VIETNAM SEA TRANSPORT AND CHARTERING JSC (VITRANSCHART) VST (HSX) Update Report – May 28, 2010
BUY TARGET PRICE VND 32,000
We provide an update on Vietnam Sea Transport and Chartering JSC (VST) with a Transportation BUY recommendation for medium term investment at a target price of VND 32,000 per share, corresponding to a 2010 P/E of 7.7x and EV/EBITDA of 5.5x. We Key Indicators recommend investing in Vietnam Sea Transport and Chartering JSC (VST) for the key Price @ 5/28/2010 23,600 rationales: Target price 32,000 The sea transport sector has just overcome the most difficult period and is Discount to target price 36% currently seeing upward momentum. After falling down from a peak of 12,000 52-week low 13,000 points in the middle of 2008, the BDI touched the bottom of 663 points at the end of 2008 and hovered around this level during the first 3 quarters of 2009. Freight rates 52-week high 27,000 have begun to see signs of recovery since Q4 2009. At present, the BDI index is at Average 10 trading day volume 502,644 4,209 points (05/28/2010), up 40% from the end of 2009. And even with recent Outstanding shares 40,000,000 downturn in the world market due to sovereig n debt crisis arising from Greek , BDI still Market capitalization (VND bil) 944 have an increase of 25% m-o-m in May 2010. Recovery of the world economy Foreign ownership 1% coupled with the transport sector’s peak season in Q2 and Q3 are buoyant factors supporting a continued uptrend in freight rates.
Valuation 2008 2009 2010 Enjoying the benefits of owning a young fleet with good transport capacity, Vitranschart (VST) is capable of accelerated growth as the economy improves. EPS (VND) 4,794 1,502 4,133 VST ranks 3rd in terms of number of vessels (16 vessels, in which 11 have deadweight nd EPS growth 140% -68% 175% tonnage of 22,000 – 28,000 DWT/vessel) and 2 in terms of total deadweight tonnage (317,542 DWT) among member companies of Vietnam National Shipping Lines P/E 5.2x 15.7x 5.7x (Vinalines). VST fleet’s average age of 13.6 years is currently the youngest in P/B 1.9x 1.9x 1.3x Vinalines. Focusing on the deadweight tonnage segment o f over 20,000 DWT with EV/EBITDA 2.2x 9.3x 4.9x occupancy rate of over 80%, VST is likely to diversify its sources of transport ROE 39% 12% 27% commodity as well as maximize its operating efficiency. This is a huge advantage ROIC 9% 2% 5% compared to companies transporting dry bulk cargo in the sector. Debt/Equity 3.2 4.0 3.5 VST’s financial performance in Q1/2010 was the most positive among its Dividend yield 11% 5% 5% peers... This result was an evidence of the company’s good operating performance. Ending Q1/2010, VST recorded VND421 billion of revenue and VND23 billion of Stock price earnings after tax, up 67% in revenue and 14 8% in earnings after tax over the same period of 2009.
… laying foundation for a breakthrough profit in Q2 and Q3/2010. Q2 and Q3 are peak seasons for transport operation. In general with positive upside to freight rates, this period is expected to generate good earnings for the company. In addition, the liquidation of old vessels to rejuvenate the fleet will lend further support to assure the company’s profit. In Q2, VST will record an estimated profit of VND 23 billion from the liquidation of the Far East vessel. In tandem, in June 2010, VST will liquidate the Phuong Dong with estimated earnings after tax of VND38 billion, which will be possibly recorded in Q3/2010. Thus, VST’s earning after tax in Q2 & Q3 are Source: HOSE anticipated to touch VND118 billion , exceeding 31% of 2010 plan. Ownership structure 2010 – The beginning of VST’s grow th cycle. We predict VST is likely to record Vinalines 60% VND1,897 billion of revenue and VND165 billion of earnings after tax in 2010, corresponding to a 48% increase in revenue and 175% in earnings after tax over Institutional investors 17% 2009. Accordingly, VST’s 2010 P/E might only be around 5.7x, 30% lower than the Foreign investors 1% sector average of 8.2x. Some concerns about the world recovery may arise after Retail investors 22% recent Greek’s sovereign debt crisis, however, as VST fleet is handy-side ones which is still expected to have a continued freight rate uptrend, we believe VST’s profit growth story only begins. Dinh Thi Nhu Hoa Trinh Thanh Can Nguyen Hoai Nam Research Analyst – Sea Transport Director of Research and Analysis Director of Institutional Sales [email protected] [email protected] [email protected] Telephone: (+84 8) 914 3588, ext: 140 Telephone: (+84 8) 914 3588, ext: 106 Telephone: (+84 8) 914 3588, ext:133 VST – Update report - Buy
Company profile
History General information 428 Nguyen Tat Thanh, Ward.18, District 4, Vietnam Sea Transport and Chartering JSC (Vitranschart) was Head office established on May 26, 1975 from taking over old sea transportation HCMC operators and their fleets including many old, small and damaged Telephone (84 - 8) 3940 4271 barges and vessels. In December 2007, Vit ranschart officially Fax (84 - 8) 3940 4711 started operating as a joint stock company and was a member of Vietnam National Shipping Lines (Vinalines). During the Website http:// www.vitranschart.com.vn development process, VST actively invested in renewing the fleet as Charter cap. 400,000,000,000 VND well as diversifying operations. VST was officially listed on the HOSE on February 20, 2009 with the Auditor Ha Noi Auditing and Accounting Company total initial capital of VND 400 billion. As of April 2010, the company fleet consists of 16 vessels with a total deadweight tonnage of 317,542 DWT, up 4.3% from the end of 2009.
