Posted by: donmihaihai | May 17, 2008

Has my projection of Jaya proved to be correct?

The reason for buying Jaya share 1 yrs ago was based on a simple calculation that the share price of about $1.45 present at that time was just = to 3 to 5 yrs of cashflow plus assets(vessels) valuation. Which mean that that in worse outcome, the amount of cash generated from FY3Q2007 to FY3Q2012 and the sale of all remaining vessels at 3Q2012 = $1.45 per share. I am betting that Jaya worth much more despite that Jaya generating 30% on equity and NBV at 3Q2007 was $0.472 which make up 33% of $1.45 which mean 67% of the rest must come from earnings which at that time = 7 yrs of earnings. So I was wildly bullish on the prospect of offshore industry that even with the worse outcome, Jaya can compress 7 yrs into 5 yrs or even better 3 yrs. In fact I was and still bullish because Jaya can realised 1 to even 2 year of earnings through sale of their vessels which was capitalised at the cost of construction.

One year later, NBV of Jaya stand at $0.52, add in another $0.12 dividend paid out in the last 12 mths, that become $0.64, which is 44% of $1.45. Using worse outcome of 4 years, Jaya have to generate cash of $0.20 per year for 4 years or another 5.7 years using initial calculation. Now, Jaya need to compress 5.7 yrs into 4 yrs so to meet my worse case outcome. It seem like my projection is going to be incorrect.

But I am not too worried yet. Because my projection is based on flat earnings even knowing that Jaya is still going for growth and which is clearly shown by increasing in no. of vessels under construction by about 50% compare to 1 year ago. That is because some time in the near future, both vessel price and charter rate are going to drop. Don’t ask me how and what is my calculation for using no growth to offset drop in vessel price and charter rate, because I just assume that it is somewhere there.

Even if everything fails, Jaya will still be alive and kicking after 3Q2012 and alive and kicking even after the current bloom in offshore shipping because Jaya have an underleveraged B/S with no commitment for payment or anything. Jaya can withstand a crash in vessel price and charter rate like a caveman hiding or changing to other vessel type for other industries if required. So what not accounted for after 3Q2012 become my margin of safety.

Looking at Jaya is incomplete without looking at the offshore industry. And for the last 12 mths, it seem that from various articles and reports, the peak of the industry had reached and stay there, no clashing but upside remain limited. Unless the world suddenly wake up in the morning and the newspaper write Peak oil was officially reached or the current push lead by Petrobras become another crazy grab of any kind of vessels available in the market, offshore industry is facing a downward slope. It’s ok because building and owning vessel is never going to be a good business to be in except for period like what is happening right now as it is a capital extensive business where earnings need to pour back to addition vessel just to stay in the business. For many reasons, what I saw in the last 5 to 10 yrs for the offshore industry may never happen again.

But before that, let enjoy the current fever by reading some extracts I get from an article from a broker specialize in this industry.

The oil companies now awash with cash are pushing further and deeper into offshore areas once considered 10-15 years ago as beyond the technological bounds. New areas are being developed. To highlight a few, Vietnam is opening up, NW Australia is seeing huge investment, the Falklands could be about to start drilling later this year, the Arctic is slowly coming into the drilling community’s crosshairs as the ice melts and bordering states clamor for sovereignty rights; and everywhere else you can think of just gets busier.

Clarkson’s Database of vessels lists over 3,700 AHTS/AHT/PSV/Supply vessels as currently in service throughout the industry. The orderbook for new tonnage is bulging to new levels, according Fearnleys Offshore Supply, as of the 1st of Jan 2008 – the number of AHTS/PSV/AHT/Standby units in yards stood at over 700 units across the globe with deliveries stretching as far out as 2011. That number doesn’t include some of the specialist multipurpose / construction / cable and seismic vessels under construction as well. One number that caught our eye, was the number of marine units that one operator, the French based Bourbon Offshore, has on order. 169 units to be precise;

LR-Fairplay’s Daily Newbuilding News says Brazil’s shipbuilding industry has been given “a significant boost” with an announcement by state oil giant Petrobras that it needs as many as 100 offshore oil and gas support vessels.

“”The Fleet of large and medium sized vessels increased by 9% in 2007. This is lower than expected largely due to deliveries being behind original schedules. The market balance is thus only marginally affected by this increase in supply. In 2008 the fleet is expected to increase by 20%, the highest increase among small and medium sized vessels“.

One of the major reasons we’ve heard for the slow up in deliveries has been the delays occurring in obtaining main engines and drive/thrusters packages. Engine manufacturers have been inundated with orders and have struggled to meet demand. However, if owners/yards have been willing to stump up more money, engines have become miraculously available through the less certain world of the “grey market“.

DOF BOA recently announced the sale of their 2002 Chinese built 18500BHP AHTS “Skandi Hercules” to Indian buyers for a cool $100m! Reading the press release it appears that DOF BOA had a book value for the vessel for just a mere $67m! So if buyers need it – they will pay for it.

Rising steel costs and engine prices are likely to be factored into newbuild contracts, and in the past six months, yards have grown increasingly wary of the falling dollar. So much so, some yards, without skipping a beat, have just changed quoting their prices from USD to EURO’s. One owner overnight just changed the currency and left the number the same… which equated to a 50% hike without even blinking!


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