Ship Finance International Sailing, No Matter What

Source: World Maritime News

Investment Thesis

Ship Finance International (SFL) is a reliable and versatile shipping company that I have held in my long-term portfolio for many years now. The shipping company has delivered outstanding results by continuously adjusting its business model to the inherent necessity of a difficult shifting market environment.

The dividend yield is now about 11.5%. The fourth-quarter dividend was $0.35 per share which was the company's 60th consecutive quarterly dividend.

Thus, I continue to recommend this company as a long-term investment because I do not see any notable changes in the way Ship Finance International is handling business that would warrant any change of heart. On the contrary, this quarter is showing again how aggressive is management to adapt and prosper by continuously investing in one of its four distinct business segments to maximize cash flow.

Hence, as I said in my preceding article, I recommend trading the stock while investing long-term, to take advantage of the inevitable ups and downs of this volatile market. Using 30% of your holding to trade the stock based on the RSI(14) should be an excellent idea that could increase your profit significantly while offering extra security. Any weakness below $12 should be an opportunity to accumulate for the long term and conversely selling a little when the company is trading above $14.50.

Ole Hjertaker, the CEO, said in the conference call:

2018 has been an active year with multiple transactions. We have grown our backlog by more than $1.3 billion and seen a major change in the fleet mix. At the same time, we have divested several older uneconomic assets, including several VLCCs from the company's initial fleet in 2004.

SFL - The raw numbers: Fourth quarter of 2018

Ship Finance International 4Q'16 1Q'17 2Q'17 3Q'17 4Q'17 1Q'18 2Q'18 3Q'18 4Q'18
Total Revenues in $ Million 97.85 96.88 94.22 93.67 96.10 92.35 96.80 111.0 118.57
Net Income in $ Million 28.53 32.28 20.11 28.73 20.09 24.66 15.77 29.93 3.47
EBITDA $ Million 92.33 66.01 64.81 61.64 64.41 65.93 66.39 87.50 n/a
Adjusted EBITDA in $ Million 120.64 118.68 117.63 115.08 116.82 99.51 107.72 120.50 125.95
Profit margin % (0 if loss) 29.2% 33.3% 21.3% 30.7% 20.9% 26.7% 16.3% 26.8% 2.9%
EPS diluted in $/share 0.31 0.32 0.22 0.29 0.20 0.24 0.15 0.28 0.03
Operating cash flow in $ Million 50.2 45.5 55.6 32.0 44.7 50.0 44.1 51.7 54.4
CapEx in $ Million 5.8 11.3 1.2 69.2 0.0 0.0 511.0 210.0 416.7
Free Cash Flow in $ Million 44.4 34.3 54.4 -37.2 44.7 50.0 -466.9 -158.3 -362.3
Total Cash $ Million 213.2 222.3 393.0 393.7 279.1 265.1 258.4 271.1 298.6
Long-term Debt in $ Million 1553 1538 1672 1712 1504 1435 1916 1955 1437
Dividend per share in $ 0.45 0.45 0.35 0.35 0.35 0.35 0.35 0.35 0.35
Shares outstanding (Basic) in Million 93.51 93.51 93.51 93.51 102.93 105.02 107.61 107.61 119.37

Source: SFL filings and Morningstar

Total liquidity is a tricky element for SFL. However, SFL owns 11 million shares of Frontline. In the conference call:

As mentioned, we have total available liquidity of $212 million at the end of the quarter, including cash in our subsidiaries accounted for as investment in associates. In addition, we have available for sale securities of $87 million, which includes investment in senior secured bonds and old securities. The fair value of approximately $26 million at quarter end. In addition to 11 million shares in Frontline with a current market value of approximately $64 million based on the closing share price yesterday.

Trends and Charts: Revenues, Earnings Details, Free Cash Flow, and Backlog discussion.

1 - Operating Revenues Operating revenues were $118.6 million compared to $96.1 million a year ago and up 23.4% sequentially. The company had net income of $3.5 million for the fourth quarter of 2018 or $0.03 per share.

The net income is after a non-cash impairment charge of about $36 million, relating to five offshore support vessels from Solstad, mitigated by gains relating to the sale of other offshore assets.

2 - Free cash flow

Free cash flow or FCF is a fundamental financial component that I always indicate as a primary component of the balance sheet. The FCF should be adequate if the business model can be considered stable, especially for a company paying a high dividend. However, in some cases, the FCF can be confusing when the company is purchasing vessels as SFL did in 2018.

And in fact, 2018 has been a busy year with multiple significant transactions for Ship Finance. The long-term benefits are clear, and the immediate adverse effects are just temporary. SFL shows an FCF of minus $937.5 million in 2018. Dividend payout is now $166 million based on ~119 million shares, which cannot be covered by the Free Cash Flow 2018. Thus, SFL is not passing the FCF test.

