J. Lauritzen. Prepared for stormy weather. Credit Insight Norway 5 March Shipping

Transcription

1 Shipping Credit Insight Norway 5 March 215 Corporate rating: B/Negative Public ratings Moody s: N.R. S&P: N.R. Fitch: N.R. Market cap (DKKm) Not listed Indicative spreads 9 85 ODF6 JLA ODF5 ODF NAVIG1 6 SFLN2 55 JLA1 GLOG1 COLG Source: SEB and Bloomberg Prepared for stormy weather A tough market, but fully financed for 216 For 215, we expect the drybulk market to remain oversupplied, but some improvements for the gas carrier business. This implies that s loan to value and cash positions will be under pressure. However, given the prudent steps taken by the management last year, we are of the opinion that the company is fairly well prepared for the challenging market that faces them. The company had USD 184m of cash at hand as of year-end 214, with an additional USD 1m in undrawn credit facilities. Therefore, the company is fully financed for Q2 216, according to our estimates. Additional support to the credit story is given by the average loan to value of 67% (net 37%), as well as the management s track record of being credit friendly and a supportive owner. We have changed our outlook of the company from Stable to Negative in order to reflect the current state of the dry bulk market and that credit metrics may come under pressure, increasing default risk somewhat. That being said, we highlight that given the credit factors above, the company is prepared for the downturn and should be able to come through the challenging times. JLA1 to be paid down with cash, JLA2 trading fairly We expect JLA1 to be paid down with existing cash or refinanced. With regards to JLA2, it is trading at 99.6 (+841bp). We believe there may be some short-term downside risk in bond pricing due to the poor market, but given the solid cash position and average LTV, we find the bonds to be trading fairly and we reiterate our Marketweight recommendation. Q4 report in line with the guidance impairments preannounced s Q4 results were in line with its previous guidance, having reported a profit warning that entailed an impairment of USD 85m on bulk carrier assets, USD 16m impairment charge on vessels within the JV and USD 6m in provisions related to older-term charters. Operationally, the company reported a LBITDA of USD 1m, reflecting a poor dry bulk market. There were some credit positives during the quarter in terms of financial risks: the company has refinanced a total of USD 225m of debt that matures in and the company appears fully financed for the upcoming year. Analyst Alexander Jost (47) alexander.jost@seb.no Key credit metrics & ratios E 216E 217E Revenue growth -16.% 14.2% -48.9% -.8% -17.4% -6.5% -4.1% Adjusted EBITDA margin 23.5% 47.9% 45.8% 49.3% 56.9% 65.1% 78.6% Adjusted EBIT margin 8.8% -1.9% -.9% 3.7% 3.9% 11.7% 22.6% Adjusted EBITDA net int. cover. (x) Adjusted net debt to EBITDA (x) Adjusted net debt to capital 49% 71% 64% 59% 77% 79% 8% Adjusted FFO / Net debt 4% 9% 9% % 5% 6% 7% The estimates in this research report have been produced in collaboration with SEB equity research analysts Source: SEB Important. All disclosure information can be found on pages 8 9 of this document

