of FSL Trust at the present moment. The DPU is given out in USD currency and the USD is currently at its weakest against the SGD; this means that Singapore shareholders would receive a correspondingly lower SGD DPU as compared to their USA counterparts who were not affected as they received their DPU in USD. However, he said that even if the USD should weaken further, the current yield was still very attractive by any standard and the absolute DPU would increase further should the Trust make more acquisitions.
Candour and Disposition
The general mood that I could detect from the CEO was that he was candid and willing to take questions from all shareholders; he was also not evasive and did not deflect questions away. But he was cautious about being too optimistic about the Trust's prospects, as the unit price has thus far not done well. He was confident about the Trust's business model and also in his Management Team which had extensive experience and knowledge in structuring operating leases to maximise value for shareholders. This confidence shone through when he spoke to many of the unit-holders. He was also jovial and relaxed and was willing to stay for 45 minutes after the official business ended to take questions from unit-holders. Mr. Cheong was also very chatty and was explaining the business model of the Trust and various technical aspects to another group of unit-holders, but I did not stay to listen.
Please note that the FSL Trust website has mentioned that the forecast DPU for FY 2008 is expected to be 10.432 US Cents per unit. This translates to about 2.61 US cents per share, or about 3.57 Singapore cents using a rate of 1.37 to the USD. This would mean a potential DPU of 14.30 Singapore cents for FY 2008; implying a forecast dividend yield of 12.4% at today's closing price of S$1.15 per unit.
Overall, it was a very good experience to attend the AGM and to speak to Management about various aspects of FSL Trust. It remains to be seen if Management can successfully execute their long-term growth strategy for the Trust but thus far they have done better than the forecast DPU for FY 2007; so this could be an early indication of their ability to deliver.
I will be providing more updates of FSL Trust as they come around, but please feel free to contribute comments on the AGM and share information too.
Monday, March 31, 2008
End-March 2008 Portfolio Summary and Review
The second-half of March 2008 saw more business activity with respect to the companies I own. The market continued to recover somewhat slightly, though I think that will be scant relief for those who probably bought at the height of the bull market. This evidently illustrates the importance of purchase with a margin of safety, and to also assess the potential investment rationally to see if it has prospects for top and bottom line growth in the years to come.
April 2008 will prove to be an interesting month, as I am expecting results announcements from FSL Trust, Suntec REIT and Ezra. Also, I am looking forward to attending the AGM and reading the Annual Reports for Swiber and China Fishery.
Below is the summary of my investments and related news as at March 31, 2008 (STI at 3,007.36 points).:-
1) Ezra (Vested since October 6, 2005) - Buy Price $0.645 (bonus adjusted), Market Price $2.07, Gain 221%, YTD Loss 37.7%. On March 27, 2008, Ezra announced the clinching of charter contracts totaling US$77.6 million; these include new and renewal charter contracts. I have details on this in my previous post. Ezra should be releasing their 1H FY 2008 results by mid-April 2008, and I will provide a review and analysis before my next portfolio review.
2) Boustead (Vested since September 13, 2006; averaged down November 13, 2006) - Buy Price $1.295 (average), Market Price $1.98, Gain 52.9%, YTD Loss 17.8%. On March 24, 2008, Salcon announced S$32 million worth of contracts from Toshiba and Samsung. Also, just this evening on March 31, 2008, Boustead Projects announced the award of a S$15 million contract to construct a warehouse and office facility for LuxAsia Pte Ltd. Contract flow has started again after a drought following the August 22, 2007 announcement of a record S$300 million Libyan township project. This is Boustead Project’s 9th Project for FY 2008.
3) Swiber (Vested since February 14, 2007) - Buy Price $1.01, Market Price $2.54, Gain 151.5%, YTD Loss 25.9%. Swiber announced on March 17, 2008 that it had been awarded a multi-year contract from CUEL Limited for installation of platforms and pipelines in the Gulf of Thailand. The project will commence in 1Q FY 2009 and is worth US$50 million per year for 5 years. Following this, on March 18, 2008, Swiber announced the appointment of Mr. John Payne as the CEO of Kreuz International Pte Ltd. This is seen as another sign of Swiber investing in human resource to beef up their Management team. On March 26, 2008, Swiber announced that Kreuz had successfully delivered two floating crane barges to their 30% associated company OBT Holdings Pte Ltd, which demonstrates Kreuz’s ability to deliver on time. Two days later, Swiber announced that they had raised S$100 million by issuing 3-year bonds at 4% interest rate, in fixed and floating rate tranches. Finally, on March 31, 2008, Swiber announced the formation of a joint venture company called Principia Asia-Pacific Engineering Pte Ltd.