Business activities Board of Directors Huynh Hong Vu Chairperson Truong Dinh Son Co-Chairperson The company’s current core businesses include ship operating and chartering, and other commerical services such as training Le Thi Lan Member of the Board crewman, ship brokering, repairing and maintenance. To Tan Dung Member of the Board To Thi Thu Van Member of the Board Nguyen Minh Cuong Member of the Board
Board of Management Truong Dinh Son General Director Le Thi Lan Deputy Director To Tan Dung Deputy Director Huynh Nam Anh Deputy Director
Revenue Structure 2009 Gross margin in past years
Trading, 12.34 Others, 4.20% % 2500.0bn 30% 24.49% 25% 2000.0
20% 1500.0 14.78% 15% 11.08% 1000.0 10%
500.0 5%
- 0% Transportation operation, 83. 2008 2009 2010F 46% Reveune Gross profit margin
www.vcsc.com.vn – Bloomberg VCSC
Income (bn VND) 2008 2009 2010 Growth 2008 2009 2010 Net Revenue 2,136 1,283 1,897 Revenue growth 52% -40% 48% Cost of goods sold (1,899) (1,093) (1,432) EBITDA growth 530% -70% 115% Sales & operating (95) (78) (118) EBIT growth 128% -51% 107% EBITDA 1,045 309 665 Net income growth 96% -69% 175% Depreciation (668) (126) (285) EPS growth 2% -69% 86% EBIT 377 183 380 Gross margin 11% 15% 24% Interest expenses (111) (103) (160) EBITDA/Revenue 49% 24% 35% Profit before tax 266 80 220 EBIT/Revenue 80% 34% 50% Corporate income tax (75) (20) (55) Minority interest - - - EPS (VND) 4,794 1,502 4,133 Net income 192 60 165 DPS (VND) 2,500 1,200 1,200
Balance (bn VND) 2008 2009 2010 Indicators 2008 2009 2010 Cash & cash equivalent 254 64 134 Liquidity ratios ST financial investment 254- - - Current ratio 0.68 0.45 0.80 Accounts receivable 84- 98 154 Quick ratio 0.61 0.34 0.62 Inventory 4484 75 98 Other current assets 44 4477 57 43 Profitability ratios Current assets 77 459 77 294 429 ROE 39% 12% 27% ROA 8% 2% 5% Long-term receivables - - - ROIC 9% 2% 5% Fixed assets 2,052- 2,472 3,078 Investment properties 2,052- - - Efficiency ratios Financial investments 20- - - Days receivables 6 13 20 Other long-term assets 2720 32 - Days inventory 9 25 25 Long-term assets 2,09827 2,504 3,106 Days payables 116 186 103 Total assets 2,557098 2,798 3,535 2,557 Leverage ratios Current liabilities 678 655 535 Debt/equity 3.28 4.07 3.59 Long-term liabilities 1,376678 1,651 2,286 Debt/Capital employ 0.88 0.94 0.85 Total liabilities 21,054376 2,306 2,821 Interest coverage 3.40 1.78 2.38 2,054 Charter capital 503 493 714 BVPS (1,000 VNĐ) 12.58 12.32 12.06 Minority interest 400503 400 592 Total owner's equity 400- - - Liabilities & Equity 2,557- 2,798 3,535 2,557 Cash flow (bn VND) 2008 2009 Valuation 2008 2009 2010 Profit before tax 266 80 At market price of 23,600 23,600 23,600 Depreciation & prepaids 668 126 P/E 5.2x 15.7x 5.7x Provisional accounts 5 (4) P/B 1.9x 1.9x 1.3x Unrealised foreign exchange 18 10 EV/EBITDA 2.2x 9.3x 4.9x Investmentsprofit/loss profit/loss (253) (70) Dividend yield 11% 5% 5% Interest expense 111 103 Operating profit before 815 245 movements in working capital At target price of 32,000 32,000 32,000 Capital expenditures 75 (19) P/E 6.7x 21.3x 7.7x Interest paid (89) (92) P/B 2.5x 2.6x 1.8x Corporate income tax paid (47) (33) EV/EBITDA 2.6x 10.5x 5.6x Other (20) (76) Dividend yield 8% 4% 4% Net cash flow operating (81) (221)
Acquisition of fixed assets (1,134) (589) Disposals of fixed assets 247 121 Receipts of dividends 10 - Net cash flow invest (876) (468)
Disbursement from loans 930 1.064 Payment to debt principal (471) (782) Dividend payment (62) (27) Other - - Net cash flow financial 397 256