3 - Net debt

SFL net debt is now $1.138 billion using cash and cash equivalent plus available securities for sale. The debt-to-adjusted EBITDA ratio as a defining guide:

Long-term debt is $1.437 billion and adjusted EBITDA 2018 is $453.58 million (please see table above).

SFL has a debt/Adjusted EBITDA of 3.1, which is robust and lower than the shipping industry in general. In the conference call:

In the fourth quarter, we concluded refinancing in the term of lease financing for six large container vessels with cash proceeds of $570 million with net liquidity effect of $130 million at very attractive terms. We have also repurchased approximately $28 million of our convertible notes in the open market, which we from time-to-time do, with a gain of $1.5 million recorded in the fourth quarter.

4 - Total Backlog (diversified fleet of 86 vessels and rigs)

Source: SFL Presentation

The company is continuing its fleet renewal process and sold another two older VLCCs (Front Ariake and Front Falcon) in the fourth quarter. SFL received $51 million in proceeds.

Also, Ship Financial sold the 2007 build jack-up Soehanah for approximately $84 million, delivered in December. Ole Hjertaker, the CEO, said in the conference call:

In December, we sold the 2007 built jack-up Soehanah for approximately $84 million. The rig was debt free, and we recorded a book gain of nearly $8 million in connection with the transaction.

The company also sold some financial investments in Golden Close Maritime Corp Limited, whose only asset was the drillship Deepsea Metro 1.

The drillship was sold for $262.5 million in 2018, and Ship financial received about $45 million from the redemption of bonds and cash dividends on shares the company owned. It was a gain of approximately $13 million recorded in the quarter. Golden Close still has some minor assets.

The company noted that as of December 31, 2018, and adjusted for subsequent acquisitions and divestments, the fixed rate charter backlog was approximately $3.8 billion, with an average remaining charter term of 8.6 years, weighted by charter revenue. Ole Hjertaker, the CEO, said in the conference call:

Following the recent acquisitions, our charter backlog now stands at approximately $3.8 billion. The bulk of transactions last year was related to container vessels, so the liner segment now represents more than 50% of our backlog, up from around 25% at year-end 2017. The offshore segment has come down from more than 40% one year ago, to 27% at the end of 2018, while the tanker segment has come down from around 20% to 7%.

Let's have a look at the different business segments at the end of 2018.

  • The tankers' segment: The spot market for crude oil tanker saw an increase in rates across all sectors in 2018, particularly the VLCC market which produced its strongest quarter in the past two years. Now, entering the year 2019, the market is softening compared to the previous quarter.
  • The liner's segment is growing significantly and represents now 52% of the backlog.
  • The Dry bulk and offshore. On the dry bulk side, SFL has 22 dry bulk vessels in the fleet with 14 larger ships contracted out on a long-term basis and seven Handysize vessels and the Supramax bulkers traded in the spot market. The company finalized the financial restructuring of Seadrill in early July last year which enabled the company to reduce its financial exposure significantly.
  • Offshore supplement: Ship Finance owns five offshore support vessels on long-term charters to a non-recourse subsidiary of Solstad Offshore ASA. In December 2018, Solstad began discussing a possible restructuring of its balance sheet. SFL has recorded impairments totaling $35.7 million, which brings the book value in line with charter free broker estimates at year-end. SFL has also removed these charters from our charter backlog, to present a more conservative forecast for our backlog. Finally, the company has a limited corporate guarantee of $30 million on the related bank financing of the affected vessels. The exposure is considered marginal for SFL.

Conclusion and Technical analysis (short term)

Ship Financial International is an impressive maritime shipping business with an extensive and diversified fleet. What I wanted to show above is that the company is adapting continuously and is delivering on cash flow. The new focus on the liners, significant acquisitions and proper handling of the Seadrill restructuring are proving the resilience of this company.

Looking forward, recent enhancements to the company's fleet is generating increasing adjusted EBITDA as the chart below is evidencing. Hence future higher net cash flow and income.

Technical Analysis

SFL is forming an intermediate ascending channel pattern (not indicated in the chart above) with line resistance at $13.50 (I suggest selling about 15% of your position at this level) and line support at about $12 (I recommend accumulating at $12 and below).

On the downside, in case of a breakout I see a re-test of $10.50 again (double bottom support, at which point SFL is a definite buy). The long-term resistance is $14.50 and high target at $15 in 2019.

Author's note: If you find value in this article and would like to encourage such continued efforts, please click the "Like" button below as a vote of support. Thanks!

Disclosure: I am/we are long SFL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.