Hubline on verge of turnaround

by **Cals** Sun 20 Oct 2013, 18:40

Published: Saturday October 19, 2013 MYT 12:00:00 AM
Updated: Saturday October 19, 2013 MYT 6:21:27 PM
Hubline on verge of turnaround
BY JOHN LOH
[You must be registered and logged in to see this image.]
Hubline's container ship Hub Enzo

THE past few years were nothing if not trying for Hubline Bhd, but the Sarawak-based shipping firm is eyeing a turnaround now that most of its bad assets have been written off.
Executive chairman and CEO Dennis Ling tells StarBizWeek that the company has reached the end of a series of painful cuts and impairments, which dented its profitability in the wake of the 2008 global financial meltdown.
“We had been saddled with these huge write-offs. But we aren’t scrapping any more vessels. We’ve gotten rid of all the inefficient ships,” he says.
Hubline has jettisoned over 10 vessels since the financial crisis sent global trade into a tailspin. Six were scrapped this year alone, resulting in combined losses of RM54.7mil as at end-June.
In total, Hubline may have to write off close to RM200mil for the just ended financial year to Sept 30 (FY13), sources familiar with the company say.
Nonetheless, this is a loss the group can stomach, Ling says. Those costs are unlikely to recur in FY14, he adds.
Despite the global slump in shipping, Hubline’s operating efficiencies are already showing in its balance sheet – gross profit margins had doubled to 14% in 2012 from 7% in 2010. That number is set to improve in FY13, Ling says.
Meanwhile, Hubline has been approached to restart its fledgling oil and gas (O&G) support services division, which the group had shuttered when the market turned for the worse in 2008.
Ling reveals that Hubline is in talks with potential joint-venture partners to charter offshore supply vessels (OSV).
Although this is still in planning, the company could opt to buy anchor handling tug supply (AHTS) ships, standby vessels and accommodation barges in anticipation of a surge in demand for O&G support services, backed by Petronas’ five-year, RM300bil investment to reverse Malaysia’s declining crude oil production.
Ling feels the time is right for Hubline to make a second attempt at O&G. The shipper had, in fact, ordered two new AHTS before the banking crisis. Then 2008 happened.
“Because it was a new division, we decided it would be more prudent to sell the ships,” he says. The crisis notwithstanding, Hubline disposed of the two OSVs for a tidy profit of RM20mil.
Should Hubline proceed with the O&G venture, Ling feels he can jump right in.
“Our operational and technical teams are ready,” he quips. “It will be a natural progression for us.”
Although he declines to say if any capital expenditure has been earmarked for O&G, Ling notes that the charter fees will be “more than enough” to offset the required investments.
“Our banks also need to see that the business will pay for itself, or they wouldn’t be willing to fund us.”
Mid-sized, newbuild AHTS in the 10,000 brake horse power range and with DP2 capability carry a market value of US$20mil (RM63mil), analysts say.
Shrewd businessman
The post-crisis period has been a time of great upheaval for the entire shipping industry, Ling explains.
“This crisis is different. The down-cycle has lasted longer than usual. It’s been six years now,” he says.
Freight rates plunged by over 20% after the global financial crisis, while bunker fuel costs have increased, both in absolute terms and as a percentage of total costs, he notes.
“We paid US$10/barrel for bunker during the Asian financial crisis in 1998. It is about US$100/barrel currently and 35% of our costs, compared to only 15% in 1998.”
Hubline, which operates both container and dry bulk shipping, wasn’t spared. In addition to a persistent oversupply that depressed freight rates, the intra-Asian trade routes plied by Hubline have also stayed anaemic.
According to CIMB Research, excess supply in the container shipping segment could rise and would only abate by 2016-2017 at the earliest.
The dry bulk market will fare slightly better in its assessment. Raymond Yap of CIMB Research says in a report that based on new ship orders placed at shipyards, “it is clear that many shipowners believe the dry bulk market has bottomed and a recovery is just a year or two away”.
But don’t expect freight rates to bounce back so soon, Yap cautions, pointing to the existing 30% glut in dry bulk vessels globally. He adds that demand will continue to lag supply in 2013, although a bright spot may emerge in 2015.
Not that any of this is alien to Ling, who has proven to be a shrewd businessman in tough times.
The chartered accountant and former partner of consulting firm Arthur Andersenshowed his deftness at diversification when in 2007 Hubline acquired a controlling stake in Highline Shipping Sdn Bhd, facilitating its entry into the lucrative dry bulk business.
It now owns 100% of its dry bulk arm, which transports mainly coal, gypsum and palm kernel chaff.
Ling had bought Highline just in time for the 2007-2008 dry bulk “super-cycle”, an event analysts don’t expect to happen again within the century.
Save for the recent down-cycle, Ling says Hubline has never made losses since he founded it in 1993.
“We even grew through the Asian financial crisis. In a good year, Hubline used to rake in about RM70mil-RM80mil a year.”
Even so, he looks at the current turmoil as an opportunity to clean house and start afresh.
Catching the wave
Ling remembers how the banks, at the peak of the 1998 Asian currency crisis, were reluctant to lend money.
“We had nine vessels on charter. Hubline hadn’t yet been listed. We knew that if we continued chartering, we still wouldn’t have any ships by the end of the crisis.
“So we negotiated with the owner for the vessel. We were in a buying spree – everything was so cheap. We obtained this vessel for US$1.7mil, upgraded it for US$500,000 and after crisis chartered it out at US$14,000 per day.”
In another instance, when Ling sought to acquire ships from a troubled firm, his bankers were glad to extend him 100% financing.
Ling made the purchase in 2001 for US$4.1mil, refurbished the ship for US$400,000 and sold it in 2004 for US$10mil.
With its older vessels gone, Hubline has whittled the average age of its fleet to 10 years. Twenty-eight of the group’s 30 vessels are wholly-owned, and two rented from a third party.
Half of its fleet is used for dry bulk and other half for container shipping. Ling says he may buy two new dry bulk ships within the next 12 months, on top of one that is on track to be delivered by yearend.
For its container business, Hubline would only consider expansion by chartering, as this segment has yet to stabilise, according to Ling.
The strategy is deliberate – while all of its dry bulk vessels are fully-owned, Hubline will stick to chartering additional container ships so that it isn’t tied down in case the market takes a dive.
Ling says the group’s dry bulk vessels are fully taken up until next year. Although its container ships contribute to 25% of revenue, Hubline gets almost all of its earnings from dry bulk.
Its dry bulk operations deliver a gross profit margin of about 20%. In contrast, the container shipping side is just breaking even. Be that as it may, Hubline has no plans to pull the plug on its liner business.
Given Hubline’s aggressive write-offs this year, industry watchers say the firm will probably close FY13 in the red. But they see it returning to profitability in FY14, with one of them estimating a conservative profit after tax of RM10mil.
The challenges notwithstanding, Ling is optimistic that the shipping market has hit bottom and is on course for a gradual recovery.
“The shipping industry tends to recover very sharply. When the tide turns, we will be there to catch it,” he quips.
Ling’s family, via Billion Power Sdn Bhd, controls 16.37% of Hubline, which also counts Lembaga Tabung Haji and the NFC Shipping Fund as long-term shareholders with interests of 3.68% and 3.82%, respectively.
The stock was unchanged last Friday at 5.5 sen on trade of 8.42 million shares. Its market capitalisation at that price stood at RM178.26mil.
For the nine months to June 30, Hubline posted a net loss of RM192.95mil versus a net profit of RM8.1mil in the same period a year ago. Turnover fell 20% to RM288.62mil from RM359.2mil.