2 Credit strengths Long established shipping sector expertise and solid market position in selected segments. Sound contracting policy secures long-term coverage in highly volatile segments. Young, modern diversified fleet with an average age of five years. Supportive owner in the Lauritzen foundation, which has recently converted subordinated loans to equity. Credit concerns Cyclical business with significant embedded capital intensity. Private ownership provides limited transparency and restricts access to equity markets. Weak economic outlook and a retained large order book create risk of prolonged weak shipping markets. Selected outstanding bonds Issuer Ticker Our view Sector Issue date Maturity date Coupon Outst. Amount mid price ASW Recommendation J Lauritzen A/S JLA1 B/B- Shipping % NOK 7m Marketweight J Lauritzen A/S JLA2 B/B- Shipping Nibor NOK 5m Marketweight Source: Bloomberg and SEB Indicative spreads JLA1 Source: SEB and Bloomberg ODF5 ODF4 JLA2 NAVIG1 SFLN2 GLOG1 ODF6 COLG Financial statement summary (USDm) Income statement E 216E Adjusted revenues Adjusted EBITDA Adjusted EBIT Cash flow statement E 216E Funds from operations (FFO) Change in working capital Operating Cash Flow Free Operating cash flow Baltic Dry Index Source: Bloomberg Feb.14 Mar.14 Apr.14 May.14 Jun.14 Jul.14 Aug.14 Sep.14 Oct.14 Nov.14 Dec.14 Jan.15 Feb.15 Revenues and EBITDA margin (USDm) (%) E 216E 217E Total revenues EBITDA margin Balance sheet E 216E Adjusted net debt / EBITDA Adjusted cash (and equivalents) (x) Adjusted total debt 1,462 1,13 1,727 1, Adjusted net debt 1, ,664 1,738 Adjusted equity Key credit metrics & ratios E 216E Adjusted net debt to EBITDA (x) Adjusted net debt to capital 64% 59% 77% 79% Adjusted FFO / Net debt 9% % 5% 6%. Adjusted RCF / Net debt 9% % 5% 6% E 216E 217E Equity ratio 39% 47% 47% 42% Source: SEB and financial reports Source: SEB and financial reports SEB Credit Research 5 March 215 2

3 Prepared for stormy weather 214 was a tough operational year for, hampered by an oversupplied dry bulk market, which after experiencing some positive signs during the beginning of the year saw charter rates reaching near all-time lows towards the last quarter of 214, with day rates reaching close to vessel opex. The gas carrier market was impacted by the lower oil price, where the volatility in energy prices caused traders to almost halt their operations in the last months of 214. Baltic Dry Index Feb.14 Mar.14 Source: SEB and Bloomberg Apr.14 May.14 Jun.14 Jul.14 Aug.14 Sep.14 Oct.14 Nov.14 Dec.14 Jan.15 Feb.15 EBITDA for the year was USD 16m, where Bulkers generated USD 6.4m and Lauritzen Kosan reported USD 18m in EBITDA (the numbers do not add up due to overhead costs), while cash flow from operations was USD 6m. We expect a continued oversupplied market within dry bulk, together with limited improvement in the gas carrier market. Compared with year-end 213, has taken many tough but necessary decisions in order to strengthen the company s balance sheet: Divestments of the Shuttle Tanker and Product Tanker business released necessary cash and deleveraged the balance sheet. The further refinancing of bank maturities has also substantially reduced refinancing risk in. The strategy of having capesize vessels without long-term contracts towards solid counterparties has also limited its market exposure in what appears to be a tough dry bulk market. As of year-end 214, the company could report a gross loan to value of 67%, USD 184m in cash giving a net loan to value of 37%. With an additional USD 1m in unutilised liquidity from a revolving credit facility, s financial flexibility has strengthened substantially since the previous year. The company has USD 139m of committed capital expenditures for its own newbuilding programme, having received financing related to these newbuilds for a total of USD 19m. We expect the company to be fully financed for 215. However, unless the market improves, the company may need some additional liquidity in 216 or 217 (depending on if it chooses to refinance the JLA1 bond maturing in 215 or pay it down in cash). We expect an oversupply dry bulk market in 215 In line with s view of the dry bulk market for 215, we expect further oversupply in the dry bulk market, while we expect limited rate improvements in 215 for the gas carriers but a large improvement over Q4 as we expect the stabilization of energy prices to increase activity towards the end of Q1 and onwards. SEB Credit Research 5 March 215 3

