Sealink International Bhd’s (63 sen) earnings results for 1QFY11 ending December were broadly in line with our expectations.
Turnover fell 35% year-on-year to RM51.2 million, due primarily to the drop in shipbuilding sales. The shipbuilding arm reported turnover totalling RM31.9 million, compared with RM63.9 million in the previous corresponding quarter from the sale of two small vessels.
The chartering arm fared better with sales improving to RM19.3 million, up from RM15.3 million in 1QFY10. This can be attributed to the gradual improvement in demand for offshore marine support vessels and better charter rates as the global economic recovery gained traction.
Net profit contracted by roughly 28% to RM9.4 million in 1QFY11, down from RM13 million in the previous corresponding quarter, due to a combination of factors, including the drop in turnover, higher depreciation and interest expenses as well as a higher effective tax rate.
Earnings unlikely to improve significantly for the rest of 2011
We expect Sealink’s earnings in the current year to be largely flattish as a result of lower vessel sales at the shipbuilding arm. Indeed, earnings in 2QFY11 are not expected to register any material improvement compared with first three months of the year.
There is one vessel pending completion to be delivered later this year but the bulk of the income has already been recognised in 2010. Additionally, the company recently announced the disposal of two vessels for a combined RM87 million, to be delivered by 3QFY11.
However, one of the vessels, valued at RM55 million, is currently classified as a fixed asset. Therefore, its disposal will not be recognised as sales.
The bulk of the income from the second, smaller vessel sale is likely to be captured in 2QFY11.
Looking ahead, sales in 2H11 will depend on whether the company closes any additional sale agreements. Currently, there are two other vessels nearing completion, which could either be sold to external parties or transferred to its chartering business, if long-term charters could be secured. Regardless, shipbuilding sales — and the company’s total turnover — this year are expected to be significantly lower than that of 2010.
Expected to rebound strongly in 2012
Positively, we expect earnings to strengthen going into 2012 on expectations of increased oil and gas activities, both by Petroliam Nasional Bhd and regional oil majors.
Utilisation for its existing fleet of vessels for charter has almost doubled over the past year, to roughly 80% currently, on the back of the improved global economic outlook and strong crude oil prices. Crude oil futures traded on the New York Mercantile Exchange have rebounded above the US$100 (RM302) per barrel level after some profit-taking in May and are expected to stay high.
Charter rates are also improving, albeit at a relatively slow pace. The industry is still in an oversupply situation. However, based on prevailing forecasts for increased oil and gas exploration and development and production, demand for offshore marine support vessels is expected to catch up over the next year or two.
The brighter outlook for the oil and gas sector also bodes well for its shipbuilding arm, where we expect sales to pick up strongly in 2012 after the lull this year.
Expanding fleet to cater for expected stronger demand
Sealink has started work on a number of new vessels. Up to 12 vessels may be built and completed over the next 18 months or so. Typically, the company will build the vessel first — the type depends on its expectations of market demand — after which, the decision on whether to sell or transfer to its chartering unit will depend on market conditions.
Its business model of vertical integration — operating both the shipyard and chartering business — allows it the flexibility to maximise returns based on market demand and pricing. Shipbuilding earnings are lumpy while the chartering business offers steadier income flow.
The company does intend to grow its fleet of vessels for charter, from the existing 37 units, by two or three new vessels per year to take advantage of the positive industry outlook. It is upbeat that operating conditions and margins will continue to improve, especially going into 2012 and beyond.
Attractive valuations suggest upside gains
We forecast net profit will drop to RM30.6 million in the current year, from RM33.6 million in 2010, before rebounding strongly to RM46.6 million in 2012. Based on our forecast, valuations for the stock will fall from 10.3 times this year to an attractive 6.8 times in 2012. That suggests room for upside gains.
Furthermore, the stock is trading well below its net assets of 90 sen per share, which should limit further downside risks.
Gearing stood at 56% as at end-March 2011, which is still relatively low compared with the industry norm of about one times shareholders’ funds. As such, there is room for the company to leverage on its balance sheet for the planned expansions. Sealink is also exploring the possibility of raising funds through a private placement towards the end of the year.
Sealink has proposed a final single-tier dividend of 2.7 sen per share for 2010. This translates into a decent net yield 4.3% at the current share price. It has yet to fix the entitlement date.
Note: These reports are brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
This article appeared in The Edge Financial Daily, June 3, 2011.
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