We did some prospecting of SSC not too long ago here at Investment Moats. [Analysis here]
This time round it is more of a note to self. I ever wonder every time they went to acquire a ship what it actually entails.
Might as well get it over with and do it once and for all here.
So it seems a typical ship acquired by SSC fits the following profile:
- It WILL come with a long charter typically 15 years
- It’s a time charter. Charterer directs where the ships are suppose to be at and which destination it is suppose to go to. SSC maintains the ship
- Charterer is a blue chip car and truck charterer. This ensures very low probability of charterer default
- With 1 –3 in mind, you can match it with the lowest form of financing
- This becomes very predictable. As a purchaser, you can calculate your ROI, cash flow yield on it
The question is can we give a fair estimate based on the data we have?
What if we were to estimate the return we can get on purchasing a 20 mil pure car and truck carrier
What goes into a ship are as follows:
- - Dry Docking Maintenance (every 3 to 5 years)
- - Taxes (Singapore ships seem to be tax free)
- - Interest Expense
The lifespan of a ship would probably last for 30 years. If its 10 years old there is probably 20 years of life more. Since 15 years is chartered out, the last 5 years will have a much lower EBITDA margin.
On an average the EBITDA margin of the 3 SSC ships, Singa Ace, Boheme and Sirius is 57%. We can assume for a normal charter the margins are as such. The last 5 years margin possibly is less or around 30%.
The revenue is 19.9 mil in total. We know that Boheme costs 50 mil, Sirius 16 mil, and assuming Singa Ace have a scrap value of 4 mil that is a total of 70 mil.
The EBITDA for the first 15 years will be 19.9 x 57% x 20/70 = 3.24 mil
The EBITDA for the last 5 years will be 19.9 x 30% x 20/70 = 1.7 mil
Considering Singa Ace’s profit contribution is around 1.3 mil, I think we are not too far off.
The rest of the information is as follows:
- Dry Docking Maintenance first 15 years 3 years once at 600-700k which will be 0.250 mil per year. Last 5 years 2 dry docking of 1 mil each since its older, coming up to 0.400 mil per year
- Borrow up to 70% of the ship’s purchase value, paying off in 8 years at 1.5% interest. The initial outlay will be 6 mil with 14 mil borrowed paid back 1.75 mil per year with 0.21 mil interest expense
Cash flow for
- first 8 years: 3.24 – 0.210 – 0.250 – 1.75 = 1.03 mil
- next 7 years: 3.24 – 0.250 = 2.99 mil
- last 5 years: 1.7 – 0.4 = 1.3 mil
We arrive with the following XIRR for the 6 mil invested:
The leverage return is rather good. There are much assumptions here:
- Charterer makes this investment predictable
- Rates remain low, even if it doesn’t, when interest is hedged or swapped with fixed rate at 3% the XIRR drops to 19%
- Dry Dock maintenance cost is realistic (This may not be the case, more unfavorably than favorable)
- EBITDA realistic. Based on working backwards depreciation and earnings, they should be quite close
It would cost 6 mil to acquire a ship and each ship acquisition looks like a leverage bond. SSC EBITDA sans Singa Ace would probably be 10.5 mil and given the 1 SGD cent dividend will take away 3.5 mil, there is 7 mil to pay back debts or acquire a new ship.
The question is whether they can frequently engineer such a deal. The likely hood is not.