Samudera Shipping (Indonesia) Research April 2022

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Company Highlights:

· Samudera Indonesia is an integrated cargo transportation and logistics company, provides cargo transportation and integrated logistics services in Indonesia and rest of Southeast Asia, the Middle East, India, and internationally, which was established back in 1964. The company has total five business line which consists Samudera Shipping, Samudera Logistics, Samudera Ports, Samudera Property, and Samudera Services to provide quality services for the customers. Company has been publicly listed on the Indonesia Stock Exchange since the year 1999.

· Company’s broad range of services includes storage and warehouse, distribution center, packaging, labelling, customs clearance, door to door distribution, multimodal transportation, terminal handling, project logistics, and offshore support. Samudera Indonesia provides reliable feeder service between central hub port of Singapore and other smaller ports in the ASEAN region. The company connects ports across wide geographical range across Asia. Samudera also provides bulk carrier and tanker services for transportation of dry and liquid cargos. Samudera also act as service providers for its clients in forwarding and warehousing.

· Samudera Indonesia has group structure as follows.

· Among multiple operating businesses, Samudera Shipping contributes majority of revenue which represents more than 80% of total sales during the year 2021. Samudera Shipping operates vessels around the ASEAN region and provide support to other vessel groups and companies. On the other hand, Samudera Logistics segment operates warehouses to provide logistic services to clients. In this area, company operates cold storage facilities, provides inland transportations, and maintain container depot to hold containers at port. While, Samudera Ports operates ports at Indonesia coastal areas to support onshore and offshore vessels that pass through within the company’s operational territory. Company manage TEUs at ports and major driver of the unit is domestic movement of goods containers. Samudera Property and Samudera Services provides asset management services and supportive services to Samudera Indonesia group, respectively. Majority revenue of these units came from internal group and group may focus to leverage these internal focused units to provide services outside of the group in upcoming period.

· Samudera Indonesia do own fractions of vessels out of total into its fleets while most of vessels are operates on lease terms. Most of lease terms are varied from 12 months to 24 months. Samudera Indonesia has shifted focus to add more vessels into the fleet to maintain control over fast changing shipping cycle throughout the year. Samudera is also dividend paying company and has good track record to pay annual dividend since the year 2001.

Business Overview:

· Samudera Indonesia is well-established ocean shipping company which provides integrated logistics services across verticals. The company currently operates four terminals and ports, out of which three are located in the port of Tanjung Priok in Jakarta, and one in Palaran, Samarinda in the East Kalimantan. The two of three terminals located in Tanjung Priok are managed with PT Pelabuhan Indonesia II in providing container and bulk services. The Company also operates a multipurpose terminal, Dermaga Serbaguna Nusantara (DSN), through the Build Operate Transfer (BOT) scheme, which offers ship docking and loading facilities as well as operator for domestic containers and general cargo. Currently, most of the cargo that goes through Samudera’s ports are major commodities and oil, which is likely to change in upcoming years as company will focus to diversify its shipping services to multiple industries.

· Company hopes the momentum of growth will continue until the year 2023 and beyond although it is believed that it will not be easy to see that there are already many goods and commodity prices have broken since achieved the all-time high record. Company has set aside $120-$140 million for expansion, out of which $80-$90 million for vessel purchase. One of the things Samudera is doing to develop other business lines such as diversifying logistics services to ports, and other logistics related services to reduce revenue concentration. Moreover, Samudera Indonesia will utilize rest of capex in acquisitions of related verticals. Samudera Indonesia has just entered into a conditional purchase agreement for the acquisition of PT Jac Logistics company, which was previously built by Samudera with Jac Group from Dubai. Currently, the joint venture between two parties share portion of 50:50, and which Samudera will take over to 100% as a logistics distribution company in Indonesia for the distribution of consumer goods products such as fast-moving consumer goods. This will help company to do constant business under essential items category, and will minimize the effect of global pricing of various commodities on its current goods volume mix.

