Abaci's Common Sense Investing

It's been a little more than one year since I first covered the container shippers. Their prices started out slowly during the 1st half of last year, then skyrocketed until October, and since then have been dropping like a rocket running out of fuel. The price movement has been much wilder than I've anticipated (even though I've seen OOIL rising from $4 to $40 in 2004 I'm still surprised this time around), and I've taken profit much too soon. But I took comfort that I could've made a huge loss as well if I bought them at the wrong time of the year.

Cyclical stocks are all about timing which is very difficult to catch, even shipping companies can get grossly wrong when predicting customer demand. So the only safe entry is to buy at beaten down prices when the need for guessing is reduced to minimum. Like last time I've avoided the analysis of the shipping industry overall because that will be too darn imprecise that even I won't rely on myself. However you can refer to my previous post in Dec 06 for background info and my very basic look at the industry.

A better time to do this review should be April after the full year results have been announced. But since we have earnings forecast from both CSCL and COSCO, there should be reasonable accuracy. And the recent massive sell off should provide additional safety for compensation.

CSCL (2866)
Capitalisation is $37.3b. 07 interim earnings were $1.15b and management forecasted FY earnings to be $3.2b.

P/E is about 11.7x, nothing spectacular. It should've been adjusted lower as the A-share issue was completed toward the end of the year while its effect on earnings (from expansion with the use of the proceeds) will only be seen next year. Still it looks pretty pricey for a cyclical as 07 isn't an average year but a relatively good one. There continues to be a premium for possible injection by the parent company.

OOIL (316)
Capitalization is $28b. 07 interim earnings (recurring) were $1.6b. 07 earnings will probably be higher than $3b but I'd rather be conservative as interim dividend was cut back. So I'd stick to my previous estimate that OOIL should earn $3b in an average year.

The interim report showed OOIL had cash and bonds of $21.5b, with debt of about $16.7b. OOIL's common practice is to have its fleet 80% financed by loans and 20% by equity. The fleet had a book value (net of operational debt) of $23.4b, meaning the entire cash and bonds isn't tied up and could be distributed! Of course part of it would be needed for buying new ships and daily operation. I'd assume $15b is idle cash and distributable.

Properties in U.S. and China had a book value of $5.7b and my assessed value is unchanged at $10b.

Taking out the cash and properties, we have a fleet that's valued at only $3b. And it earns $3b a year! Even if I use book value for properties, the fleet is still insanely cheap at $7.3b! At this valuation, I won't be worried even if earnings drop all the way to $1b.

I think OOIL's share price is approaching liquidation value, except it's far from liquidation and in net cash position.

I'll continue with COSCO in my next post, separately, as its business has changed to largely dry bulk shipping.