4) Suntec REIT (Vested since December 9, 2004) - Buy Price $1.11, Market Price $1.45, Gain 30.6%, YTD Loss 15.2%. There was no news on Suntec REIT in the half-month ended March 31, 2008.
5) Pacific Andes (Vested since March 29, 2006; Rights Issue July 11, 2007 at S$0.52 per share; averaged down August 17, 2007) - Buy Price $0.655 (rights-adjusted), Market Price $0.515, Loss 21.4%, YTD Loss 18.3%. There was no news on Pacific Andes during the period ended March 31, 2008.
6) China Fishery Group (Vested since November 20, 2007) - Buy Price $1.50 (average), Market Price $1.51, Gain 0.7%, YTD Loss 18.4%. There was no news for CFG for the period ended March 31, 2008.
7) First Ship Lease Trust (Vested since January 14, 2008) - Buy Price (Averaged Down) $1.105, Market Price $1.11, Gain 0.5%. FSL Trust’s AGM will be held on April 2, 2008 (Wednesday) and they have also announced on March 31, 2008 that they had appointed a new Head of Sales Mr. Vijay Kamath for East of Suez. Hopefully, with his experience and expertise, this means that FSL Trust can embark on more acquisitions which can enhance yield for unit-holders.
Overall Portfolio
My overall portfolio has increased by 51% without taking into FSL Trust’s cost. If included, the gain is 37.0% from a cost of S$80.4K as at March 31, 2008. The market value of my portfolio without FSL Trust is S$88K, and if FSL Trust is included then the portfolio value is S$110.1K. Realized gains remain at about S$4.9K until the ex-dividend date for China Fishery comes along.
Comparison against STI
The FTSE STI had declined by 13.6% since the start of 2008. Without FSL Trust, my portfolio has declined 24.6%.To date in 2008, my portfolio has under-performed the new benchmark FTSE STI by 11 percentage points.
My next portfolio review will be on Tuesday, April 15, 2008 after market close.
The second-half of March 2008 saw more business activity with respect to the companies I own. The market continued to recover somewhat slightly, though I think that will be scant relief for those who probably bought at the height of the bull market. This evidently illustrates the importance of purchase with a margin of safety, and to also assess the potential investment rationally to see if it has prospects for top and bottom line growth in the years to come.
April 2008 will prove to be an interesting month, as I am expecting results announcements from FSL Trust, Suntec REIT and Ezra. Also, I am looking forward to attending the AGM and reading the Annual Reports for Swiber and China Fishery.
Below is the summary of my investments and related news as at March 31, 2008 (STI at 3,007.36 points).:-
1) Ezra (Vested since October 6, 2005) - Buy Price $0.645 (bonus adjusted), Market Price $2.07, Gain 221%, YTD Loss 37.7%. On March 27, 2008, Ezra announced the clinching of charter contracts totaling US$77.6 million; these include new and renewal charter contracts. I have details on this in my previous post. Ezra should be releasing their 1H FY 2008 results by mid-April 2008, and I will provide a review and analysis before my next portfolio review.
2) Boustead (Vested since September 13, 2006; averaged down November 13, 2006) - Buy Price $1.295 (average), Market Price $1.98, Gain 52.9%, YTD Loss 17.8%. On March 24, 2008, Salcon announced S$32 million worth of contracts from Toshiba and Samsung. Also, just this evening on March 31, 2008, Boustead Projects announced the award of a S$15 million contract to construct a warehouse and office facility for LuxAsia Pte Ltd. Contract flow has started again after a drought following the August 22, 2007 announcement of a record S$300 million Libyan township project. This is Boustead Project’s 9th Project for FY 2008.