· The Indonesian freight and logistics industry does not have a high level of industry concentration, especially with regard to the international players. International players are holds approx. 30% of the market share and the remaining 70% is goes to local players. Within the 70%, the concentration is medium among domestic players, where ten largest players do not make up for more than 30% of the local market share. It is noted that the large players are more focused on freight transport and logistics infrastructure. Key competitors of Samudera Indonesia in the market includes Siba Surya, Kama Djaja Logistics, and CKB Logistics etc. Due to a fragmented market, there is high competition and quite a number of mergers and acquisitions have taken place in last few years in Indonesia. Samudera may also consider capex in capacity build up to grow market share along with purchase of new vessels in medium term and may look into more M&A deals in the future.

· The global economy is becoming more and more interconnected every year, driving the constant upward demand for transportation of goods across regions and economies. In 2021, global container throughput reached approximately 849 million twenty-foot equivalent units (TEUs), increased by 7% Y-o-Y compared to 2020. TEUs is continue to increase with expected volume of 888 million TEUs during 2022 along with vessels in mid to long term as there is constant increasing trades between world economies and series of trade agreements taken place in past few years. There is also an increase of container volume around Indonesian ports as country’s incremental focus on global trade. Samudera also had planned capex for buying new vessels and to add more capacity through building new ports before COVID hit adversely. Samudera may have done some capex during 2021 and may push to make further capex during 2022 to maintain top-line numbers from the global pricing declines.

World Container Index Chart

PAT & EBITDA Margins % (2019–2021)

Source: WCI Drewry Data, Annul Reports of Samudera

· The World Container Index (WCI) assessed is a composite of the eight routes indices weighted for volume on each of the routes representative trade. Index shows average prices of all combined eight routes in dollar terms. It has been noted that WCI is positively correlated with certain routes on which Samudera runs its operation around Southeast Asia, Singapore and China. WCI has also direct impact on shipping companies’ performance on financial front as there is direct impact on company’s cost of operation, revenue and margin levels. It has also been noted positive correlation between EBITDA Margin and WCI level. Samudera has seen similar improvements on margin front, both EBITDA % and PAT %, since there is increase in WCI and shipping charges across the world due to various reasons. Hence, WCI and price level across major ports of the world affects Samudera in both directions. WCI index and pricing across major ports are declining since January 2022 peak, but still remains above than average of last many years. WCI declined further to under $8,000 mark during mid-April 2022 and likely to decline further in short term due to seasonality effects, expected ease of port operations, capacity enhancement etc. Samudera’s EBITDA and PAT is likely to affect adversely during 2022 and beyond once there is stabilization in supply chain chaos. However, Samudera’s EBITDA and PAT levels are likely to stay above than average of last few years, as WCI index is likely to remain above crucial level of $4,000-$5,000 during most of the period of the year 2022.

· Trade within the Indonesian region has been peaked during March 2022 as export value reached to $26.5 billion, significantly increased by 44.36% on Y-o-Y basis, while on the other hand import value also increased by 30.85% Y-o-Y to reach at $21.97 billion during March 2022. Cumulatively, Indonesia’s export value from January to March 2022 reached $66.14 billion, up by 35.25% compared to the same period in 2021. In non-oil and gas segment, trade volume has been increased in agriculture, fisheries, mineral commodities, forestry products, electrical machineries and parts and consumer goods etc. Moreover, trade with ASEAN countries also holds significant share in total trade volume. It has been noted that Samudera’s level of operation highly depends on the volume of trade that happens within and around the Indonesian territory as it provides vessel services in and around the country. Indonesia’s internal reforms on manufacturing segment, infrastructure push and favorable industrial policies will help country continue to increase trade volume around the region, which will help Samudera to offset the effect of declining world container prices up to certain extent.

· Consolidated net revenue has increased by 37.10% Y-o-Y to reach at $672.92 million by end of the year 2021 backed by skyrocketed shipping charges and steady improvement in container volume. Gross profit margin has also improved more than 1500 bps to 28.21% by end of the 2021. Samudera has made net profit during 2021 after two years of losses. Company’s profit after tax reached at $139.08 million during 2021 and net margin stood at 20.67% by end of the 2021. Samudera is expected to grow well during 1Q2022 but likely to show some downturn in top line numbers from 2Q2022 due to intense lockdown in China (one of the key routes to company’s operations) and seasonality in shipping industry. However, World Container Index is likely to stay above than average at-least in the year 2022 and later it will start declining from the year 2023 onwards (if there is no new disruptions). Company is expected to grow its top-line number at-least during 1H2022 and may starts to decline on the basis of year over year during 2H2022. Company do expect to reach revenue of in the range of $700-$800 million during 2022.

