Wednesday, April 11, 2007

PER of less than 1x?

Last month, Mr Market offered a "free" stake in Lane Crawford through Wheelock & Co. As we write today, Mr Market remains in generous mood. What's available for "free" today are ships, specifically three "ro-ro" vessels.

Singapore Shipping Corporation Ltd ("SSC") owns these three "ro-ro" vessels which are used to transport cars around Asia. They represent the only significant assets remaining after the firm made a series of divestments. Besides the vessels, the book of SSC comprises of cash and cash equivalents, with little liabilities. The net cash position of SSC is S$0.37. So purchasing SSC at a market price of S$0.40 suggests that one obtains the three vessels for "free" as its book value is marginally higher. On a PER basis, it is about 12.5x but if one were to strip out the cash, the real adjusted PER is actually less than 1!

The founder of SSC, Ow Chio Kiat continues to hold 37% of the shares. Hence, his interests will be aligned with that of minority shareholders. What is more impressive is that Ow has a track record of rewarding shareholders. Besides spinning off assets such as Cougar Logistics, Ow has also dished out sizable dividends in the last two financial years.

In FY05, SSC declared a total dividend payout of $0.04; comprising of a final dividend of $0.024 and a special dividend of $0.016. The cash windfall was repeated in FY06. Then, SSC declared a total dividend payout of $0.17; comprising of a final dividend of $0.03 and a special dividend of $0.14.

For our base case scenario, SSC is assumed to declare a dividend payout of 3 cents for FY07, the counter would have a net yield of 6.6%. This leaves room for yield compression to occur. If the yield compresses to 6%, the price of SSC would increase to 45 cents. A more generous payout of 4 cents would obviously lead to higher potential capital gains.

At the current price, we view the pay-off profile of SSC to be similar to a call option. Even in the unlikely scenario where SSC does not declare any dividends, it may potentially mean that the firm is close to making vessel or real estate acquisitions. The market is likely to welcome such purchases as it signifies that SSC has growth potential. Such a development is likely to lead to analyst upgrades, spurring price increase.



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