3Q results above expectations. Samudera Shipping Line Ltd (SS)’s 3Q07 turnover increased 7.2% QoQ to S$149m (up from S$139m), marginally beating our forecast by 5.7%. On a YoY basis however, turnover declined 9.4% from S$164.4m due to a shift in container volume mix towards higher margin shorter haul cargo. Cost of services fell by 15.8% YoY to S$130m from rationalisation of its shipping services and reduced fleet number. This resulted in reduction of vessel related operating costs like charter hire cost, bunker expense and port charges. The net effect is a gross margin expansion from 6.6% to 12.8%. Profit attributable to shareholders jumped 2.6 times YoY from S$3.9m to S$10.2m.
Gaining a foothold in India. SS has set up offices in Kolkata and Chennai, both of which have been operational from October. The two new offices would allow SS to tap into the growing shipping market in India and give them control over their operations as well as provide a higher quality of customer service.
Potential rise in FX losses from strengthening S$. With the weakening of the US$ against the S$ (US$ has weakened from US$/S$1.54 since beginning of year to US$/S$1.45 currently) and MAS’s recent announcement of allowing the S$ to appreciate faster, companies like SS with US$ revenue stream will potentially incur translation losses as revenue is converted to S$ (the reporting currency). This strengthening of the S$ versus US$ has already resulted in a FX loss of S$1.6m in 3Q07 for SS, up 245.3% YoY from a loss of S$0.5m. In an attempt to reduce the FX translation losses, SS has converted a portion of their US$ cash to S$ and placed them in short term deposits so as to enjoy the flexibility to convert back to US$ quickly should the exchange rates change direction. We estimate that SS’ FX losses may rise by approximately 121% YoY by FY08. Hence, we have lowered our FY08 earnings forecast downwards by 5% to S$18.6m from S$19.7m.
Maintain HOLD rating. Taking into consideration the potential increase in FX translation losses and a better 2H07 versus 1H07 (boosted by a better than expected 3Q earnings), we are maintaining our fair value at S$0.40, based on P/B ratio of 0.7x. With the stock’s last done at S$0.415, we see limited upside and thus reiterate our HOLD rating.