· Based on initial information, Samudera has recorded revenue of $250.09 million during 1Q2022, growing to about 48.88% Y-o-Y. On profitability front, company’s gross profit reached at $ 100.22 million, up by 69% Y-o-Y and while net profit reached to $58.4 million, up by 338.75% Y-o-Y during 1Q2022 (Detailed financial statement of 1Q2022 is awaited while writing the note).

Macroeconomic Developments & Impact:

· Congestion at ports in China and elsewhere around the world is locking about 10% of the global container-ship fleet by beginning of the April 2022 and there are no significant improvements by mid-April 2022. The world’s supply chains are still being hammered and adversely affected by labor shortages and logistics challenges as the pandemic enters its third year with disruptions still differ from country to country. The major cause of congestion is heavy labor shortage across the ports due to COVID restrictions earlier imposed and internal system imbalanced at various ports across the world. Congestion has eased somewhat on the USA west coast after months of long delays but could go worse if there is no meaningful conclusion arrives between dockworkers and port operators. On the other side, lockdowns in Shanghai, Shenzhen and other Chinese cities due to rising COVID-19 cases during March-April 2022 and China’s Zero COVID Policy, have led to growing ship queues off China, threatening more delays in shipping goods and higher freight rates in coming months. Higher shipping rates are likely to stay here in medium term as ongoing development suggests delaying in normalization of ship operation worldwide. Samudera and other shipping companies will continue to get benefits in the year 2022 on pricing front, as prices on all front of shipping containers are likely to stay well above than pre-pandemic or 2019 levels.

· Value of global trade reached a record level of $28.5 trillion in 2021 which is increase of 25% as compared to 2020 and 13% higher compared to pre-pandemic level of 2019. Moreover, economies around the world are re-opening and getting back to normal mobility across the nations, demand of international goods across categories have increased rapidly in recent time. On the other hand, there are significant increase of Free Trade Agreements (FTAs) are taken place among countries will further boost global trade volume in upcoming years. Out of total global trade volume, majority of goods are transported through ocean shipping which stands almost 80%-90% goods due to lower cost of transportation. There is also spike in trade volume and ocean mobility around ASEAN region and Singapore, which are the key routes of Samudera Indonesia. Global economy is continued to rise in the long term, irrespective of any short-term shocks which will maintain ocean shipping industry’s sustainability. Moreover, ASEAN region will have some structural changes in policy, supportive government moves, increasing manufacturing activities in the region etc. will helps Samudera to maintain its position in the region.

· Global shipping industry is highly aligned with regional manufacturing activities, seasonality, demand & supply of goods, trade volume between countries. Higher manufacturing activities leads to higher volume of goods set aside for international trade pushes shipping industry’s volume upward. Global purchasing managers’ indexes (PMIs) for services and manufacturing indicates near-term expansion among key regions. The manufacturing PMIs for individual economies are especially strong in the United States, where US Manufacturing PMI increased to 59.7 in April 2022 from 58.8 in March 2022, beating market forecasts of 58.2 which is the strongest growth in factory activity in seven months. On the other hand, Eurozone Manufacturing PMI fell to 55.3 in April 2022, where India’s PMI stood at 54 by end of the March 2022. Manufacturing activities are also kicked up in Southeast Asia region where almost all countries PMI has well maintained above 50. Increased and constant manufacturing activities around the world shows constant demand for shipping services at-least mid-term. However, seasonality around the year also affects shipping industry as overall industry face decline in freight rates during certain months. Europe’s exports have seasonality in February, December, and September, where freight rates are seen to have fallen during Christmas and Chinese New Years’ time. October and November months’ seasonality is shown for all indices, which indicate demand before Christmas. In May, a drop in rates seen around tropical areas due to Monsoon period. Currently, global freight cost is declining on each route around the world due to seasonality effect in normal rate cycle. However, any potential disruptions in cycle could affect overall industry either in positive or negative way.

