Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside of the COL Financial website as these may be subject to tampering or unauthorized alterations. Company Description. Chelsea Logistics Corp. (CLC) is engaged in shipping transport through its wholly owned subsidiaries Chelsea Shipping Corp. and Trans-Asia Shipping. Through Chelsea Shipping Corp., the company mainly provides maritime carriage of petroleum products. Meanwhile, through Trans-Asia Shipping, CLC engages in the transportation of cargo and passengers within Philippine territorial seas. The company currently has 33 vessels under its fleet comprised of 11 tankers, 4 barges, 8 tugboats, and 10 RoPax. In March 2017, CLC forayed into the logistics and supply chain solutions business after acquiring a 28.2% effective interest in 2GO Group. Raising Php5.8Bil for fleet expansion and strategic acquisitions. CLC will be offering 546.6Mil primary shares to local investors at Php10.68/sh. Assuming full subscription, the company will be able to raise Php5.8Bil in gross proceeds from the IPO. CLC’s market capitalization at the offer price would be Php19.5Bil. CLC will use 68.5% or Php4.0Bil to acquire an additional 8% stake in 2GO’s parent company, Nenaco, and also to acquire another shipping company that would complement CLC’s RoPax business under Trans-Asia. Meanwhile, 32% or Php1.8Bil will be used to acquire seven additional vessels in 2017. Strategic acquisitions serve as main drivers of growth. CLC’s strategic acquisitions will serve as the main driver of growth as it expands its business in the marine transport and logistics industry. The 2GO acquisition paves way for increased scale and efficiency for the company as 50% of 2GO’s revenues comes from shipping while the other 50% from logistics services. Management also expects to realize synergies through the acquisitions as they integrate the operations of the acquired businesses. For example, Chelsea intends to reorganize the ticketing and coding systems, employ common marketing and distribution strategies, and streamline the fuel costs of the acquired businesses. Besides this, the company’s relationship with the SM Group, which owns a 34.5% stake in Nenaco, also provides other business opportunities. Valued at a premium compared to regional comparables. Assuming that CLC’s FY18 net income reaches Php951Mil driven largely by the consolidation of 2GO’s profits and the acquisition of the other shipping company, CLC would be trading at a 2018E P/E of 20.5X based on the offer price of Php10.68/sh. CLC would be priced at a premium compared to its regional peers which are trading at a median 2018E P/E of 10.7X for shipping companies and 13.6X 2018E P/E of logistic companies. Local peer, LBC, is trading at 18.9X 2018E P/E, which is slightly lower compared to CLC’s valuations. Admittedly though, CLC’s growth prospects are more attractive relative to other shipping and logistics companies given the Philippines’ strong economic growth outlook, the company’s aggressive growth plans and potential synergies among the various subsidiaries and related companies. Year to December 31 (Php Mil) 2014 2015 2016 Net Sales 1,848 2,485 2,900 % change y/y - 34.5 16.7 Gross Profit 420 505 746 % change y/y - 20.2 47.7 Gross Margin (%) 22.7 20.3 25.7 Operating Income 268 334 481 % change y/y - 24.6 44.0 Operating Margin (%) 14.5 13.4 16.6 Net Income 139 98 132 % change y/y - -29.5 34.7 Net Profit Margin (%) 7.5 3.9 4.6 EPS 0.28 0.20 0.26 % change y/y - -29.5 34.7 RELATIVE VALUE P/E (X) 52.6 74.6 55.4 P/BV (X) 3.3 2.9 4.7 ROE (%) 4.1% 6.4% Source: CLC FORECAST SUMMARY Chelsea Logistics Corporation FRI 21 JULY 2017 A play on shipping and logistics JUSTIN RICHMOND CHENG RESEARCH ANALYST justin.cheng@colfinancial.com
Transcript
Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside of the COL Financial website as these may be subject to tampering or unauthorized alterations.