Net cash flow in year 255 (188) Cash at beginning year - 254 Exchange rate adjustment (1) (2) Cash at end of year 254 64
Source: 2009 Financial statement, VCSC forecast
www.vcsc.com.vn – Bloomberg VCSC
Sea transport sector is seeing upward momentum on course with the economy’s recovery cycle Freight rates have overcome the breakeven point and are seeing a positive uptrend in the long term. After falling down from a peak of 12,000-point in the middle of 2008, the BDI touched the bottom at 663-point at the end of 2008 and hovered around this until the first few months of 2009. Freight rates have begun to see signs of recovery since the latter months of 2009. At present, the BDI index is around 4,209 points (05/26/2010), up 40% from the end of 2009. BHSI index, representing Handysize ships (VST’s current fleet type) has increased 61.5% from the 2009 average. Moreover, recovery of the world economy and the arrival of the transport sector’s peak season in Q2 and Q3 are also buoyant factors supporting the expectation of a continued uptrend in freight rates. Picture: Comparison of BDI and BHSI from 2008 – May 2010
Source: Bloomberg
BHSI index rises faster than BDI index from the 2009 average (61.5% compared with 20.9%).
At present, VST’s freight rates have grown by an average of 20% from the end of 2009. BHSI index (the freight rate of Handysize ship s) which VST references to determine its freight rates has increased by 61.5% from the average of 2009 to reach 1,502 points. As a result, Q1/2010 revenue reached VND 442 billion, up 67% from Q1/2009. Table: VST’s freight rates for main routes in Q1/2010
Route Cargo Freight rate (USD/ton) Difference (%) Q4/2009 Q1/2010 South America – Southeast Asia Sugar 66 82 24 South America – West Africa Sugar 44 55 25 Vietnam – West Africa Rice 55 60 9 Source: Vitranschart
Import-export growth in 2010 is also a supportive factor for the domestic transport sector. Vietnam borders the South China Sea owning a coastline of 3,200 km. With such a favorable geographic location, it is without doubt the Vietnam transport sector has great www.vcsc.com.vn – Bloomberg VCSC
potential. Furthermore, international integration will promote trading deman d among regions as well as stimulate the development of the transport sector since over 80% of import -export goods are transported by sea. The maritime economy plays an indispensable role in Vietnam’s economic structure. With expectation of a 20% increase in 2010 import-export growth and continued upside in freight rates, sea transport companies are wholly capable of achieving great earning results from their core operations without having to look for other income sources to compensate.
Transport demand of dry bulk is improving while new supply of Handysize ships remains constricted In 2008 backwards, most transportation companies ordered build new vessels with large capacities or looked for old ones in order to increase their transport capacity. The selling price of old vessels at that time consequently spiked, especially for vessels with large capacity. For instance, the selling price of vessels of 31,000 DWT and around 11 years old at that time was USD 54 million, 100% higher than current price levels. Most companies believed that building large vessels could help them transport more cargo. It came as no surprise that they built new vessels with deadweight tonnage of over 35,000 DWT (H andymax size ships). Most of these vessels have already been completed as it normally takes about 2-3 years to build, leading to an increase in the supply of Handymax vessels.