3) Swiber (Vested since February 14, 2007) - Buy Price $1.01, Market Price $2.54, Gain 151.5%, YTD Loss 25.9%. Swiber announced on March 17, 2008 that it had been awarded a multi-year contract from CUEL Limited for installation of platforms and pipelines in the Gulf of Thailand. The project will commence in 1Q FY 2009 and is worth US$50 million per year for 5 years. Following this, on March 18, 2008, Swiber announced the appointment of Mr. John Payne as the CEO of Kreuz International Pte Ltd. This is seen as another sign of Swiber investing in human resource to beef up their Management team. On March 26, 2008, Swiber announced that Kreuz had successfully delivered two floating crane barges to their 30% associated company OBT Holdings Pte Ltd, which demonstrates Kreuz’s ability to deliver on time. Two days later, Swiber announced that they had raised S$100 million by issuing 3-year bonds at 4% interest rate, in fixed and floating rate tranches. Finally, on March 31, 2008, Swiber announced the formation of a joint venture company called Principia Asia-Pacific Engineering Pte Ltd.
4) Suntec REIT (Vested since December 9, 2004) - Buy Price $1.11, Market Price $1.45, Gain 30.6%, YTD Loss 15.2%. There was no news on Suntec REIT in the half-month ended March 31, 2008.
5) Pacific Andes (Vested since March 29, 2006; Rights Issue July 11, 2007 at S$0.52 per share; averaged down August 17, 2007) - Buy Price $0.655 (rights-adjusted), Market Price $0.515, Loss 21.4%, YTD Loss 18.3%. There was no news on Pacific Andes during the period ended March 31, 2008.
6) China Fishery Group (Vested since November 20, 2007) - Buy Price $1.50 (average), Market Price $1.51, Gain 0.7%, YTD Loss 18.4%. There was no news for CFG for the period ended March 31, 2008.
7) First Ship Lease Trust (Vested since January 14, 2008) - Buy Price (Averaged Down) $1.105, Market Price $1.11, Gain 0.5%. FSL Trust’s AGM will be held on April 2, 2008 (Wednesday) and they have also announced on March 31, 2008 that they had appointed a new Head of Sales Mr. Vijay Kamath for East of Suez. Hopefully, with his experience and expertise, this means that FSL Trust can embark on more acquisitions which can enhance yield for unit-holders.
Overall Portfolio
My overall portfolio has increased by 51% without taking into FSL Trust’s cost. If included, the gain is 37.0% from a cost of S$80.4K as at March 31, 2008. The market value of my portfolio without FSL Trust is S$88K, and if FSL Trust is included then the portfolio value is S$110.1K. Realized gains remain at about S$4.9K until the ex-dividend date for China Fishery comes along.
Comparison against STI
The FTSE STI had declined by 13.6% since the start of 2008. Without FSL Trust, my portfolio has declined 24.6%.To date in 2008, my portfolio has under-performed the new benchmark FTSE STI by 11 percentage points.
My next portfolio review will be on Tuesday, April 15, 2008 after market close.
Saturday, March 29, 2008
Ezra - US$77.6 Million Charter Contracts, Interview with Lionel Lee in Pulses
It's been awhile since newsflow from Ezra came out, what with the steady stream of announcements and press releases by Swiber. But on March 27, 2008, the company announced that they had clinched charter contracts worth US$77.6 for 7 of their vessels. These consist of new as well as renewal charters and these charters are expected to impact earnings in the current financial year (i.e FY 2008 ending August 31, 2008).
According to a news report update from Energy Current website, the charters will cover 5 AHTS, namely 18,000 bhp Lewek Toucan, 12,240 bhp Lewek Swift, 10,000 bhp Lewek Emerald, 7,200 bhp Lewek Mallard and 5,000 bhp Lewek Ebony. The charters will also cover one AHT, 4,900 bhp Lewek Robin as well as Ezra’s heavy-lift accommodation barge Lewek Chancellor. Lewek Swift and Lewek Emerald are granted extensions on their current charters with Shell in Australia, Lewek Mallard is working for Newfield and Nippon Oil in offshore Malaysia while Lewek Toucan is believed to be contracted to Shell supporting semi-submersible Atwood Falcon.