Company Description. Chelsea Logistics Corp. (CLC) is engaged in shipping transport through its wholly owned subsidiaries Chelsea Shipping Corp. and Trans-Asia Shipping. Through Chelsea Shipping Corp., the company mainly provides maritime carriage of petroleum products. Meanwhile, through Trans-Asia Shipping, CLC engages in the transportation of cargo and passengers within Philippine territorial seas. The company currently has 33 vessels under its fleet comprised of 11 tankers, 4 barges, 8 tugboats, and 10 RoPax. In March 2017, CLC forayed into the logistics and supply chain solutions business after acquiring a 28.2% effective interest in 2GO Group.
Raising Php5.8Bil for fleet expansion and strategic acquisitions. CLC will be offering 546.6Mil primary shares to local investors at Php10.68/sh. Assuming full subscription, the company will be able to raise Php5.8Bil in gross proceeds from the IPO. CLC’s market capitalization at the offer price would be Php19.5Bil. CLC will use 68.5% or Php4.0Bil to acquire an additional 8% stake in 2GO’s parent company, Nenaco, and also to acquire another shipping company that would complement CLC’s RoPax business under Trans-Asia. Meanwhile, 32% or Php1.8Bil will be used to acquire seven additional vessels in 2017.
Strategic acquisitions serve as main drivers of growth. CLC’s strategic acquisitions will serve as the main driver of growth as it expands its business in the marine transport and logistics industry. The 2GO acquisition paves way for increased scale and efficiency for the company as 50% of 2GO’s revenues comes from shipping while the other 50% from logistics services. Management also expects to realize synergies through the acquisitions as they integrate the operations of the acquired businesses. For example, Chelsea intends to reorganize the ticketing and coding systems, employ common marketing and distribution strategies, and streamline the fuel costs of the acquired businesses. Besides this, the company’s relationship with the SM Group, which owns a 34.5% stake in Nenaco, also provides other business opportunities.
Valued at a premium compared to regional comparables. Assuming that CLC’s FY18 net income reaches Php951Mil driven largely by the consolidation of 2GO’s profits and the acquisition of the other shipping company, CLC would be trading at a 2018E P/E of 20.5X based on the offer price of Php10.68/sh. CLC would be priced at a premium compared to its regional peers which are trading at a median 2018E P/E of 10.7X for shipping companies and 13.6X 2018E P/E of logistic companies. Local peer, LBC, is trading at 18.9X 2018E P/E, which is slightly lower compared to CLC’s valuations. Admittedly though, CLC’s growth prospects are more attractive relative to other shipping and logistics companies given the Philippines’ strong economic growth outlook, the company’s aggressive growth plans and potential synergies among the various subsidiaries and related companies.
FIELD NOTES I CLC: A PLAY ON SHIPPING AND LOGISTICS
FRI 21 JULY 2017
Company Description
Chelsea Logistics Corp. (CLC) is engaged in shipping transport through its wholly owned subsidiaries Chelsea Shipping Corp. and Trans-Asia Shipping. Through Chelsea Shipping Corp., the company mainly provides maritime carriage of petroleum products with complete services that include general cargo handling, loading, and discharging, among others. Meanwhile, through Trans-Asia Shipping, CLC engages in the transportation of cargo and passengers within Philippine territorial seas. The company currently has 33 vessels under its fleet comprised of 11 tankers, 4 barges, 8 tugboats, and 10 RoPax (a vessel that accommodates transportation of cargo and passengers). Through its extensive fleet, CLC caters to the end-to-end supply chain from refineries to depots to retail customers.
In March 2017, CLC forayed into the logistics and supply chain solutions business after acquiring a 100% stake in Udenna Investments B.V. Through the acquisition, CLC obtained a 31.9% indirect stake in 2GO’s parent company, Nenaco, as well as a 28.2% effective interest in 2GO Group. With the acquisition, CLC was able to diversify its operations within the marine transport and logistics business. Including the 25 vessels under 2GO, Chelsea’s fleet would total 58 vessels, and this would also translate to an increase in the company’s overall customer base.