Risk:

· One of the key risks for the company and overall shipping industry is stabilizing or declining global freight rates across the routes in upcoming quarters. Price is likely to remain well above in the year 2022 than year 2019 but could decrease subsequently in medium term due to reduction in port congestion, increase in supply of containers and vessel space by freight carriers, expected global recession or slowdown in medium to long term due to rising interest rates etc. It has been noted that profitability and margins of shipping companies are highly correlated with global freight rates as the same pattern has been recognized during the year 2020 and 2021. Once there is reversal in global freight rates which has been declining since February 2022, it is highly expected that it will affect overall industry’s top line growth and will ultimately affect companies’ profitability and margins. Samudera performance on financial and stock price front has been clearly affected the way global freight rates has moved in the history. Global container freight rate index breached $2,000 mark for the first time during mid-2020 where the same index has been trading in the flat range of $1,200-$1,800 since the year 2008–2009. It shows any decrease in global freight index in upcoming period will affect negatively on top-line numbers of the company, if company do not increase freight container volume.

· Another potential risk is increasing vessel fuel cost around the world. Most of the vessels and ships in ocean shipping industry runs on Very Low Sulfur Fuel Oil (VLSFO) bunker oil whose price in the market affects the cost of operating vessels. Fuel cost consists anywhere between 30%-50% of total operating cost of ship. Pricing of the bunker oil at any point of time directly affects company’s cost structure and operating expenses as well as effects on company’s profitability and margins. Price of VLSFO in the international market has been risen since the mid-2020 where world started re-open after being locked under COVID-19 restrictions. Demand of the goods and international trades skyrocketed in mid-2020 which pushed oil and gas prices to new high. Bunker price was bottomed at $227 per ton during 2020 global lockdown, which was increased $421 per ton by end of the 2020. Bunker cost further increased by end of the year 2021 to $633 per ton due to rapid global recovery. Trend of bunker oil price and other commodity was expected to reverse in 2022, which did not happen on Ukraine-Russia war. The global geo-political imbalance pushes the bunker price further up over $1,000 per ton by beginning of the March 2022. The price of VLSFO is still well above than historic levels and trades at above $900 per ton at major ports of the world. Higher cost of operating and expected slowdown in global economies in medium term may affect industry wide contraction of margins and may affect overall financial condition of the companies operates in ocean shipping industry.

· Shipping industry is highly correlated to global trade, government policies, geopolitical diplomacy, ongoing COVID-19 wave in China etc. Moreover, there is significant concern over ongoing long negotiation between USA west coast dockworkers and port operators over compensation which seeking to replace new agreement over current contract and usage of automation processes at ports harming workers to lose jobs. US west coast ports contributes major role to run global trade in smoothly manner as delaying at west coast will further push waiting time for many ships which have travelled from different part of the world. If there is any delaying or issues related to movements of ships and vessels in upcoming period, it is highly likely that there would be less volume for shipping companies and lower availability of containers could harm companies’ top line. There might be relatively higher price as seen during 2021 compared to historic average, but industry could not take full advantage of hiked price which might be offset by lower volume and lack of available containers on time.

Valuation & Conclusion:

· Samudera Indonesia is one of the leading shipping companies in Indonesia, operating on major routes around ASEAN region, China and Singapore. Company’s share price is soared more than 6 times in last two years on global factors and industry specific factors. Samudera’s financial performance is highly tied with global shipping price, global economy, industry specific factors and regional trade volume. Based on current scenario and expected slowdown in global economies backed by increasing interest rates across the world, there might be some downward pressure on global trade in upcoming period which may direct impact company’s operational and financial performance. Global shipping prices are also set to decline further, which has already been declined from all time high. Moreover, company’s planned capex to increase port capacity and vessel purchase could add some extra handling volume for the company. Currently, shares of the company trading all-time high at 6.3 P/E 2022E EPS and around 12 P/E 2023E EPS, which is fair value based on historic average. However, it is not recommended to buy stock at this time for the long-term investing as there might be more industry specific shocks ahead which will equally impact company’s financial performance. But there could trading investing could be done with time frame of two quarters as there might be some favorable factors likely to stay for next 2–3 quarters.

Valuation at Historic P/E Average 3–12

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