Meanwhile, the world economy is still in the beginning phases of recovery and transport cargo has yet to breakthrough. For this reason, it is diffi cult for vessels with large deadweight tonnage to look for efficient shipments. Under this circumstance, Handysize ships are the most suitable choice because of its moderate deadweight tonnage and the ability to transport many kinds of goods. This was the primary reason that led the BHSI index to a faster rise than the BDI from the 2009 average (61.5% compared to 18.9%).
Picture: Number of new vessels
Ship size Tonnage (DWT) 2009 2010 2011 2012 Total Capesize 175,000 - 400,000 146 268 166 91 671 Post-panamax 54 107 111 47 319 Panamax 65,000 – 80,000 78 166 116 61 421 Handymax 35,000 – 60,000 265 343 261 88 957 Handysize 15,000 – 35,000 260 278 183 99 820 Total 803 1,162 837 386 3,188 Source: Howe Robinson and Co Ltd
Benefits of owning young fleet with high transport capacity
VST has one of the youngest fleets in Vietnam . Owning a fleet including 16 vessels with total deadweight tonnage of 317, 542 DWT, Vitranschart is ranked 3rd in national fleets, after Vosco (total deadweight tonnage of 545,567 DWT, average age of ships is 16.8 years) and Falcon (total deadweight tonnage of 390,635 DWT, average age of ships is 23.9 years). Young vessels, modern equipment and an experienced crew staff all helped VST hold an advantage in negotiating freight rates and improve utilization rates while decreasing non- availability time for repair and maintenance . Moreover, thanks to fuel cost savings together with reduction in maintenance cost and repair time, VST has shortened its fleet’s transport time to increase its efficiency. Within 2 years, its utilization rate has been improved markedly from 86.5% in 2007 to 96.4% in 2009 and repair time was also reduced from 13.5% in 2007 to 3.6% in 2009.
www.vcsc.com.vn – Bloomberg VCSC
Picture: Utilization rate and non-availability due to repair and mainten ance
105.0%
100.0% 05% 05% 04% 08% 08% 95.0% 14% 90.0%
85.0% 95% 95% 96% 92% 92%
80.0% 87%
75.0% 2004 2005 2006 2007 2008 2009
Operation time Maintenance time
Source: Vitranschart
Since 2007 till present, the company has bought 9 new vessels and liquidated 7 old vessels out of depreciation.
Focusing on the deadweight tonnage segment of over 20,000 DWT with occupancy rate of over 80%, VST is likely t o diversify sources of transport commodity as well as maximize its utilization rate. Among VST’s 16 vessels, 11 have deadweight tonnage of 22,000 – 28,000DWT. This is the average deadweight tonnage of Handysize ship (15,000 – 35,000 DWT) which can enter most of ports all over the world. In 2010, VST’s deadweight tonnage might increase slightly by 9% from 2009 due to the purchase of two new vessels (deadweight tonnage of 56,000 DWT) and liqui dation of two old ones with small capacity including Far East and Phuong Dong 2 (total deadweight tonnage of 30,295DWT). Old ve ssels (over 20 years) having small deadweight tonnage (under 15,000 DWT) are mainly used for cargo in packages without bulk cargo or steel or iron. Average loading time of this vessel type is around 7 – 10 days. In contrast, new vessels have many advantages. In addition to young age (10 years), new vessels have relatively large deadweight tonnage (28,000 DWT) suitable for transporting many kinds of goods. Average loading time for this type of vessel is around 4 – 5 days.
