Ship Finance International Ltd. (SFL, Financial), the $1.4 billion Bermuda-based shipping and ports company, reported 17.6% year-over-year revenue reduction to $96.9 million and a disappointing 31% drop in profits to $32.3 million in the first quarter – a 33.3% margin compared to 39.8% in the same period last year.
Despite having lower operating expenses, Ship Finance recorded lower results in associate and interest income while having an overall increase of $3.86 million in interest expenses resulting in lower profits in the period.
"Ship Finance continues to take steps to strengthen its balance sheet and diversify its contracted backlog. In the first quarter, we took delivery of our second 19,200 TEU container vessel, and we expect to take delivery of two product tankers in the third quarter this year. These three vessels, backed by long-term charters, will add approximately $26 million in annual EBITDA following their deliveries. We are also pleased to have secured employment for our sole uncontracted drilling rig.
"We are of course focused on the restructuring of Seadrill (SDRL, Financial), one of our large counterparties, which we hope will be finalized in the coming months. At the same time, we have significant capital available for investments, and our objectives remain to find accretive investment opportunities across our core markets and to maximize returns from our existing portfolio of assets." –Â Ole B. Hjertaker, CEO of Ship Finance Management AS
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Valuations
Ship Finance is undervalued compared to its peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 10.15 times vs. the industry median of 17.6 times, a price-book (P/B) ratio of 1.24 times that is the same as the industry median and a price-sales (P/S) ratio of 3.74 times vs. the industry median of 1.14 times.
The company also had trailing dividend yield of 13.14% with 129% payout ratio.
Average 2017 revenue and earnings-per-share estimates indicated forward multiples of 3.9 times and 14.6 times.
Total returns
Ship Finance failed to outperform the broader Standard & Poor's 500 index in the past five years having generated total annualized returns of 6.78% vs. 14.48%. So far this year, the company has provided (-)1.68% total returns vs. the index’s 9.6%.
Ship Finance International
According to filings, Ship Finance was formed in 2003 as a wholly owned subsidiary of Frontline (FRO, Financial), a major operator of large crude oil tankers.
In 2004, Frontline distributed 25% of Ship Finance’s common shares to the former’s ordinary shareholders in a partial spinoff, and its common shares commenced trading on the New York Stock Exchange on June 17, 2004.
Frontline subsequently made six further dividends of Ship Finance’s shares to its shareholders, and its ownership in Ship Finance is now less than 1%.
Ship Finance is engaged primarily in the ownership and operation of vessels and offshore related assets and also involved in the charter, purchase and sale of assets.
The company operates through subsidiaries located in Bermuda, Cyprus, Malta, Liberia, Norway, the United Kingdom and the Marshall Islands.
As of April 13 Ship Finance’s assets consist of 14 crude oil tankers, 22 dry bulk carriers, 22 container vessels (including two chartered-in 19,200 TEU vessel), two car carriers, two jack-up drilling rigs, two ultradeepwater drilling units, five offshore support vessels, two chemical tankers and two newbuilding oil product tankers.
Ship Finance’s customers include Frontline Shipping, Golden Ocean (GOGL, Financial), Seadrill, Sinochem Shipping Co. Ltd. (SHSE:600500, Financial), China National Chartering Co. Ltd., Heung-A Shipping Co. Ltd. (XKRX:003280, Financial), Hyundai Glovis Co. Ltd. (XKRX:086280), Maersk Line A/S (OCSE:MAERSK A)(OCSE:MAERSK B), Rudolf A. Oetker KG, Phillips 66 Co. (PSX), MSC Mediterranean Shipping Co. S.A. and Deep Sea.
The company has only one reportable segment and does not evaluate performance by geographical region or asset type as it believes that any such information would not be meaningful.
Total charter revenue
According to filings, TCR is the summation of long- and short-term charter revenues. Long-term charter revenues include total gross charter hire related to contracts undertaken for a period greater than one year from all vessels and rigs, including assets in 100%-owned subsidiaries classified as "investment in associates."
Short-term charter revenue, meanwhile, includes gross hires from short-term charters, voyage charters, gross revenue earned from pooled vessels and profit share income.
In the recent quarter, TCR was $152 million compared to $174 million in the same period last year.
Sales and profits
In the past three years, Ship Finance recorded revenue growth average of 15.09%, profit growth average of 17.96% and profit margin average of 40.8%.
Cash, debt and book value
As of March, Ship Finance had $61.6 million in cash and cash equivalents and $1.54 billion in debt with a debt-equity ratio of 1.36 times vs. 1.39 times in the same period last year. Overall debt has decreased by $61.8 million while equity declined as well by $18.2 million year over year.
No goodwill or intangible assets were observed in Ship Finance’s balance sheet. The company’s book value declined by 1.6% year over year to $1.13 billion.
Cash flow
In the recent quarter, Ship Finance’s cash flow from operations rose by 6.7% year over year to $45.5 million. Despite the lower profits in the period, the company recorded lower cash outflow in relation to its operating assets and liabilities.
Capital expenditures were $11.3 million leaving Ship Finance with $34.3 million in free cash flow compared to (-)$40.3 million in the year prior. The company also provided 123% of its free cash flow in dividends to shareholders.
In the past three years, Ship Finance has provided an accumulation of $483 million in dividends while having generated (-)$459 free cash outflow.
In the recent quarter, the company also allocated $18.3 million in debt repayments net any issuances.
Conclusion
Recent quarterly performance failed to show any improvement in operations. The company-defined metric, TCR, also demonstrated weaker results having declined at a rate of 12.6% year over year. Nonetheless, the company did have strong business growth in recent fiscal years (see sales and profit section).
In addition, the company carried a leveraged balance sheet while having been a consistent dividend provider to its shareholders in recent years.
Five analysts have an average price target of $13.7 per share –Â incidentally the same price at the time of writing. Asking a 20% margin from the company’s current book value would indicate a value of $8.92 per share.
In summary, Ship Finance is a pass.
Disclosure: I do not have shares in any of the companies mentioned.
