American Shipping Company ASA (OTCQX: ASCJF) is a core holding in the HDS+ portfolio.
We added it on 02/01/18, just over 4.5 years ago. Since then, American Shipping Company has achieved a total return since inception of 82.72%, averaging well beyond 19% per year. Even better for us income investors, 73% of his return came from his $1.82/share in dividends.
So far in 2022, the ASCJF has posted a total return of 9.61%, far exceeding the -17.7% loss of the S&P 500.
American Shipping Company has a fleet of nine modern utility-sized product tankers, one modern utility-sized shuttle tanker, and one international subsea construction vessel. The Company is listed on the Oslo Stock Exchange under the symbol “AMSC”.
Founded in 2005, American Shipping Company is a ship finance company focused on the US Jones Act intercoastal shipping market. It has 10 modern utility-sized tankers and one modern utility-sized shuttle tanker on long-term bareboat charter with Overseas Shipholding Group (OSG), a US-based company. Aker ASA is the main shareholder with ~19% of the shares.
NOTE: We will refer to American Shipping as AMSC or ASCJF in this article.
The Jones Act is an American law that was passed in the 1920s. It states that “the transportation of goods by sea between two points in the United States must take place on board a ship built in the United States, owned by the States States, flying the American flag and with an American crew”.
The Jones Act is a key feature of United States national security policy because it provides the capability required to meet national security needs and avoid complete reliance on ships controlled by foreign nations. Since the United States’ maritime position in international trade has declined significantly over the past three decades, the Jones Act is the primary maritime market for US shipyards and operators.
The Gulf of Mexico is a major shipping lane for Jones Act ships. Florida does not have a pipeline connection or refinery, so all clean products (gasoline, diesel, and jet fuel) consumed are supplied by sea via Jones Act ships.
Over the past 10 years, this trade has grown with a CAGR of around 3.5%. There is also a demand for Gulf products in the North East, but this depends on prices compared to international alternatives such as Brent Crude.
The pandemic has reduced demand, with less use of refineries, but the International Energy Agency (“IEA”) now sees clean fuel volumes almost fully recovered.
AMSC charters its vessels on long-term bareboat charters that provide stable and predictable cash flow. On June 10, AMSC announced 2 new multi-year Jones Act bareboat charters with Keystone Shipping Co., beginning with the re-delivery of current charters in December 2022.
In May 2022, AMSC entered into an agreement to acquire the offshore construction vessel Normand Maximus and to enter into a long-term bareboat charter from the fourth quarter of 2022 with a subsidiary of Solstad Offshore ASA, which will be earnings accretive. This bareboat contract is for 5 years firm, with 2 extension options of 5 years.
The fleet had a Jones Act guaranteed revenue arrears of US$175.7 million, with a weighted average term of 1.9 years, as of 6/30/22.
CSIA is governed by the Jones Act. on fairly long-term contracts, which were renewed in December 2019. Its main charterer is OSG. The end users of these vessels are blue chip companies: Royal Dutch Shell, BP, Chevron, Philips 66 and Marathon.
AMSC also has a profit-sharing deal with OSG, which could drop to its bottom line. Additionally, it has a deferred principal obligation, DPO, whereby OSG repays principal and interest, up to $7 million per vessel, over an 18-year period. However, if the charter of the vessel is terminated, the balance becomes due immediately. This gives AMSC good leverage with the OSG in recharter negotiations.
AMSC continues to have downside protection with “come hell or high water” bareboat contracts (meaning charterer pays crew and vessel operating costs), with 1 tank of product secured until December 2022, 6 product tanks secured until December 2023, 1 shuttle tanker secured until June 2025, and 2 vessels secured until December 2025:
AMSC is not an earnings growth engine, but rather a stable income driver, with consistent revenue, EBITDA and EBIT, which supports its quarterly distributions. Adjusted net income can be lumpy at times, due to expense timing issues.
AMSC’s share count, which has been stable at around 60.6 million since at least 2017, could face an 18% dilution, if a private placement of 11.24 million shares is approved at a a shareholders’ meeting in October.
At its price per share of $3.86 on 9/15/22, AMSC has a very attractive dividend yield of 12.44%.
AMSC usually goes ex-dividend in February-March/May/August/November. schedule and pays in March/June/Sept./Dec. program. It should be ex-dividend on ~11/25/22, with a payment date ~12/6/22.
On an EBDA basis, earnings before amortization and amortization, AMSC’s dividend payout ratio has been very stable, ranging between 51.59% and 55.11% per quarter. The average payout ratio is 52.90%, which equates to a dividend coverage ratio of 1.89X.
AMSC had approximately $467.8 million of federal net operating losses carried forward in its U.S. subsidiaries as of 12/31/21, of which approximately $151.7 million is subject to certain IRS limitations. It also had ~$62.9 million in net operating losses carried forward in Norway as of 12/31/21.
Profitability and leverage:
AMSC saw a good increase in ROE in 2022, surpassing pre-pandemic levels. ROA also increased slightly. Net debt/EBITDA improved slightly, while debt/equity is a bit higher. However, EBITDA/interest coverage is currently much stronger, at 2.63X, compared to 1.81X in Q4 20.
AMSC’s debt-to-equity leverage is well below general industry averages, while its net debt-to-EBITDA leverage is above average.
Management repaid $13.4 million of debt in the first half of 2022, reducing the debt balance by 4.5% compared to 06/30/21. AMSC was in compliance with all of its debt covenants as of June 30, 2022. All of AMSC’s debt matures in 2025.
AMSC has 2 credit facilities: a 5-year $160 million term loan/credit facility with BNP Paribas, secured by 5 vessels; and a $145 million loan over 5 years with Prudential:
While its P/Book and P/Sales are above the average values for the entire shipping industry, where ASCJF looks very undervalued is in its price/EBDA per share of 4.06X , which is well below the industry average of 15.45X.
ASCJF is also cheaper on an EV/EBITDA basis, at 8.43X, versus the 12.04X industry average. Moreover, its distribution coverage of 1.89X is higher than the industry average of 1.62X.
“As demand for clean transport has returned to pre-pandemic levels, it is the emerging trade in renewable diesel driving demand and time charter rates. AMSC currently has 5 vessels in this trade – this could increase to 7 vessels in the short term.
The renewable energy trade consists of transporting biofuels from the US Gulf to the US West Coast and is necessary for US West Coast states to meet certain carbon emissions targets. The round trip from the US Gulf to the US West Coast takes over 30 days and therefore the longest in the Jones Act, meaning additional ton-miles for the fleet.
Market (vessel) supply remains stable, with limited US shipyard capacity and rising construction costs, making it “New construction is unlikely to enter the market in the coming years.” (AMSC website) (emphasis added).
American Shipping Company ASA is a classic hidden dividend stock – with little media coverage (the most recent article on Seeking Alpha was by U.S as of Q3 2019), no Wall St. analyst coverage, and its earnings presentations/calls are also not listed on SA.
Potential stock dilution coming in early October could provide cheaper entry prices for new investors. On the earnings side, the acquisition of a new vessel in Q4 22 should offset some of the dilution effect on earnings per share and cash flow/share in Q4 22. We rate ASCJF a long-term BUY , but let’s wait after the dilution.
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