The award of these contracts again reaffirms the fact that Ezra’s vessel fleet is still very much in demand. Of course, one could argue that it is more likely the case of the daily charter rate which they are getting which determines their revenues and margins. But Mr. Lionel Lee mentioned that there was “no let-up in the enquiries” and that Ezra’s future focus will be more on deepwater support vessels for E&P activities in Malaysia and Australia. There is still currently a worldwide shortage of vessels for younger, medium and large-sized offshore vessels. Ezra is due to take delivery of 11 more vessels from now till FY 2010, and these include Multi-Functional Support Vessels (MFSV), a Floating Production Storage Offloading vessel (FPSO) and a well service and maintenance vessel.
In the recent issue of Pulses, there was an exclusive interview conducted with the Managing Director of Ezra, Mr. Lionel Lee. I have read through the interview and summarized the main points he brought up about growing Ezra’s business to higher levels:-
1) Ezra has mitigated the risks that their vessels become “white elephants” by engaging good shipyards and good equipment. They have worked from the beginning with established names such as Pan-United Marine and Rolls-Royce in order to maintain high quality and ensure their vessels are in strong demand.
2) The company has set a new profit target for the future but he declined to give more details until the company actually managed to hit it. This shows that they have a long-term vision to grow their earnings steadily, which will benefit shareholders.
3) Ezra has focused on merging its assets with its services, so that they can offer the “full suite” instead of just partial service. It is akin to providing the doctor, surgeon as well as hospital in order to treat a patient, in an analogy provided by Mr. Lee. This helps to enhance their competitive edge and boosts their profile as a one-stop solution provider for the oil and gas industry.
4) Mr. Lee feels that deepwater will have stronger growth compared to shallow waters, but that the shallow water market still needs to be served as it accounts for 60-65% of the current reserves. He believes replacement of assets will take place for shallow water, but that “he doesn’t think there will be big growth”.
5) Ezra has a competitive edge in that they invest in people with expertise, which is critical because expertise is difficult to find. They have an R&D office in London with 30 staff and he believes this is what differentiates Ezra from other players.
6) Ezra continues to expand its geographical reach, and Mr. Lee intends to take it even more global, and to hone its expertise further. Steps have been taken to invest in people, such as providing scholarships (Mr. Tan mentioned this to me during AGM FY 2007), training facilities to train crew for technically complex new vessels, as well as a US$10 million annuity plan (announced by Ezra on Jan 15, 2008).
Wednesday, March 26, 2008
Pacific Andes - 3Q FY 2008 Results Analysis and Review (Part 2)
To continue my review, I will be touching on Cash Flow Statement and prospects and plans for PAH in this post.
Cash Flow Statement Review
Please note that for my cash flow review, I will be referring to numbers for 9 months ended Dec 31, 2007 (not the 3-month figures as these are more short-term by nature).
Cash generated from operating activities continues to remain healthy, as cash inflows before changes in working capital came up to HK$958 million for Dec 31, 2007 compared to just HK$542 million a year ago. Their cash generation ability from operations is not the worrying section, but I am keeping an eye on their interest paid and income taxes paid, which saw a significant rise from a year ago due to higher financing costs and expansion of their operations.
Most of the cash outflows were from investing activities, as PAH had already announced their intention to raise their stake in CFG. HK$558 million was spent on acquiring property, plant and equipment, while a whopping HK$2.37 billion was spent on raising their effective interest in CFG from 28.8% to 64.1% ! This culminated in a total cash outflow of HK$3.43 billion, a 203.5% rise over the cash outflow of HK$1.13 billion a year ago.
For financing, PAH raised cash through the issue of convertible bonds and rights shares (at $0.52 per share cum-rights). This amounted to a total of HK$ 2.49 billion, and was used to pay for the acquisition of CFG. More monies were also raised through finance leases and bank borrowings too. The result was a net cash inflow of HK$2.57 billion for 9M 2008.
These cash flows are not reflective of the usual business operating conditions for PAH as they involve a very large acquisition of CFG which is funded by pure debt, equity and convertible debt. Thus, I believe it will be more indicative to review PAH's cash flow for FY 2009 after the acquisition has gone through, in order to assess its effects on cash.
