Ship Finance International: The Big Boats Are Thriving

Includes: CSD, SFL
by: Andrew Corn

The Hamilton, Bermuda headquartered Ship Finance International Ltd. (NYSE:SFL), is a spin-off company in our Clear Spin-Off Index, which is now invest-able through the Claymore Clear Spin-Off ETF, symbol (NYSEARCA:CSD), that engages in shipping through the ownership and operation of oil tankers. Now operating one of the largest fleet of tankers in the world, SFL was formed in 2003 and spun-off from Frontline Ltd. (NYSE:FRO) in June 2004. Its current market capitalization is $1.72 billion and the firm generates $438.75 million in annual revenue.

SFL currently owns and operates 50 vessels, including 28 VLCCs, each having a capacity of 260,000 to 309,000 deadweight tonnage, and 22 Suezmax tankers, each having a capacity of 150,000 to 170,000 dwt, forming one of the highest combined cargo capacities in the world, 11.7 million dwt. The firm also creates revenue from the purchase and sale of vessels after chartering them. For instance, this year it sold a vessel for proceeds of $45 million, to be used for further growth into other business areas.

One such area that the business is expanding into is the containerization sector. The company recently purchased two 1,700 TEU containers along with five 2,850 TEU container vessels to be delivered by May 2007. These vessels are already planned to be chartered on long term contracts to Horizon Lines Inc. (HRZ). Among other recent sales and purchases of vessels, SFL has assumed two Suezmax tanker contracts to be delivered in 2009 from Frontline.

Its financial performance is thriving, with one year operating margins of 69.09% that are more than two times the 30.73% average posted in the sector. Its gross margin is as well impressive at 73.30%, compared the industry average of 55.03%. Also, the trailing twelve month return on equity [ROE] of 36.05% is third highest in the industry and significantly above the average ROE of 20.10% posted by its competitors.

Since its IPO on June 17, 2004, the stock has already grown by 105%. Despite such stellar performance, we calculate that the market has not properly recognized the true valuation of the stock. For instance, SFL has a price to earnings (P/E) ratio of 8.43 which is less than the shipping industry average of 11.20.SFL is being punished for running a high margin slower top line growth than the industry average. After crunching the numbers and following SFL’s diversification, we anticipate mid- to long-term gains on this investment.

SFL 2-yr chart:

SFL chart

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