Exhibit 1: Fleet breakdown
source: CLC Prospectus
CLC ALONE CLC WITH 2GO
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Exhibit 2: Corporate Structure
source: CLC Prospectus
Raising Php5.8Bil for fleet expansion and strategic acquisitions
CLC will be offering 546.6Mil primary shares to local investors at the offer price of Php10.68/sh. Assuming full subscription, the company will be able to raise Php5.8Bil in gross proceeds from the initial public offering (IPO). Following the IPO, the public will own 30% of the company, while existing shareholder, Udenna Corporation, will practically own the remaining 70% stake. The IPO shares will be offered from July 24 to 31 and the stock will list on August 8. CLC’s market capitalization at the offer price would be Php19.5Bil. The stock will be trading under the ticker symbol CLC.
Exhibit 3: IPO details
source: CLC prospectus
CLC will use more than half of the proceeds for the acquisition of other shipping and logistic companies. Specifically, 68.5% or Php4.0Bil will be used to acquire an additional 8% stake in 2GO’s parent company Nenaco; thereby, increasing its effective interest in 2GO to 35.2% from 28.2%. Additionally, part of the Php4.0Bil will also be used to acquire another shipping
Stock symbol CLCMax o�er price Php10.68/shTotal shares on o�er (in Mil)
Primary shares 546.6Gross proceeds to be raised (in Bil) Php5.8Issued and oustanding shares post-IPO (in Mil) 1,822.0Market Capitalization (in Bil) Php19.5Public �oat 30%O�er period July 24 - 31Listing date August 8
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company that would complement CLC’s RoPax business under Trans-Asia. With this acquisition, management expects to expand its fleet and client base as it services more routes in the VisMin area. No further details regarding this acquisition are available yet. Meanwhile, 32% or Php1.8Bil will be used to acquire seven additional vessels in 2017. Broken down, this would be comprised of 1 tanker, 2 RoPax cargo vessels, and 4 tugboats.
Exhibit 4: Use of proceeds
source: CLC prospectus
Key Investment Highlights
Strong industry growth supported by healthy economic outlook
With the Philippines being an archipelago comprised of 7,641 islands, the shipping industry functions as a primary means of inter-island transport of both cargo and passenger alike. From 2011 to 2016, cargo and shipping have grown at an average of 6.7% and 6.5%, a rate of growth not far off from the Philippine GDP’s 5 year CAGR of 6.7% during the same period. Meanwhile, other segments of the shipping industry such as ship calls and containers have grown at an average pace of of 5.4% and 4.9% each year, respectively, slightly trailing the average growth of GDP. Nevertheless, growth in ship calls and containers actually enjoyed an uptick in the recent years following a 9.5% y/y increase for both segments in 2016 alone.
Given the close tie between shipping and the development of the broader economy in the Philippines, the industry stands to benefit further from a healthy economic outlook. GDP is projected to grow by an average of 7% every year from 2016 to 2021 according to the IMF, supported by the government’s initiatives, which include efforts to increase infrastructure spending, the passage of the tax reform program, and a push for a more decentralized growth.
Leading industry position in shipping
CLC leads the shipping industry in terms of tanker capacity as well as by market share of RoRo (vessels for wheeled cargo) and passenger routes. Chelsea’s tankers have a combined capacity of 41,183 gross registered tonnage (GRT), representing 14% of the industry in 2016. Meanwhile, it dominates the RoRo and Passenger segment by routes with a market share of 33%. In addition, the company operates in 70% of the ports in the Philippines. Management aims to increase the number of routes they service through strategic acquisitions, and this should further cement its leading position within the industry. With these strengths under CLC’s umbrella, the company is well-positioned to capitalize on the growth opportunities and positive outlook of the industry.
