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Rickmers Maritime: A Strong Dividend Yield Play Or Trap?
Corporate Digest | 29 May 2014
By: Shane Goh
Articles (99) Profile

The FTSE Singapore Index provided investors a dividend yield of 3.6 percent over the 12 months ending 5 March. Here’s a company that doubled that figure.

Rickmers Maritime is a business trust that owns and operates containerships. As of 31 December 2013, the trust owns a portfolio of 16 vessels with a total capacity of 66,410 twenty-foot equivalent units (TEU).

The vessels are leased to leading container liner companies, mainly under long-term fixed-rate time charters. Its clients include Mitsui O.S.K. Lines and Maersk Line.

Stagnating Turnover
Rickmers’ revenue for the past five years has gone by without much fanfare, ranging between US$143.5 million and US$149.5 million. Its operating fleet size of 16 has not changed since FY09 either.

At its bottom line, Rickmers suffered a net loss in FY10, due to a one-off US$64 million compensation expense related to an obligation to purchase seven vessels.

If we exclude the expense, the trust’s net profit margin declined 11.5 percentage points to 16.4 percent over the same period.

On a positive note, Rickmers has maintained its fleet utilisation above 98.9 percent from FY09 to FY13. Moving forward, the remaining committed revenue from charter contracts up till 2019 is US$338.7 million.

Revenue And Net Profit Margin

Consistent DPU
In spite of the stagnating top line and falling net profit margin, Rickmers has grown or sustained its distribution per unit (DPU) in the past four years.

The trust raised its annual DPU by 3.9 percent from $0.0231 to $0.0240 between FY10 and FY11, and has maintained that amount since then.

Based on its closing share price of $0.29 on 27 May, Rickmers trailing-12-months yield is 10.5 percent, far outstripping the 3.6-percent yield offered by the FTSE Singapore Index.

However, one has to question, with the income statement in this state, is Rickmers taking on more debt in order to support its consistent DPU?

Improving Gearing And Interest Coverage
A peek into its balance sheet would uncover a shrinking total debt. Rickmers has lowered its borrowings by 36.3 percent, from US$773.6 million in FY09, to US$493.1 million in FY13.

As a result, its gearing level has fallen from 66.2 percent to 48.5 percent over the same period.

Since a large portion of its debt rests under non-current liabilities, investors may be more concerned with the firm’s ability to meet present interest expenses, as opposed to its long-term borrowing obligations.

If we strip away the one-off compensation expense in FY10, Rickmers’ interest coverage, measured by earnings-before-interest-and-taxes divided by interest expense, has maintained above 1.7 times. This means the trust has sufficient income to pay off its annual interest expense.

Moving forward, management has provided a schedule to lower its debt with an average reduction of US$47.2 million over the next three fiscal years. This would lead to further improvement in both its gearing ratio and interest coverage.

Total Debt And Gearing Ratio

Declining Charter Rates
Within its portfolio, charter contracts for five vessels will expire by end-2014 while more than half of the agreements for its fleet would run its course by end-2015. In order to replenish its income flow, Rickmers will need to enter into new agreements.

While obtaining contracts for its vessels, charter rate is a major factor. Although the 4,400 TEU 10-year average stands at US$24,800/day, a glance at the 10-year chart would tell two different tales before and after the Global Financial Crisis in 2008.

Since peaking out in 2005, charter rates for 3,500 TEU and 4,400 TEU have fallen dramatically. Notably, the present rates are much lower than Rickmers’ 2013 average daily charter rate.

If the trend persists, Rickmers may not be able to secure favourable charter rates for its ships.

Container Time Charter Market

    Investment Merits

  • Consistent DPU over the past few years
  • Lowering of gearing ratio and clear schedule to reduce debt
  • High utilisation rate

    Investment Risks

  • More than half of the trust’s charter contracts expire by end-2015
  • Less than positive outlook on charter rates
  • Falling net profit margin

SI Research Takeaway

A company possessing a consistent dividend payout over the past few years checks the list for any investor looking for a high yield stock.

On its balance sheet front, declining debt and a clear outline to reduce borrowings suggests a strengthening of Rickmers’ capital structure and leverage ratios.

However, the lack of visibility on its income statement offers investors little comfort before sinking their coffers into the firm.

I would hold onto my purse strings until Rickmers shed the veil on future of its vessels.

Currently pursuing his Chartered Financial Analyst qualification, Shane provides coverage on the property, consumer and environmental sectors at Shares Investment.

Please click here for more information about this author.

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