Ship Finance International: Cruising on Profits
by: Tim Plaehn posted on: August 24, 2008 | about stocks: FRO / SFL
I should not be bored owning a high yield stock that is this consistent, but the quarterly earnings reports for Ship Finance International Ltd (SFL) almost makes it difficult to write an interesting analysis. (Call Transcript)
Ship Finance has developed a business model that appears to be bullet proof and the market puts such a low value on the company there appears to be no room for a negative surprise. This quarter SFL increased the quarterly dividend 2¢ to 58¢, giving the stock a current yield of about 8.4%. This makes 18 straight quarters where the dividend has been stable or increased.
Here is a little background and some numbers that I think show the stability of Ship Finance. The company was spun off by Frontline Ltd. (FRO) in 2004 with 40-some of Frontline’s tankers, which have been leased back to FRO. 39 of SFL’s vessels are still leased to FRO and in the last 4 years SFL has increased its fleet to a total of 71. Oil tankers now make up approximately half of the fleet as the company has diversified into dry bulk, container ships, offshore supply ships, drill rigs and chemical tankers. Most of the leases require the lessees to pay ongoing expenses and SFL books steady profitable cash flow from each lease. The fleet has an average remaining charter term of 13.4 years.
I love the cash flow: From the fixed charter payments the cash flow (EBITA minus interest) per quarter is $1.11 per share, excellent coverage for the 58¢ dividend. In addition to the regular lease payments SFL has a profit sharing agreement with Frontline to receive 20% of the revenue over a fixed charter rate. This amount came at 46¢ a share for the excellent 2nd quarter. The profit share has averaged over 30¢ per share for the last 18 quarters. Ship Finance will also take advantage of profitable sales opportunities. The company recently sold two new-build tankers to be completed next year for $111 million each providing a profit of $68 million (about 50¢ per share) to be booked next year.
The company is using the excess cash flow to pay down debt and as capital to invest in fleet expansion. All deals are viewed with the goal to increase the quarterly distribution. They have ready access to financing and structure new deals to minimize capital and interest rate risk.
I look forward to future dividend increases and would not mind if the market started pricing the stock like the stable dividend payer it is, a 6.5% yield would give a $35 share price. I think the stock is definitely a buy anytime the yield pushes into the mid 8s. SFL is a component of this site’s Income Portfolio.
Note: I have a long position in SFL.