4 Annual rate history and forecast, USD/day TCE rates, USD/day, Averages E 215E 216E Capesize 7,3 51,98 44, ,365 97,747 41,161 3,892 14,153 8,375 16,349 13,975 11,88 13,625 Panamax 32,528 24,378 23,854 56,832 48,835 19,416 25,157 13,959 5,857 6,614 6,744 8,515 8,515 Handy 31,27 21,455 2,284 42,457 33,522 14,878 19,281 12,34 7,686 11,58 9,972 8,866 8,375 Source: Clarksons, SEB Quarterly rate history and forecast, USD/day TCE rates, USD/day, Averages Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 Q3/14 Q4/14E Q1/15E Q2/15E Q3/15E Q4/15E Q1/16E Q2/16E Q3/16E Q4/16E Capesize 5,61 7,398 12,951 31,598 18,85 9,85 9,183 16,333 1,51 9,414 9,88 17,5 12, 12,5 12, 18, Panamax 4,322 5,739 5,894 1,5 7,932 4,467 4,244 1,333 7,625 7,127 7,37 12, 7,625 7,127 7,37 12, Handy 8,949 1,827 1,66 15,883 13,462 9,434 7,819 9,171 8,16 7,659 7,787 12, 8, 7,5 8, 1, Source: Clarksons, SEB Gas carriers rate estimates 215E 216E 217E 8 cbm 13,95 14,8 15,8 6 cbm 13, 14, 14,2 45 cbm 6,7 6,7 6,7 32 cbm 8,9 9,8 1,4 FP 6,7 7, 7,3 Source: SEB has significantly better contract coverage for its dry bulk fleet compared with last year; particularly for the Capesize vessels with 71% coverage (two owned vessels are on long-term contract while part of the time charter is un-contracted for 215). The Supramax vessels on charter hire have significantly more visibility in 215 over 214, while the gas carriers are in line with last year. Contract coverage significantly better than 214 for dry bulk 8% 7% 6% 5% 4% 3% 2% 1% % Source: Company reports Capesize Supramax Handysize In line for gas carriers 8% 7% 6% 5% 4% 3% 2% 1% % Source: Company reports Ethylene Semiref Fully pressuriszed Vessel values were on average down 9% y-o-y, where 7% of the 9% slide in valuation related to the second half of 214, as the drybulk market weakened. Meanwhile, the gas carrier fleet values remained relatively stable, dropping 2% in valuation according to ship brokers. For 215, we expect the gas carrier valuation to remain steady, while we believe there is some downside risk to the drybulk fleet. Note that the book values on the capsize reflect the value of the contracts in place (which are against a strong counterparty) and contrary to what the chart below may seem to indicate, we do not believe there is a significant risk for write-downs. SEB Credit Research 5 March 215 4

5 Average loan to value of 67% for the drybulk fleet Handysize Capesize Book versus market value Handysize Higher than market value due to firm contracts Capesize Market Value Debt Book Market Value Source: SEB and Company reports Source: SEB and Company reports The drybulk fleet has an average loan to value of 67%, but we believe there are risks of asset valuations continuing to decline. However, assuming a 125% asset cover ratio (the typical asset coverage requirement for the bank facilities) the company still has 25% headroom in terms of asset cover to reach bank covenants, with the drybulk fleet reported at 15% asset cover (not value weighted). The gas carrier fleet had a LTV of 59%, with a reported average asset cover of 168%, giving comfortable headroom to bank covenants. Average loan to value of 59% on gas carriers Conservative book values Semi ref Fully pressurized Ethylene Semi ref Fully pressurized Ethylene Market Value Debt Book value Market Value Source: SEB and Company reports Source: SEB and Company reports Financial forecast In our base forecast, we expect an EBITDA of USD 5m in 215, improving to USD 17m by 216 and USD 45m in 217. These rates suggest a net cash outflow from operations of USD 26m in 215 and USD 16m in 216. We expect the current cash position to worsen over the year, a result primarily driven by capital expenditures (USD 47m in 215) and the cash outflows from operational activities after debt repayment. In our forecast, we have assumed a full draw-down on the RCF and newbuild facility in addition to a refinancing of the bonds. The company would need some additional USD 88m of liquidity to sustain a healthy cash balance of USD 48m by year-end 217 in our model, and we have assumed this would be financed through debt. In our view, the company is fully financed from 215 to Q2 216, and assuming refinancing of JLA1 (which at the current point could be paid down in cash or through drawing its RCF) it is fully financed for 216. If the debt markets are not available at this time, we expect the Lauritzen foundation (1% owner of ) to be willing to support the company. The Lauritzen foundation owns, among other things, 43% of DFDS (market cap USD 1.3bn). SEB Credit Research 5 March 215 5

