COSCO Corp Suffers Analyst Downgrades

Last week, Singapore listed COSCO Corporation suffered multiple analyst downgrades from major securities houses. Analysts were largely disappointed by the weak 2Q11 net earnings and flagged concerns over demand, risk of order cancellations and delivery delays. BNP Paribas Brenda Lee pointed out that even though turnover in 2Q11 was up 3% year-over-year but net profit was down 53% year-over-year to SGD 31.9 million (USD 26 million). The poor operating performance, attributed largely to sliding margins for offshore engineering, shipbuilding, ship repair and conversion, was also aggravated by a higher tax rate due to lower tax-exempt shipping profits and lower deferred benefits.

CIMB Analyst Lim Siew Khee warned that given COSCO’s lack of experience in turnkey offshore projects (including deepwater drillships, tender rigs and jack-up rigs), margins are expected to remain low. “We fear that a history of provisions for lossmaking contracts in shipbuilding could repeat themselves in offshore as these provisions typically surface after projects have reached substantial completion,” she added. Meanwhile, DBS Analyst Janice Chua pointed out that the Chinese shipbuilder will face rising cost and currency pressure. Based on her sensitivity analysis, every 1% increase in steel cost and RMB appreciation could decrease Cosco’s bottomline by 1% and 2.2% respectively. Recent news of Cosco’s Norwegian client Sevan Marine’s potential bankruptcy also fuelled more fears among investors who were already worried about weak orderbook growth and rising costs. Sevan now accounts for 22% of COSCO’s order book, with 3 deep water drilling rigs.

Management Buyout at BP Shipcare

As the industry braces itself for overcapacity across all major shipping segments, layup is increasing seen as an efficient way to manage the shipping cycle with savings of up to 80% against operating costs, according to Gavin Kramer, Managing Director at International Shipcare (see accompanying table).

In terms of costs, the average cost of layup for a large vessel (i.e. a VLCC) is around USD 1,500 per day, against current operating costs which can exceed USD 10,000 per day. Once the vessel is in a cold laid-up, there will be major savings in fuel costs because very little fuel is consumed. International Shipcare runs its own generators on the vessel for two or three hours daily so as to ensure relative humidity is maintained. Owners can also expect their insurance premiums to reduce by as much as 50%. In addition when the ship is laid up, the owner can take the opportunity to carry out preventive maintenance, conduct pre-docking preparation, and upgrading that will help to ensure long term preservation of the asset. And perhaps even more importantly, reactivation can be performed at relatively short notice allowing vessels to be placed back in the market to meet the improved market conditions or take advantage of employment opportunities at short notice.

International Shipcare is born following the completion of a management buyout of BP Shipcare Sdn Bhd led by Mr. Kramer and two other former BP executives. It has been a leading ship lay-up and marine services facility based in Labuan, Malaysia, for 35 years and is the oldest established layup facility in Asia today.

“Right here and right now, we believe there are opportunities in our business and this is supported by the level of enquiries we are getting in the market,” said Mr. Kramer. Andrew Lockie, Director at International Shipcare, added that the market is expected to be weak due to oversupply trickling through over the next two to three years. “We had a poor market in 2009 and the number of ships that were laid up with International Shipcare trebled to 49. Dry bulk is now having a tough time… this is quite closely followed by tankers.” International Shipcare currently has a mixed bag of 20 ships under its care – LNG carriers, FPSO conversions and car carriers and is seeing more enquires for smaller offshore support vessels and out of contract FPSOs Traditionally, shipowners have often viewed layup facilities as “graveyards” for their assets but as more and ships are being delivered to the marketplace, more owners will have to rethink about their strategy and positioning. Laying up vessels could well be an effective way to adjust market exposures during periods of low earnings

Different Means, Same End

There are a number of similarities between Marco Polo Marine and Otto Marine. Both are Singapore listed and have their ship chartering and shipbuilding businesses focused on tugboats and barges. Coincidentally, both revealed plans to raise more capital in the past two weeks, but in different ways.