Moreover, the bold investment in fleet helped VST shorten its transport time to increase its operating cycle perhaps by 20% and transpo rt volume compared to old ones too. Consequently, revenue from transport operations has seen positive changes. For example, assuming the BHSI index remains at the current level, the VTS Tiger is expected to generate around USD 10 million per year (conducting 6 shipments/annum) - up 150% compared to the old vessel. Total new investment capital in the new vessel is about USD 18 million ( of which debt financing is 82%). The depreciation period is 12 years and the loan repayment period is 8 years. New investment also contributes to increase d profit from the company’s sea transport operations. In the future, VST also plans to liquidate all old vessels with tonnage under 15,000 DWT and continue to invest in new ones having deadweight tonnage of over 20,000 DWT.
www.vcsc.com.vn – Bloomberg VCSC
Self-operation of the fleet bring high operating results
Over 80% of sea transport revenue comes from self operation of VST’s fleet. Revenue from transport operations is comprised of two types of services: self-operation and time charter. Under a charter agreement, the charterer bears all expenses incurred for transport activities such as crew salaries, fuel costs, port charges, loading and unloading ch arges…etc. Typically, a charter contract is fixed for 6-12 months and the ship owner does not benefit when rates fluctuate. Therefore, gross margin is often not as high compared to self-operation of ship transport. Currently, most sea transport companies in Vietnam primarily operate with charter contracts such as a VIP, VNA, Falcon, VOSCO (leasing of ships with tonnage larger than 50,000 DWT). Thus VST’s gross margin is high compared to other companies in the industry, reaching 14.78% in 2009. In 2010 as the economy moved toward recovery, freight rates have improved markedly and VST has benefited most from this positive development. However since the company has almost no long-term charter contracts it must accept a certain degree of risk to down trend fluctuations in transport rates.
A good network of brokers combined with the initiative to actively seek new cargo sources has led to occupancy rates over 80%. Occupancy rates are above 80% thanks to a network of professional brokers and an initiative to actively seek new cargo sources. The close relationship between the n etwork of brokers and VST’s associates is the bridge linking demand and the company ensuring its fleet is always in continuous operation and facilitates high fleet utilization. In addition, apart from cargo transport sources in traditional routes from Vietnam to West Africa, Central America, South America, Middle East and Southeast Asia, areas where other sea transport companies have weak presence, VST also actively seek new cargo sources to avoid running empty vessels for the next transport route. VST’s average occupancy rates are over 80% while other companies manage to achieve only 40% - 50%. Revenue from cargo operations outside Vietnam accounts for 60% of the company’s total transport operating revenue. 40% of revenue comes from a stable source of exports. The transport of export goods from Vietnam are mainly staple foods like rice, sugar, agricultural products (green beans, soybeans, soybean residue, wheat ...). These are Vietnam’s key export items and revenues coming from the transport of these items are relatively stable. Our economy is still developing and the potential to exploit these products is still large. However, there is usually no demand for cargo goods to transport back to Vietnam from regions to which VST’s fleet deliver Vietnamese exported goods, so the activeness and efficiency in looking for new sources of goods to transport from those regions to other places is VST’s true advantage.
Financial performance analysis
2009 – A difficult year for sea transport
2009 was a challenging year for all companies operating in the sea transport industry due to the plunge in freight rates. Freight rates were low, even below cost for a long time as many domestic companies had to transport "just the ship" or accept running one-way empty - slightly better options than letting the ship remain idle. VST felt the same pains as the company lowered its profit target from VND116 billion pre-tax profit to VND80 billion. Ending 2009, VST’s revenue and pre-tax profit reached VND1,283 billion and VND80.4 billion, respectively.
The core business was offset by profit from the liquidation of ships. In the last two years, ship liquidations has been used as a last ditch effort by the sea transport companies to save the results of its operations. VST was also not the exception, in 2009 VST liquidated four ships to www.vcsc.com.vn – Bloomberg VCSC
realize pre-tax profits that reached VND76.8 billion, accounting for 95.5% of the company’s profit before tax. Also, like other dry bulk transport companies under Vietnam National Shipping Lines, in 2009 the Ministry of Finance allowed VST to adjust the depreciation period rather than applying a quick depreciation policy like before, leading to a 50% reduction in depreciation in the year.
