SOCI: Don’t expect dry docking business contribution in 2018

2017 Financial Statement Analysis

  • Net Profit increased +1% YoY to USD21.57million (Rp296Bn), but increased more on a Rupiah basis due to the strengthening of the USD
  • Underlying Net Profit (with non-recurring items removed) decreased -16% YoY to USD21.21million, from USD 25.2million in 2016.
  • Revenue increased +6.5% YoY
    • Shipping Revenue –  Up +2.7% YoY
    • Shipyard Revenue – Down -13.3% YoY
  • Gross Profit decreased -1.7% YoY, driven by higher depreciation (as SOCI purchased new fleet) and increased vessel operational expenses (probably due to a higher oil price)
  • Operating Expenses increased +16% YoY
  • Income from Operations decreased -6.3% YoY
    • Shipping – Down -2.8%
    • Shipyard – Huge drop
  • Interest Expenses – +32.5% YoY to USD11.8million
    • due to lower capitalising of interest expenses to the shipyard construction in progress

Normalizing Capex

2017 Capex was at USD31.32million, compared to USD62.07million in 2016. I believe we will see that SOCI will scale back on its capex for the following years. For 2018, management has prepared a capex budget of USD40million, which will only be used if there is demand for new time charter shipping contracts from its customers.

2018 Forecasts

One of the important thing to note from SOCI’s financial report is that its shipyard construction completion target has been delayed to Semester 2, 2018 (from the end of 2017). Note that this project was started in 2009, and had experienced many completion delays in the past. It used to be targeted to be completed in the end of 2014, but is has been delayed for 3.5years. Meanwhile, I maintain my forecast that the shipbuilding business is not a profitable business (which I believe is due to the company’s inexperience in this business). As a result, we should not expect the shipyard division to contribute any profit in 2018.

Meanwhile, the shipping business’ performance has been weak in 2017. While costs increased due to inflation and fleet expansion, revenue increases were not able to compensate. SOCI’s utilization rates are shown below:

  • 2014 – 88.1%
  • 2015 – 89.2%
  • 2016 – 86.4%
  • 2017 – 87.7%

The only possible catalyst for SOCI’s shipping business to grow is high world economic growth, which will fuel higher freight rates worldwide, which will allow SOCI to negotiate higher prices for their shipping contracts. For 2018, due to no clear signs yet of higher freight rates, I maintain my earnings forecast at Rp300Bn.

2018 Target Price

For 2018, I believe SOCI should be trading at a 10x P/E multiple, resulting in a Target Price of 424. Rationale for P/E multiple:

  • Down cycle earnings – higher probability of higher earnings in the future
  • SOCI’s very high capex business model would mean its earnings are rather overstated. Because its financial statements are prepared using historical cost, their depreciation expenses might not reflect current replacement cost due to inflation. I believe owner earnings are lower than accounting earnings, hence a lower multiple is justified.
  • Potential earnings growth in 2019 with their dry docking business – if management is able to execute it well – which I expect to be able to earn around Rp100Bn when fully operational (dry docking business has a capacity to produce revenue of USD30-40million p.a.). But due to the considerable execution risk due to management’s poor track record, I decide not to put too much emphasis on it in calculating the fair value.
  • Stable shipping business – which would justify a valuation like a Utilities business

 

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