Last Wednesday, Marco Polo Marine announced its disposal of 8 vessels to a related party on a sale-and-leaseback arrangement for SGD 11.9 million (USD 8.48 million). The company explained that this arrangement would serve two purposes. Firstly, this reduces the company’s gearing level and improves cash flow while maintaining the fleet size without the loss of commercial and operational control. Secondly, this circumvents the restriction faced by company in operating Indonesian flagged vessels. The company is not allowed to own Indonesian flagged vessels (since only Indonesians can do so) and the sale-and-leaseback arrangement will enable the company to operate Indonesian flagged vessels freely in Indonesian waters. Continue Reading

Showing Resilience

Last Thursday, Pacific Shipping Trust (“PST”) released its full year results and as expected, there were no surprises. Key figures – revenue, operating profit and distributable income were largely in line with analyst expectations. Gross revenue in 4Q09 grew 8% to USD 15.6 million from the corresponding quarter in 2008, boosted by contributions from a vessel chartered to Compania Sud Americana de Vapores S.A. (“CSAV”). Net profit for the full year of 2009 increased 49% to USD 27.4 million while distributable income grew correspondingly by 46% to USD 27.1 million. With a fleet of 12 containerships all on long term charters, PST has contracted charter income of USD 300 million over the next 7 years.

For shipping trust investors, credit risk remains a top concern. And unlike the other two shipping trusts, PST has only two charterers – its sponsor Pacific International Lines (“PIL”) and CSAV and both have been facing immediate challenges in the container shipping business. PST has chartered 10 vessels (2 Panamaxes and 8 Handymaxes) to PIL for 6 to 8 years and 2 Panamaxes to CSAV for 5 years. Questions at the results briefing were therefore naturally centered on the financial standings of both companies.  Continue Reading

Red Alert

Last Monday, Hong Kong listed shipbuilding, tanker operator and oil storage group Titan Petrochemicals Group (“Titan”) has announced the appointment of Goldman Sachs (Asia) and ING Bank (Singapore Branch) to restructure its existing USD 315.4 million bonds due March 2012. This could potentially result in bondholders losing as much as 70% of their investments.

Titan is offering its bondholders USD 199 in principal amount of the new notes it plans to issue, in addition to 3,075 new shares in Titan and USD 12.50 in cash for each USD 1,000 held as the principal amount of the existing notes. Guaranteed on a senior basis, the seven year USD 400 million bonds were previously issued in March 2005 and have an outstanding principal amount of USD 315.4 million. Continue Reading

Setting Sights on Overseas

Danish shipowner Torm has signed a ten year USD 167.3 million loan facility with a syndicate of banks led by Bank of China and Societe Generale. The funds will be used to cover 60% of the cost of six 53,000 dwt MR product tankers, each ordered at USD 46.5 million a piece from Guangzhou Shipyard International. Out of the USD 167.3 million facility, USD 83.7 million will be unsecured loans and the other USD 83.7 million in the form of buyer’s credit. This is also the very first time in a foreign syndicated loan that China Export & Credit Insurance Corporation (“Sinosure”) will underwrite the country risk in relation to the buyer’s credit. Torm will have to fork out the remaining 40% equity. Continue Reading

Korea Line on Thin Ice

Troubled Korea Line has successfully renegotiated its existing time charter agreement for a 50,326 dwt Supramax with Hellenic Carriers at a reduced time charter rate of USD 35,000 per day. The new rate is close to 38% lower than the previous charter rate. Continue Reading

Feeling the Love?

Last week, Seaspan Corporation (“Seaspan”) held its Second Investor and Analyst Luncheon at New York’s Palace Hotel and just looking at numbers of guests one can term it a huge success. It appeared to us that not only had the numbers doubled but, in addi­tion, the hotel staff had to roll in additional tables as unplanned for guests arrived in the midst of the presentation.

The story is consistent and unchanged. Mr. Gerry Wang started off describing Seaspan by listing four key bullet points. It is the largest and fastest growing independent containership charter owner. Not just a leasing company, Seaspan is an active asset manager with strong technical expertise, which is applied to operations as well as shipbuilding and design. In an attempt to provide some differentia­tion from the pack, Mr. Wang characterizes Seaspan as a globaliza­tion and infrastructure play that is focused on growing distrib­utable cash flow.

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Company News – 03/15/2007

FR8 to NAVIG8

FR8 was established in 2003 as a joint venture with Projector Ltd, a prominent oil trader, who provided a core volume of cargos and access to attractive time charter opportunities. FR8 is not your father’s shipping company. With its owned fleet, time chartered fleet and management companies, it resembles a normal shipping company except for the fact that its brain is wired and its perspective is that of a trader. In short, this is the world of seeking arbitrage opportunities, while managing risk and not just looking at “last done.”

The company controls a fleet of approximately 30 product tankers via a combination of time charters, joint ventures, ownership and commercial agreements. Of the controlled fleet, the company together with its joint venture partners own two LR product tankers and eleven MR tankers (including the orderbook) and have purchase options on three more vessels. Continue Reading

Jefferies Buys M&A Firm, Beefs up Shipping Team, Moves to New York