Indicators 2009 VST VNA Vosco VIP VTO PVT
Charter capital (VND billion) 400 200 1,400 598 600 2,303 Revenue (VND billion) 1.283.17 659.38 1,939.41 1,213.14 1,165.02 1,928.91 Profit after tax (VND billion) 60.07 19.95 52.58 51.95 34.29 (16.83) Gross profit margin (%) 14.78 5.51 6.73 7.38 23.62 7.73 Net profit margin (%) 4.68 3.03 2.71 4.28 2.94 -0.87 EV/EBITDA 9.34 10.54 13.48 9.47 6.22 12.48 Debt/Equity (%) 407 222 180 159 286 190 ROE (%) 12.19 6.42 3.61 6.38 4.37 -1.14
2010 – Growth prospects due to rebound in freight rates Q1/2010 operating results was the m ost promising compared to other companies in the sea transport industry with revenue up 67% and profit after tax increasing 148% over Q1/2009. VST’s Q1/2010 operating results most clearly demonstrates the Company’s performance as the transport industry recovers. At the end of Q1/2010, VST’s revenue reached VND442 billion, an increase of 67% compared to Q1/2010. Revenue growth in the period was supported by price and volume with freight rates increasing by 50% and average transport volume increasing 29% over Q1/ 2009. Total Q1/2010 transport volume reached 623,307 tons, of which, rice accounted for a 34% stake, sugar accounted for 12%, and farm products accounted for 25% of total transport volume. Some shipping routes saw significant hikes in freight rates, such as routes through West Africa from South America increased 50%, routes from West Africa to Southeast Asia increased 60% to 70%. Thus, in gene ral freight rates increased an average of more than 50% over Q1/2009. Profit before tax for the first three months of the year reached VND30 billion (excluding profit from the liquidation of the Far East vessel), of which March 2010 alone contributed VND20 billion in profit. This is remarkable growth compared to a loss of VND63 billion in Q1/2009. As such VST has fulfilled 23.75% of target revenue and 25% of profit before tax plan. Along with expectations of a rebound in freight rates for Handysize ships in 2010, we see the results as not only reinforcing the Company’s ability to complete plan but to also exceed the company’s guidance. Breakthrough profits in Q2 and Q3/2010. Q2 and Q3 is the sea transport industry’s peak season. With freight rates trending upward, this will be the company’s time to shine. Furthermore, the liquidation of old ships to rejuvenate the fleet will add further benefits to the company. In Q2 VST will record profit from the Far East vessel liquidation with profits estimated at VND23 billion. Also, in June 2010 VST will liquidate the Orient 2 vessel with after-tax profit estimated at VND38 billion - and is expected to recognize the gain in Q3/2010. Thus, profit after tax realized from these two quarters is estimated at VND118 billion, exceeding 2010 plan by 31%. 2010 – The beginning year of VST’s growth cycle with revenue estimated to grow 48% and profit after tax to increase 175% compared to 2009. Based on projected average freight rates increas ing 30% and 15% improvement in transport volume compared to 2009, we estimate the company’s revenue in 2010 will reach VND1,896.7 www.vcsc.com.vn – Bloomberg VCSC
billion, up 48% y-o-y. In particular, transport revenue will reached VND1,575.79 billion, accounting for 83% of total revenue for the company. Revenue from other activities will reach VND300 billion. In 2010, depreciation expenses, interest and exchange rate differences are expected to increase compared to 2009. The company plans to invest in two new vessels with a total capital investment of over VND752 billion, of which the company plans to borrow VND632 billion. Interest costs are estimated to be VND159 billion in 2010, up 55% compared with 2009. Also, in late January 11/2009 up to now, the State Bank has adjusted the VND/USD exchange rate up about 5%, this will greatly impact VST’s business results. We forecast the exchange rate differences arising from the revaluation of foreign currency debt at about VND40 billion in 2010. In 2010, the company plans to liquidate two ships (the Far East and Orient 2), in which the Far East has been liquidated in Q1/2010 with a profit of around VND23 billion. The Orient 2 is scheduled for liquidation in the Q2/2010 with profits estimated at VND38 billion. We forecast profit after tax gain from the liquidation of these two ships will be around VND61 billion. With these assumptions, we estimate after-tax profits in 2010 will reach about VND165.3 billion, equivalent to a 175% increase compared to 2009. Accordingly, 2010 net profit margin will reach 8.72% and average EPS reach VND 4,133/share. Also in 2010, the Company proposed issuing bonus shares at a ratio of 100:18 with a total estimated number of 7.2 million shares issued. At the same time, through the issuance of additional shares to existing shareholders with a 10:3 ratio at 10,000 VND per share, the issuance of these 12 million shares will finance the purchase of two new ship project s mentioned above.
Target price of VND32,000 per share through EV/EVITDA methodology
We use P/E and EV/EBITDA to value VST stocks with P/E and EV/EBITDA referenced from the industry average in Asia. With the assumption of a 15% increase in 2010 profits for companies in the region, VST’s target price is about:
Valuation Industry average Discount rate Price method P/E 9.59 15% 33,699 EV/EBITDA 7.42 15% 32,276 With a reference price of VND 23,600 per share, VST is trading at a 36% discount to the target price. At this price level, the VST’s 2010 EV/EBITDA is 4.9x, lower than other listed companies in the industry, and thereby increasing the attractiveness of an investment decision in Vitranschart.
