Thursday, April 29, 2010

Why I Like Sealink

SEALINK is principally involved in the shipping business including chartering of vessels, shipbuilding and repair of vessels and letting of properties. Sealink International Bhd, incorporated in 1974 was founded by Mr Yong Foh Choi. Initially, the group provided chartering services of marine vessels to non-oil and gas industries such as the navy, fishing, dredging, logging and mining companies in and outside Malaysia.

The group ventured in chartering vessels in 1994 and later on started its shipbuilding business in 1997. The group is an integrated service provider that builds and operates a diverse fleet of offshore marine support vessels in Malaysia, serving the global offshore oil and gas exploration and production industry. The group's shipyards, located in Miri, Sarawak have the capacity to build up to eighteen vessels per annum, depending on the size and complexity of the vessels. The Group was ISM certified by the Marine Department in 2005.

The main shareholders of the company are Sealink Holdings 51.8%; Yong Kiam San 13.4% and Yong Foh Choi 9.1%. The group has over 299 suppliers as of 2007 which increased steadily from 146 in 2005. Its biggest supplier is Ming Kiong Agencies (S) Pte Ltd from Singapore. Its biggest Malaysian supplier is Scott & English Sdn Bhd. The group's customers include both local and international companies from the USA, Australia, China, India, Latin America, Europe, East Africa, Southeast Asia and the Middle East.

Sealink, which owns two shipyards in Miri capable of building up to 18 vessels a year, now operates a diverse fleet of 33 offshore support vessels used mostly in the oil and gas industry. The company, one of the largest tug and barge operators in Malaysia, plans to increase its fleet to 40 vessels by end 2010.

Sealink has close ties with Boustead Heavy Industries, and judging from its location, the prospects for Sealink looks very bright indeed.

Why are investors not considering this stock? I have no idea. This is a wonderful gem of a company. Sealink reported net profit of RM8mil in 4QFY09, taking its FY09 net earnings to RM50.1mil. Thats a net EPS of 10 sen and the share price really has no business trading below 80 sen!

The industry had a tough 12 months but Sealink has proven to be able to ride it out very well. Lower-than-expected earnings can be attributable to lower recognition from its shipbuilding unit with only one vessel sold last year. This unit suffered from a weak external credit market amid global financial crisis - its vessels are not sold in Malaysian waters to avoid competing with its
chartering unit. Both shipbuilding and chartering divisions suffered declines in turnover - 21% and14% drop respectively - although EBIT from chartering unit was stable, attributing to healthy margins of 30%. Those are temporal issues and not management issues, the company's business model is still very attractive going forward.

Sealink’s shipbuilding order book has dropped below RM100mil - given that no new vessels were sold. While it is true that tight credit hampers demand from foreign buyers, this only applies to speculators. Demand is still there for offshore support vessels, although the market remains a buyers’ market with vessel prices at a 10%-15% discount. This is the main reason why Sealink is opting to keep its vessels for chartering - stronger margins to boost its bottomline. Sealink remains hopeful that Petronas tenders will be awarded by end of this year - where three to four vessels are earmarked for this tender.

Signs of activity picking-up in oil and gas are visible with Sealink having secured contracts worth RM58mil. It announced that it had won two long-term charter contracts:
(1) Supply of an AHTS for one year
(2) A utility vessel for two years
The charter rates should be in-line with rates secured recently by Tanjung Offshore at US$1.70-US$1.80/bhp/day. The group also announced that it had completed a vessel sale to be delivered in 2QFY10F.

As if to give the Malaysian public a tight slap in the face, the company has just announced that they will award a 4 sen dividend per share. Looks like the controlling shareholders will reward themselves, and this will allow them to continue to hold onto their shares for future capital gains without having to sell down their shares. 4 sen on a 65 sen share is a dividend yield of 6%.

The Board of Directors of SIB had on 28 April 2010 recommended a final single tier dividend of 4 sen per share, amounting to RM20,000,000 for the financial year ended 31 December 2009. The declaration of the final single tier dividend is subject to the approval of the Company's shareholders at the forthcoming Annual General Meeting of the Company.
The proposed dates are as follows:-
Dividend entitlement date : 15 July 2010
Payment date : 30 July 2010

Sealink is trading at a very cheap PE of 6-7x a discount of 45% versus its peers at 11x. Net asset per share at 85 sen. Cash in bank at RM49.5m. The finance cost is at a very low RM10.5m a year compared to its recent net profits of RM50.1m. The company is slated to make a net profit of RM61m for 2010 or 12 sen per share.

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.


Patrick YSC said...

Hi Dali,

Thanks for this write up. I saw Sealink a year back, at this same period. It was trading about 64 sen then and also offering the 4 sen divvy.

Could you offer your thoughts to why we see the spike to 90sen and then a retreat to ~60-70sen price range the remainder of the year?

I sold my holdings at 85sen and took profits. Did not wait for the divvy, but I bought it back two days ago at 62 sen in anticipation of the dividend again.

K C said...

Hi Dali,
After reading your writeup, I made an analysis on Sealink and compared with its peer, Coastal Engineering.
Sealink Coastal
09Growth (revenue) -18% +34%
09Growth (Profit) -9% +69%
Return of Equity +12% +36%
Return of inv cap +8% +29%
Times int earned +6.6 +45
Price/earnings 6.7 5.6
Price/Book 0.8 2.0
Dividend yield 6% 1.2%
Hence except for its price/Book and Dividend yield, Coastal is way ahead in its profitability and attractiveness as an investment. Coastal may need to conserve cash for its profitable operations. Earnings may be more important than assets.

K C said...

Hi Dali, thanks for the writeup.
I made a comparison between Sealink and its peer, Coastal Contract.
2009 revenue growth: -18% Vs +34%
2009 profit growth: -9% Vs +69%
Profit margin: 26% Vs 35%
Return of Equity: 12% Vs 36%
Return of invested capital: 8% Vs 29%
Times interest earned: 6.6 Vs 45
Price earnings ratio: 6.7 Vs 5.6
Price to book: 0.8 Vs 2.0
Dividend yield: 6% Vs 1.2%
Hence except for the last two measures, Coastal is far ahead in profitability and hence a much better investment.

kl said...

A Miri, Sarawak based company. Fairly recent KLSE listing. Owners have low visibility. Not surprised at all that Sealink is selling at sharp discount. Quite a few other small listed companies suffer similar investor prejudice.

kl said...

Something was bugging me all yesterday about Miri based listed companies. Then I remembered - Pan Pacific Asia Holdings Bhd, a timber company run by the doctor son of a prominent wealthy Sarawak family which went bust. Lots of discrepancies with its reported financials. Big ethical issues. And so on. However, no protection for minority shareholders. Have not liked Sarawak companies since.

K C said...

I do not know about you but I have been in the Malaysian stock market long enough and dare to say with no uncertain terms that hanky panky doggy handling of public companies' affairs by individuals is rampant, not only for Sarawakian companies. Minority shareholders are always at the losing ends. So I come to conclusion that the most important thing about whether I would like to invest in its shares is the credibility of the managers and directors.