Amount in PhpMil Percentage Estimated TimingAcquisition of:
other shipping and logistics companies 4,000 68.5% August 2017new vessels, equipment, container 1,838 31.5% September 2017
Total 5,838 100.0%
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FRI 21 JULY 2017
Exhibit 5: Market share
*market share includes tankers with GRT above 500
**RoRo & RoPax market share computation includes 2GO’s share
Growth strategies involve re-fleeting and increasing capacity and routes
CLC plans on re-fleeting and upgrading its vessels by acquiring optimal-sized tankers, larger RoPax vessels, and expanding tug operations. The company expects to add 21 vessels in five years with seven additional vessels in 2017, four in 2018 and 2019, and three each in 2020 and 2021. After taking into account the six tankers to be disposed within five years, CLC’s fleet would reach 48 vessels by 2021 from 33 as of end 2016. The disposal of these tankers are aimed to optimize CLC’s fleet and operations as well as to comply with the shipping modernization act that requires vessels reaching the age of 35 years to be disposed. Note that in 2016, CLC’s fleet had an average age of 27 years. Following the disposal of several tankers until 2021, we estimate the average age of its fleet would fall to around 20 years.
In terms of volume, the MR tanker to be acquired in 2017 would add an additional capacity of around 50 million liters, doubling total tanker capacity to 115 million liters. This tanker will be used by the company to strengthen its regional presence by servicing the importation of petroleum to the country. Meanwhile, the two RoPax cargo vessels would add an additional 300 TEU’s each to bring total RoPax capacity to 4,860 TEUs. Recall that the proceeds from the IPO will only be used to acquire seven vessels in 2017. None of the proceeds will be used to pay off debt, and management will need to borrow more to fund the future acquisition of vessels.
Together with its fleet upgrade, CLC will expand to new routes in Palawan, Surigao, Davao, and General Santos, among others. The company believes in capitalizing on its first mover advantage by servicing areas not yet covered by competition. Down the road, CLC is also looking to upgrade its facilities by acquiring machineries, ports, port facilities, and a shipyard. These would reduce the company’s dry docking costs and other operational costs in the long run.
14%
11%
10%
8%8%7%
42%
Chelsea Logistics
Via Marine
SMC Shipping
Petrolift Group
Magsaysay Group
Herma Group
Others
33%
16%9%
8%
8%
26%Chelsea Logistics
Philippine Span AsiaCarrierOceanic
Magsaysay Group
Solid Shipping
Others
14%
11%
10%
8%8%7%
42%
Chelsea Logistics
Via Marine
SMC Shipping
Petrolift Group
Magsaysay Group
Herma Group
Others
33%
16%9%
8%
8%
26%Chelsea Logistics
Philippine Span AsiaCarrierOceanic
Magsaysay Group
Solid Shipping
Others
2016 TANKER CAPACITY SHARE (IN GRT)*
2016 RORO & ROPAX MARKET SHAREBY ROUTE**
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Exhibit 6: Acquisition Schedule
source: CLC Prospectus
Strategic acquisitions serve as main drivers of growth
Recall that over 50% of the proceeds will be used for the acquisition of additional stake in 2GO as well as another shipping company. These acquisitions will serve as the main driver of CLC’s growth as it expands its business in the marine transport and logistics industry. The 2GO acquisition also paves way for increased scale and efficiency for the company as 50% of 2GO’s revenues comes from shipping while the other 50% from logistics services. As of 1Q17, CLC’s combined fleet stands at 58 vessels from 33 in 2016 driven by the consolidation of 2GO’s 25 vessels. This is expected to increase even more throughout the year as the company acquires new ships and also with the possible consolidation of another shipping company.
Management also expects to realize synergies through the acquisitions as they integrate the operations of the acquired businesses. For example, Chelsea intends to reorganize the ticketing and coding systems, employ common marketing and distribution strategies, and streamline the fuel costs of the acquired businesses. In fact, given CLC’s affiliation with PNX or Phoenix Petroleum, 2GO stands to benefit from having a more affordable supplier of fuel. Besides this, the company’s relationship with the SM Group, which owns a 34.5% stake in Nenaco, also provides other business opportunities. Management pointed out that 2GO currently services only about 5% of SM’s logistics needs and this may be an area of opportunity for 2GO’s revenues to grow.