Recommendation
Companies in the sea transport industry have overcome their most difficult period and have new opportunities for growth as the economy recovers. Most stocks in other industries regained growth momentum while sea transport industry stocks saw the deepest declines and are still in stages of recovery. The BHSI index at 1,502 points currently, up 61.5% compared to the average in 2009 is one positive signal showing the recovery of transport operations in the world.
With the advantages of owning a young fleet, transport capacity along with high credibility and seniority of more than 30 years experience, Vitranschart is cable of accelerated growth as the economy recovers. Q1/2010 operating results clearly demonstrates the Company’s performance . Forecasted after-tax profits will reach VND49 billion Q2/2010, including VND23 billion from the liquidation of the Far East. Also, according to our forecast in June 2010, the www.vcsc.com.vn – Bloomberg VCSC
Company will proceed with the liquidatio n of Orient 2 with profits estimated at VND38 billion. This profit will be recognized in Q3/2010. Thus, after-tax profit is forecasted to reach VND165 billion in 2010, up 175% from 2009.
Currently, most sea transport stocks have seen certain level of gains recently. VST’s stock despite having the positive financial performance among other listed companies has not seen a rebound in price appreciation. With current market price of VND 23,600/share; VST is trading at EV/EBITDA of 4.9x and 36% discount to the target price. In addition, we used the NAV approach to value the company’s fleet as a reference method. T he fleet’s NAV is estimated at VND30,000 per share, 27% higher than the current share price. Consequently, we believe VST is a good candidate for medium term investment purposes and can be accumulated from now till the end of June 2010 to catch up with the positive Q2.
www.vcsc.com.vn – Bloomberg VCSC
Appendix 1: Valuation of the fleet through NAV methodology We use the method of calculating the net asset value (NAV) to value the company’s fleet. We consulted with the company’s senior management as well as the Simpson Spence and Young index (SSY) and the website at www.timaraya.com to determine the market value of the fleet as of March 31, 2010. According to SSY, Handysize ships have tonnage of about 25,000 to 35,000 DWT therefore prices shown on this site is the price of a vessel with average tonnage. Vitranschart’s fleet, except for two Vietnamese ships (Far East 3 and Far East 5) and the three Orient 1, 2, 3 which were purchased from Britain and have small tonnage (15,136 DWT), the remaining vessels have capacity from 22,000 to 25,000 DWT. Therefore, we take the two indicators above as reference to determine the market price of the rest VST’s fleet. The pricing model does not consider the value of two ships (Far East 3, Far East 5). For VTC Phoenix which was purchased in Vietnam (built in 2008, total tonnage of 22,500 DWT), we estimate its value at USD 1 2 million. As for the three Orient 1, 2, 3; due to small capacity (15,136 DWT; built in 1986), we refer to the price of the Far East ship to determine the market value of these three vessels. Unit: VND billion
Fleet’s value (USD million) 192 Fleet’s market price (VND billion) – Exchange rate VND/USD 3,651 19,000 (1) Fleet’s book value (2) 2,741 Profit from revaluation of fleet (1-2) (*) 683 Owner’s equity 512 Net asset value 1,195 Shares 40,000,000 NAV/share (VND) 29,865 (*) we have discounted the value of the fleet by 25% after revaluation
Appendix 2: Comparison of select transport companies in the world Indicator VST Rig Jutha Sea Aboitiz China Ship-H MISC BHD Average Tenders Transport Country Vietnam Indonesia Thailand Philippines Hong Kong Malaysia Market Cap (M USD) 52 50.9 15.8 62.1 5,191.5 12,179.6 EV/EBITDA trailing 9.28 3.90 6.39 3.88 4.91 10.24 7.42 ROE 12.19 3.29 24.25 1.84 28.64 13.07 15.24 ROA 2.15 2.04 7.28 0.92 20.04 8.50 7.77 P/E 15.38 7.19 8.16 5.18 30.62 15.81 9.59 P/B 1.87 0.76 0.83 0.55 1.52 1.79 1.28 Source: Bloomberg (*)VST’s EV/EBITDA is calculated in 2009.
