Posted by: donmihaihai | November 29, 2008

Jaya shipwreck!

Surprise! Surprise! How long I haven’t look at Jaya share price? 2 days, 3 days or one week? It closed at $0.285 on Friday. How I wish, my fingers were not itches and keyed in the “buy” button about one month back. What happened? I don’t know, perhaps the market is telling me that Jaya has a big hole at the bottom of their hull that is no longer capable of sailing anymore.

The 1st thing that come to my mind of the sinking share price is that Jaya reported a slumped of 78% in NPAT to $9.1 million from $42.2 million in 1Q2009. But is it that bad? No of course. In fact, 1Q2009 was a beautiful quarter for Jaya just by taking away unrealised loss on derivative financial instrument and foreign exchange loss of total $37.2 million. It was beautiful because Jaya earned gross profit margin of about 55% for both its chartering and shipbuilding business. Look around other listed OSV companies, even some pure chartering OSV are not getting that kind of margin. I know it unsustainable. But when the margin drops, who will hurt more? Those with GP margin of 20 to 30% or Jaya and CH Offshore with GP margin of 50 to 70%? While many factors must be taken into consideration, the chances are, if a shipwreck come, Jaya and CH Offshore will be the last one standing. In fact, I don’t like to compare Jaya to CH Offshore as a big portion of Jaya earnings are not reflected in their gross profit as part of their yearly vessels build each year are not for sale immediately which won’t be capture in gross profit, leakage in another word but capture in other income when they are sold later while CH Offshore gross profit is all about chartering vessel and other income for CH Offshore is like gain from trading of vessel. Talking about B/S, who B/S is more conservative? One that capitalise their vessels at cost or other that capitalise their vessels at market price? Ok, enough of comparing.

Talking about cashflow, liabilities, credit crunch and future sale of vessel. Other than $248 million in debts, $58 million for FY2008 final dividend payment(paid) and another about $250 million in liabilities and some insignificant lease commitment, there are not going to be any surprise coming out if a shipwreck come especially when Jaya has never engaged in sale and lease back kind of stuff. Jaya own their vessel and shipyard. Better still, the management has indicated in their latest results that they intend to sell more vessels rather than holding them for chartering. I like that as it is sensible and the best is if the price of everything is so good, then sell every vessel away, take the cash and wait or return them to shareholder.

Unless there is a coming shipwreck like the bulk shipping, which I think is unlikely, Jaya will generate very strong cashflow(include cashflow from disposal of vessels) with the cooling down of shipbuilding program, (cash will pour in with the reduce of capital require) which hurt its cashflow quite a bit in 1Q2009 as it generated $14.5 million from operating activities and $32 million from disposal as compare with $15.7 million from operating activities and $60 million from disposal in 1Q2008(Jaya disposal of vessels in 1Q2008 was huge). Here is the meat, Jaya reported $9.1 million NPAT for 1Q2009 but $46.6 million of cash poured into Jaya bank before talking about Capex which was $56 million.

And I have not a single worry about unrealised loss on derivative financial instrument due to unfavourable exchange movement. It is not what reported in P&L matter but in what nature or why are derivative being used. While it is not a prefect hedge, the reason for these losses is actually that Jaya want to be conservative, to be certain of their cashflow. Oh, getting killed for the reason they are trying to avoid? Foreign transaction is another story as some of the losses may be real due to unfavourable exchange movement at that moment especially on loans, receivables, deposit and cash remittance for dividend payment. But that will not going to wreck Jaya.

The second reason is perhaps the sinking oil price which delay expenditure in offshore activities with Keppel Corp being the latest one to get hurt. My view is the same whether oil price is at US$50 to US$150 and I think it is very funny that IEA recently urged oil companies/OPEC to continue their expenditure despite the drop of US$100 in oil price. What IEA trying or talking about is the same as mine and by celebrating or cheering steep drop in oil price, with many expenditures being delay or throw away, we are seeding for another sharp surge of oil price in the future.

There is no need to do valuation of Jaya on the basis of PE, PB, ROE or dividend yields as anyone of these valuating methods will give the same results. It is just plain no-brainer. Anyway, by the look of it, Jaya will generate more cash than their market capitalisation within 2 years. So keep showing me the cash.

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Responses

  1. Hi Don! Are you aware of any rumours that Nautical Offshore may be launching another takeover exercise for Jaya? Thanks!

  2. Usually I will be the last one to know any rumours.. But this time, pls help me to spread the “news” that Nautical Offshore is preparing to lanuch a takeover exercise for Jaya at the price of $2. Thanks!

    • ! :))


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