In terms of profits, the restatement of 2GO’s financials brought 2016 net income down to Php330Mil from Php1.3Bil originally. Management explained that 2GO’s growth potential remains fairly intact as the cause for the lower income were largely driven by non-cash and non-recurring expenses such as impairment of goodwill, accelerated depreciation, and provisions. Revenues and revenue growth were hardly changed (see exhibit 7 for details). With this, assuming that earnings will grow 15% annually from the 2GO’s original income of Php1.3Bil (2014 to 2016 compounded annual growth at 26%), 2GO’s 2017 and 2018 earnings would reach Php1.5Bil and Php1.8Bil, respectively. Given CLC’s effective stake in 2GO of 28.2% starting March 2017 and the planned 35.2% stake starting 2018, the company would book equitized earnings amounting to Php322Mil in 2017 and Php617Mil in 2018, respectively. Meanwhile, assuming that the remaining 7% indirect stake in 2GO is acquired at Php17.50/sh or Php3.0Bil (based on 2GO’s 90-day volume weighted price), CLC would only have Php1.0Bil left to spend on acquiring the new shipping company. Assuming that the valuation of the
DisposeNet
Addition Tankers RoPax Tugboats Total Tankers Vessels
2017 1 2 4 7 0 7 40
2018 2 2 0 4 2 2 42
2019 2 2 0 4 2 2 44
2020 1 2 0 3 1 2 46
2021 1 2 0 3 1 2 48
AcquireTotal Fleet
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FIELD NOTES I CLC: A PLAY ON SHIPPING AND LOGISTICS
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new company would be at par with the 2018E median P/E of shipping companies, earnings from this new acquisition would amount to Php94Mil in 2018. Coupled with the profits from CLC’s own operations, consolidated earnings are projected to grow to Php530Mil in 2017. Furthermore, 2018 earnings would accelerate by 79% to Php951Mil still mainly driven by its M&A strategy.
Exhibit 7: Summary of restatements in 2GO’s Income Statement
source: 2GO
Exhibit 8: Earnings Assumption
*2GO’s 2016 earnings is the restated net income figure
Valued at a premium compared to regional comparables
Assuming that CLC’s FY18 net income reaches Php951Mil driven largely by the consolidation of 2GO’s profits and the acquisition of the other shipping company, CLC would be trading at a 2018E P/E of 20.5X based on the offer price of Php10.68/sh. CLC would be priced at a premium compared to its regional peers which are trading at a median 2018E P/E of 10.7X for shipping companies and 13.6X 2018E P/E of logistic companies. Local peer, LBC, is trading at 18.9X 2018E P/E, which is slightly lower compared to CLC’s valuations. Admittedly though, CLC’s growth prospects are more attractive relative to other shipping and logistics companies given the Philippines’ strong economic growth outlook, the company’s aggressive growth plans and potential synergies among the various subsidiaries and related companies.
Given the nature of CLC’s business, a major cost component of the company is tied to oil prices. In fact, 23% of the company’s direct costs are represented by bunkering costs (fuel and lubricants). As such, oil price volatility is a key risk that could significantly affect CLC’s profitability. In addition, the tax reform proposal also adds some risk to CLC’s costs as the bill seeks to place an excise tax of Php3.0 per liter in 2018, Php5.0 in 2019, and Php6.0 in 2020 for diesel fuel, liquefied petroleum gas, and bunker fuel. Management did note that their affiliation with Phoenix Petroleum, which is a business engaged in the trading of refined petroleum products, allows them to mitigate some of this risk. They also intend to engage in forward contracts if needed.