www.vcsc.com.vn – Bloomberg VCSC
Appendix 3: Comparison of selected companies in the industry Indicator VST VIP VTO VNA PVT Vosco Charter cap (VND bil) 400 598 600 200 2,303 1,400 Price (VND) 5/28/2010 23,600 20,300 12,700 25,700 14,800 19,350 Market Cap (VND bil) 944 1,214 762 514 3,409 2,709 Revenue 2009 1,283.17 1,213.14 1,165.02 659.38 1,928.91 1,939.41 Profit after tax 2009 60.07 51.95 34.29 19.95 (16.83) 52.58 Gross profit margin (%) 14.78 7.38 23.62 5.51 7.73 6.73 Net profit margin (%) 4.68 4.28 2.94 3.03 -0.87 2.71 Debt/Equity (%) 407 159 286 190 222 180 P/E 2009 (x) 15.71 23.37 22.22 24.66 N/A 49.26 P/B 2009 (x) 1.92 1.49 0.97 1.65 2.31 1.86 ROA 2009 (%) 2.15 2.33 1.04 1,86 -0.26 1.13 ROE 2009 (%) 12.19 6.38 4.37 6.42 -1.14 361 EV/EBITDA (*) 9.15 9.18 6.11 10.32 12.08 13.17 LNST 2010F (**) 164.43 64.53 47.19 30.00 - 80.44 P/E 2010 (VCSC) 5.71 18.82 16.15 17.13 - 33.68 Source: VCSC
(*) EV/EBITDA is used in comparing prices with other companies in the transport industry aimed at excluding the impact of different depreciation policy for individual business. VST’s 2010 EV/EBITDA at the reference price is x 4.9, lower than other listed companies increasing the attractiveness for investment decisions in Vitranschart.
(**) VST’s profit after tax in 2010 estimated by VCSC, profits of the remaining companies is based on company’s plan.
Appendix 4: VST’s fleet at the end of April 2010
Ship name Built Origin GRT NRT DWT 1 Orient 1 1986 Britain 8,996 6,239 15,136 2 Orient 2 1986 Britain 8,996 6,239 15,120 3 Orient 3 1986 Britain 8,996 6,239 15,136 4 Far East 3 2004 Vietnam 4,143 2,850 6,500 5 Far East 5 2006 Vietnam 4,143 2,850 6,500 6 VTC Light 1995 Japan 13,865 7,738 21,964 7 VTC Globe 1995 Japan 14,436 8,741 23,726 8 VTC Sky 1997 Japan 14,743 7,920 24,260 9 VTC Star 1990 Japan 13,705 7,738 22,273 10 VTC Dragon 2007 Vietnam 12,560 6,058 22,500 11 VTC Sun 1996 Japan 14,734 7,920 23,581 12 VTC Planet 1993 Japan 13,706 7,738 22,176 13 VTC Ocean 1999 Philippines 14,762 23,492 23,492 14 VTC Phoenix 2008 Vietnam 12,560 6,058 22,500 15 VTC ACE 1996 Japan 15,354 8,111 24,157 16 VTC Tiger 1999 Japan - - 28,666 Source: VST GRT (Gross Register Tonnage) NRT (Net Register Tonnage) DWT: (Dead Weight Tonnage)
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DEFINITION OF RECOMMENDATION BUY Highly appreciated stock with targeted 20% return over one year period. Little amount of downside risk is foreseen.
HOLD Fairly priced stock with less than 20% returns over one year holdin g period. Little amount of downside risk is foreseen.
SELL Over-valued stock or poorly performing company with high amount of downside risk.
HISTORY OF RECOMMENDATION Date Recommendation Closing price Target price
DISCLAIMER Copyright 2009 Viet Capital Securities Company. All rights reserved. This report has been prepared on the basis of information believed to be reliable at the time of publication. VCSC makes no representation or warranty regarding the completeness and accuracy of su ch information. Opinions, estimates and projection expressed in this report represent the current views of the author at the date of publication only. They do not necessarily reflect the opinions of VCSC and are subject to change without notice. This repor t is provided, for information purposes only, to institutional investor and retail clients of VCSC, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction. Investors must make their investment de cisions based upon independent advice subject to their particular financial situation and investment objectives. This report may not be copied, reproduced, published or redistributed by any person for any purpose without the written permission of an authorized representative of VCSC. Please cite sources when quoting.
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