Prospects and Plans
According to PAH and CFG, the global demand for fish is on an uptrend and will rise steadily due to consumers' increasing awareness of healthy alternatives to red meat, as well as steadily rising income levels for consumers in China which means that they have the spending ability to purchase healthier products which are fish-related. This trend should see PAH and CFG improving their revenues for the forseeable future as the demand for fish is a constant and growing one which is unlikely to die down anytime soon.
PAH increased their transportation fleet from 2 to 4 reefer vessels to enhance competitiveness and efficiency. I believe the Management will be looking out for other attractive acquisition opportunities to build up their fleet in order to further enhance capacity and hence improve margins through economies of scale. Their plans to commence fishing operations in the South Pacific Ocean in FY 2009 should see new revenue flowing in, and they will deploy 3 upgraded super-trawlers there. The re-structuring of the 4th VOA is also in progress to ensure it is on a prepaid charter hire basis and not daily basis. If all this sounds uncannily familiar, it's because I had mentioned it on CFG's FY 2007 review as well ! The two companies are very closely tied and thus information may tend to get repeated.
For their fishmeal operations, Management plans to acquire more vessels and fishmeal plants in order to increase their capacity for catch and also enhance their efficiency in having more locations for unloading their fish catch. However, of late, the sub-prime crisis in USA has made financing more difficult, which may be the reason for the slowing down of their acquisition pipeline. Still, I am confident of Management's ability to negotiate for quality assets at an acceptable price to enhance value for shareholders.
Finally, shareholders should also be waiting for more news and information on PAH's proposed scrip dividend scheme. I believe this should accompany the FY 2008 financial results announcement as Management had mentioned paying dividend just once, instead of an interim and a final one.
To continue my review, I will be touching on Cash Flow Statement and prospects and plans for PAH in this post.
Cash Flow Statement Review
Please note that for my cash flow review, I will be referring to numbers for 9 months ended Dec 31, 2007 (not the 3-month figures as these are more short-term by nature).
Cash generated from operating activities continues to remain healthy, as cash inflows before changes in working capital came up to HK$958 million for Dec 31, 2007 compared to just HK$542 million a year ago. Their cash generation ability from operations is not the worrying section, but I am keeping an eye on their interest paid and income taxes paid, which saw a significant rise from a year ago due to higher financing costs and expansion of their operations.
Most of the cash outflows were from investing activities, as PAH had already announced their intention to raise their stake in CFG. HK$558 million was spent on acquiring property, plant and equipment, while a whopping HK$2.37 billion was spent on raising their effective interest in CFG from 28.8% to 64.1% ! This culminated in a total cash outflow of HK$3.43 billion, a 203.5% rise over the cash outflow of HK$1.13 billion a year ago.
For financing, PAH raised cash through the issue of convertible bonds and rights shares (at $0.52 per share cum-rights). This amounted to a total of HK$ 2.49 billion, and was used to pay for the acquisition of CFG. More monies were also raised through finance leases and bank borrowings too. The result was a net cash inflow of HK$2.57 billion for 9M 2008.
These cash flows are not reflective of the usual business operating conditions for PAH as they involve a very large acquisition of CFG which is funded by pure debt, equity and convertible debt. Thus, I believe it will be more indicative to review PAH's cash flow for FY 2009 after the acquisition has gone through, in order to assess its effects on cash.
Prospects and Plans
According to PAH and CFG, the global demand for fish is on an uptrend and will rise steadily due to consumers' increasing awareness of healthy alternatives to red meat, as well as steadily rising income levels for consumers in China which means that they have the spending ability to purchase healthier products which are fish-related. This trend should see PAH and CFG improving their revenues for the forseeable future as the demand for fish is a constant and growing one which is unlikely to die down anytime soon.
PAH increased their transportation fleet from 2 to 4 reefer vessels to enhance competitiveness and efficiency. I believe the Management will be looking out for other attractive acquisition opportunities to build up their fleet in order to further enhance capacity and hence improve margins through economies of scale. Their plans to commence fishing operations in the South Pacific Ocean in FY 2009 should see new revenue flowing in, and they will deploy 3 upgraded super-trawlers there. The re-structuring of the 4th VOA is also in progress to ensure it is on a prepaid charter hire basis and not daily basis. If all this sounds uncannily familiar, it's because I had mentioned it on CFG's FY 2007 review as well ! The two companies are very closely tied and thus information may tend to get repeated.