Company Name Ticker 2018E P/ECosco Shipping Development-H 2866 HK 9.98Cosco Shipping Holdings Co-H 1919 HK 15.67Ea Technique M Bhd EATECH MK 4.88Misc Bhd MISC MK 15.27Shipping Corp Of India Ltd SCI IN 16.37Yinson Holdings Bhd YNS MK 12.3Bumi Armada Berhad BAB MK 9.09Cosco Shipping Energy Tran-H 1138 HK 10.65Soechi Lines Tbk Pt SOCI IJ 4.59Chelsea Logistics Corp CLC PM 20.5Median (ex-CLC) 10.7
Company Name Ticker 2018E P/EXinjiang Tianshun Supply C-A 002800 CH 63.75Jwd Infologistics Pcl JWD TB 30.57China Logistics Property Hol 1589 HK 17.27Container Corp Of India Ltd CCRI IN 26.02Vrl Logistics Ltd VRLL IN 19.14Navkar Corp Ltd NACO IN 14.83Allcargo Logistics Ltd AGLL IN 12.36Tasco Bhd TASCO MK 9.15Tiong Nam Logistics Holdings TNL MK 9.36Freight Management Holdings FMH MK 9.64Sinotrans Limited-H 598 HK 9.38Harbour-Link Group Bhd HALG MK 8.02Chelsea Logistics Corp CLC PM 20.5Median (ex-CLC) 13.6
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Execution risk
With CLC’s growth strategies involving fleet expansion and mergers and acquisitions, the company faces a high degree of execution risk. Future earnings growth is contingent on the successful execution of its acquisition of another shipping company as well as the additional indirect stake in 2GO. Any obstacles and delays in acquiring the new shipping company would temper CLC’s earnings growth. In addition, the growth of 2GO and other businesses acquired in the future is dependent on CLC’s ability to realize the potential synergies foreseen by the company.
Highly leveraged position
As of March 2017, CLC had a net debt to equity of 0.87X. This is above the median net debt to equity of regional shipping peers of 0.78X. In addition, CLC only had an interest coverage ratio of only 2.0X in 2016 and 1.4X in 1Q17, making the company at risk from higher funding costs. Although CLC expects to generate Php5.8Bil from its IPO, proceeds are not enough to fund CLC’s planned expansion up to 2021 where it plans acquire a total 21 vessels in five years. Consequently, CLC would have to increase its borrowings further in the next few years.
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FIELD NOTES I CLC: A PLAY ON SHIPPING AND LOGISTICS
FY14 FY15 FY16Cash & Equivalents 181.0 360.0 509.0 Trade Receivables 282.0 540.0 945.0 Inventories 206.0 104.0 79.0 Other Current Assets 269.0 186.0 1,101.0 PPE 5,278.0 5,788.0 7,819.0 Other Non-Current Assets 181.0 266.0 307.0 Total Assets 6,397.0 7,244.0 10,760.0 Accounts Payable 773.0 1,005.0 1,359.0 ST Debts 869.0 1,485.0 5,029.0 Other Current Liabilities 671.0 511.0 226.0 LT Debts 1,584.0 1,468.0 2,343.0 Other Non-Current Liabilities 252.0 236.0 242.0 Total Liabilities 4,149.0 4,705.0 9,199.0 Total Equity 2,248.0 2,539.0 1,561.0 Total Liabilities & Equity 6,397.0 7,244.0 10,760.0
BALANCE SHEET (IN PHPMIL)
Chelsea Logistics Corp. (CLC) is engaged in shipping transport through its wholly owned subsidiaries Chelsea Shipping Corp. and Trans-Asia Shipping. Through Chelsea Shipping Corp., the company mainly provides maritime carriage of petroleum products. Meanwhile, through Trans-Asia Shipping, CLC engages in the transportation of cargo and passengers within Philippine territorial seas. The company currently has 33 vessels under its fleet comprised of 11 tankers, 4 barges, 8 tugboats, and 10 RoPax. In March 2017, CLC forayed into the logistics and supply chain solutions business after acquiring a 28.2% effective interest in 2GO Group.
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