6 Cash bridge (USDm) Source: SEB Cash YE 214 Operating cash flow Change in debt Assumed refinancing of JLA1 (USD 54m outstanding) Capex 215 Cash YE 215 Operating Change in cash flow debt 216 Draw down on RCF and newbuild facility Capex 216 Cash year Operating Change in end 216 cash flow 217 debt Assumes refinancing of 217 bond and USD 88m additional in debt Capex 217 Cash position at year end s low LTV implies some financial flexibility as assets are liquid A further source of financial flexibility could be through asset sales. operates in a market were the assets are highly commoditised and a relatively liquid second hand market. has some USD 25m in asset values after debt repayments, which could be used as a source of additional liquidity. For instance, selling the gas carriers (USD 142m in terms of net asset value) or dry bulk vessels (USD 18m NAV on the handysize fleet) could be a substantial source of liquidity, if needed. s management has taken the appropriate choices in terms of honouring debt commitments and we expect this to continue. Market values and debt - potential sources of liquidity through asset sales Market value Debt Potential liquidity Handysize Capesize Contracted and not likely to be sold Semi ref Fully pressurized Ethylene Total 25 Source: SEB SEB Credit Research 5 March 215 6

7 Profit & loss statement (USDm) E 216E 217E Total revenues Total expenses EBITDA Depreciation Intangibles amortisation -2 EBIT Associated companies Net interest expenses Value changes Other financial items Reported pre-tax profit Minority interests Total taxes Net profit EBITDA margin EBIT margin (%) (23.2) (16.) (11.6) (14.5) (8.) 2. Tax rate (%) (6.2) Growth rates y-o-y (%) Total revenues (27.5) 48.9 (15.9) 15.1 (49.4) (.2) (15.4) (6.5) (4.1) EBITDA n.a. 87. (42.1) (39.2) (91.8) 19.3 (68.2) EBIT (72.5) Pre-tax profit Cash flow (USDm) E 216E 217E FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds 1, Share issue Other Net change in cash Capex/sales (%) Balance sheet (USDm) E 216E 217E Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets 1,51 1,929 2,215 1,752 1, Intangibles Total assets 2,188 2,411 2,682 2,315 1,875 1,28 1,8 1,1 1,125 Interest bearing debt 936 1,54 1,394 1, Other liabilities Minority interests Shareholders' equity 1,126 1,239 1, Total liabilities and equity 2,188 2,411 2,682 2,315 1,876 1,28 1,81 1,1 1,125 Net debt (m) ,16 1, Net debt/equity (%) Equity/total assets (%) Net debt/ebitda (x) EBITDA Interest cover Main shareholders Management Company information Name (%) Votes Capital Title Name Contact Lauritzen Fonden COB Bent Østergaard Internet CEO Jan Kastrup-Nielsen Phone number CFO Birgit Aagaard-Svendsen Company description: Founded in 1884, J.Lauritzen is a shipping company with a modern and diversified portfolio. Its current fleet of 178 vessels has an average age of five years and operates in the dry bulk, small gas tanker, product tanker and offshore services. The company is fully owned by the Lauritzen foundation Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 5 March 215 7