For their fishmeal operations, Management plans to acquire more vessels and fishmeal plants in order to increase their capacity for catch and also enhance their efficiency in having more locations for unloading their fish catch. However, of late, the sub-prime crisis in USA has made financing more difficult, which may be the reason for the slowing down of their acquisition pipeline. Still, I am confident of Management's ability to negotiate for quality assets at an acceptable price to enhance value for shareholders.
Finally, shareholders should also be waiting for more news and information on PAH's proposed scrip dividend scheme. I believe this should accompany the FY 2008 financial results announcement as Management had mentioned paying dividend just once, instead of an interim and a final one.
Monday, March 24, 2008
Pacific Andes - 3Q FY 2008 Results Analysis and Review (Part 1)
I know this review is long overdue, but I really haven't had time to get down to it till today. Anyhow, as my investments are long-term by nature, the fortunate thing is that it does not really matter if I analyzed it today, yesterday or even last month. The nature of Pacific Andes' business is not going to change overnight, or for the next 5 years for that matter ! As it is, they will probably be even more diversified (I hope !) in the next few years after announcing their intentions to expand their fishing activities to South American seas.
Anyhow, below is my quick and brief review for PAH's 3Q FY 2008 financials. Note that I will place more emphasis on the FY 2008 results once they are out by late May 2008.
Income Statement Analysis
For 3Q 2008, revenues were HK$1.11 billion, a 52% increase over the same period last year. However, economies of scale meant that COGS only increased by 40.3% over the same period, resulting in an increase in gross profit of 101%. GP Margins for 3Q 2008 stood at 24.6%, compared to inly 18.3% for 3Q 2007. For 9M 2008, gross margins were 20.7% against 9M 2007 gross margin of 17.1%. This clearly shows that economies of scale in PAH's fishing operations are beginning to bear fruit, as they are able to reap cost benefits from their enlarged fleet of purse seine vessels.
As a result of the issue of bonds to fund the increase in stake in CFG from 28.8% to 64.1%, interest expenses ballooned from just HK$57.7 million in 3Q 2007 to HK$111.3 million in 3Q 2008, an increase of 93%. For 9M 2008, the increase was 146.2% due to a low base for finance costs incurred in early FY 2007. As a result of this, profit before tax rose only 93.8%, less than the increase in gross profit but nevertheless still impressive. The fishing division (now bolstered) accounted for 55% of 3Q 2008 revenues, up from just 37.4% previously. China still made up the main bulk of sales (77.5% for 3Q 2008) and it remains to be seen if there will be pricing pressures for the Group due to the Government's announcements to combat inflation. Fish being a staple food item on Chinese menus may not make this effect too pervasive, but their next results update should mention something about their ASP (average selling prices) to hopefully be able to maintain their margins.
As explained in Note 8 (Page 10) of the result announcement, finance costs had risen due to interest attributable to US$93 million 4% convertible bonds, US$225 million 9.25% senior notes as well as increased short-term borrowings. The Group seems to have taken on a lot of debt in order to increase the contribution provided by the fishing division, and the effects of this additional debt are going to follow the company for some time into the future. I view this as part of PAH (and CFG's) expansion plan to increase their reach into the South American seas, and CY 2008 should be the year in which they manage to extend their footprint to these regions and also to add a new revenue stream to their business. As it is, it will be prudent to watch for their gearing, cash flows and financing costs in subsequent quarters.
Balance Sheet Review
The most notable increase within the Balance Sheet under "Non-Current Assets" belongs to PPE, and this increase is 77.4% from HK$863 million to HK$1,533 million. This reflects the Group's purchase of their additional stake in CFG and shows up CFG's related assets. Goodwill has also increased due to their acquisition of CFG.
Inventories have dipped slightly as this is the "low" season for PAH (4Q 2008 will be the peak season). Bills receivable has increased to HK$177 million in line with the increase in scale of operations and revenues. Current and Quick ratios are 1.56 and 1.27 respectively for 3Q 2008, and are 1.90 and 1.51 for 3Q 2007. The dip is due to the higher bank advances drawn on bills and also higher current portion of interest-bearing borrowings. As the ratios are still above 1, the company is not in any immediate danger of insolvency.
For non-current liabilities, it is worth noting that there is an amount of HK$615 million now appearing for convertible bonds. There is also an amount of HK$416.5 million worth of deferred consideration payable which I believe is a one-off amount. Net assets had increased to HK$4.25 billion from HK$2.78 billion from March 31, 2007, representing an increase of 52.9%.
Stay tuned for Part 2 of this analysis, which I will try my best to keep short and succinct !
I know this review is long overdue, but I really haven't had time to get down to it till today. Anyhow, as my investments are long-term by nature, the fortunate thing is that it does not really matter if I analyzed it today, yesterday or even last month. The nature of Pacific Andes' business is not going to change overnight, or for the next 5 years for that matter ! As it is, they will probably be even more diversified (I hope !) in the next few years after announcing their intentions to expand their fishing activities to South American seas.
Anyhow, below is my quick and brief review for PAH's 3Q FY 2008 financials. Note that I will place more emphasis on the FY 2008 results once they are out by late May 2008.
Income Statement Analysis
For 3Q 2008, revenues were HK$1.11 billion, a 52% increase over the same period last year. However, economies of scale meant that COGS only increased by 40.3% over the same period, resulting in an increase in gross profit of 101%. GP Margins for 3Q 2008 stood at 24.6%, compared to inly 18.3% for 3Q 2007. For 9M 2008, gross margins were 20.7% against 9M 2007 gross margin of 17.1%. This clearly shows that economies of scale in PAH's fishing operations are beginning to bear fruit, as they are able to reap cost benefits from their enlarged fleet of purse seine vessels.
As a result of the issue of bonds to fund the increase in stake in CFG from 28.8% to 64.1%, interest expenses ballooned from just HK$57.7 million in 3Q 2007 to HK$111.3 million in 3Q 2008, an increase of 93%. For 9M 2008, the increase was 146.2% due to a low base for finance costs incurred in early FY 2007. As a result of this, profit before tax rose only 93.8%, less than the increase in gross profit but nevertheless still impressive. The fishing division (now bolstered) accounted for 55% of 3Q 2008 revenues, up from just 37.4% previously. China still made up the main bulk of sales (77.5% for 3Q 2008) and it remains to be seen if there will be pricing pressures for the Group due to the Government's announcements to combat inflation. Fish being a staple food item on Chinese menus may not make this effect too pervasive, but their next results update should mention something about their ASP (average selling prices) to hopefully be able to maintain their margins.
As explained in Note 8 (Page 10) of the result announcement, finance costs had risen due to interest attributable to US$93 million 4% convertible bonds, US$225 million 9.25% senior notes as well as increased short-term borrowings. The Group seems to have taken on a lot of debt in order to increase the contribution provided by the fishing division, and the effects of this additional debt are going to follow the company for some time into the future. I view this as part of PAH (and CFG's) expansion plan to increase their reach into the South American seas, and CY 2008 should be the year in which they manage to extend their footprint to these regions and also to add a new revenue stream to their business. As it is, it will be prudent to watch for their gearing, cash flows and financing costs in subsequent quarters.
Balance Sheet Review
The most notable increase within the Balance Sheet under "Non-Current Assets" belongs to PPE, and this increase is 77.4% from HK$863 million to HK$1,533 million. This reflects the Group's purchase of their additional stake in CFG and shows up CFG's related assets. Goodwill has also increased due to their acquisition of CFG.
Inventories have dipped slightly as this is the "low" season for PAH (4Q 2008 will be the peak season). Bills receivable has increased to HK$177 million in line with the increase in scale of operations and revenues. Current and Quick ratios are 1.56 and 1.27 respectively for 3Q 2008, and are 1.90 and 1.51 for 3Q 2007. The dip is due to the higher bank advances drawn on bills and also higher current portion of interest-bearing borrowings. As the ratios are still above 1, the company is not in any immediate danger of insolvency.
For non-current liabilities, it is worth noting that there is an amount of HK$615 million now appearing for convertible bonds. There is also an amount of HK$416.5 million worth of deferred consideration payable which I believe is a one-off amount. Net assets had increased to HK$4.25 billion from HK$2.78 billion from March 31, 2007, representing an increase of 52.9%.
Stay tuned for Part 2 of this analysis, which I will try my best to keep short and succinct !
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