8 Credit Research Disclaimer Authors' statement of independence (Analyst Certification) We, the authors of this report, hereby confirm that notwithstanding the existence of any such potential conflicts of interest referred to herein, the views expressed in this report accurately reflect our personal views about the companies and securities covered. We further confirm that we have not been, nor are or will be, receiving direct or indirect compensation in exchange for expressing any of the views or the specific recommendation contained in the report. None of the authors of this research report are registered or qualified as a research analyst, representative or associated person under the rules of the FINRA, the New York Stock Exchange any other US regulatory organization or the laws, rules or regulations of any State in the USA. 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9 Company specific disclosures and potential conflicts of interest: A member of, or an entity associated with, SEB or its affiliates, officers, directors, employees or shareholders of such members (a) is not, and has never been, represented on the board of directors or similar supervisory entity of, (b) has from time to time bought or sold the securities issued by the company or options relating to the company, (c) SEB or its affiliates beneficially own less than 1% of a class of common equity securities of, and (d) SEB or its affiliates beneficially do not own debt securities of, as of 28 Feb 215. SEB or its affililiates is a market maker or liquidity provider for the financial instruments of the company. The analyst(s) responsible for this report (jointly with their closely related persons) hold(s) shares, employees of SEB, Oslo Branch hold shares, and SEB, Oslo Branch holds shares in (not including shares held as hedge against derivatives positions). Explanation of Credit Research recommendations: SEB derives its Recommendations from its appraisal of the Credit Rating of the issuer (itself derived from business risk profile and financial risk profile and from other factors). SEB uses the following recommendation system for the corporate bond market: Overweight over the next six months we expect a position in this instrument to exceed the relevant index, sector or benchmark. Marketweight over the next six months we expect a position in this instrument to perform in line with the relevant index, sector or benchmark. Underweight over the next six months we expect a position in this instrument to underperform the relevant index, sector or benchmark. SEB uses the following recommendation system for CDS spreadsheets: Buy we expect the CDS to outperform the sector performance Neutral we take a neutral view on the CDS, and do not recommend either a buy or sell Sell we expect the CDS spreads to underperform the sector performance. Credit Watch Negative When an identifiable event or short term trend has occurred and when additional information is needed to evaluate the impact on the current rating but the likely outcome is a negative rating change. Credit Watch Positive - When an identifiable event or short term trend has occurred and when additional information is needed to evaluate the impact on the current rating but the likely outcome is a positive rating change. Credit Watch Developing When an identifiable event or short term trend has occurred and when additional information is needed to evaluate the impact on the current rating and the likely outcome is uncertain SEB also assigns credit ratings, definitions of which can be found on our website: Methodology SEB s Credit Research assigns its credit rating to an issuer based on the assessment of an issuer s business risk profile as well as its financial risk profile. The business risk profile includes country risk, industry risk, competitive position, and profitability. The financial risk profile includes financial policies, accounting, cash flow adequacy, capital structure and liquidity. The outcome of the assessment of the two risk profiles is weighed together for a final overall rating. In addition to SEB s credit rating assessment, other factors considered in a particular issuer include the credit ratings assigned to a specific issuer by independent agencies, the value and market price of its securities, macroeconomic factors such as interest rates, promised coupon or yield of the specific instruments, and historical spread developments. Credit Research Distribution (as of 1 Dec 214) A* B* Overweight 17.3% 5.9% Marketweight 63.% 17.3% Underweight 19.7% 6.5% A* denotes recommendations for all companies covered B* denotes recommendation for companies to which SEB has provided investment banking services in the last 12 months. Recommendation History Instrument Recommendation Date J Lauritzen 24 Oc 217 N3M+825 Marketweight 16 May 214 J Lauritzen 5 may % Marketweight 16 May 214 Recommendation changes by SEB Credit Research Analysts in the subject company over the past 12 months. If no recommendation changes were made in that period, the most recent change is stated. SEB Credit Research 5 March 215 9

10 Copenhagen Bernstorffsgade 5 DK-1577 Copenhagen Telephone: Capital Markets Sales Telephone: Treasury Sales Telephone: Frankfurt Stephanstrasse DE-6313 Frankfurt am Main Telephone: Capital Markets Sales Telephone: Gothenburg Östra Hamngatan 24 SE-45 4 Göteborg Telephone: Treasury Sales Telephone: Helsinki Unioninkatu 3 FI-1 Helsinki Telephone: Capital Markets Sales Telephone: Hong Kong 17/F Jardine House 1 Connaught Place, Central Hong Kong Telephone: London One Carter Lane London EC4V 5AN Telephone: Forex & Money Market Telephone: Treasury Sales Telephone: Malmö Östergatan 39 SE-25 2 Malmö Telephone: Treasury Sales Telephone: New York Oslo 245 Park Avenue, 33rd Floor Filipstad Brygge 1 New York, New York 1167 NO-123 Oslo Telephone: Telephone: Capital Markets & Treasury Sales Capital Markets Sales Telephone: Telephone: Treasury Sales Telephone: Stockholm Kungsträdgårdsgatan 8 SE-16 4 Stockholm Telephone: Capital Markets Sales Telephone: