Sealink ... Sept09

It is looking towards increasing the contribution of its ship chartering business to cushion the slowdown in overseas demand for vessels that has affected the company’s shipbuilding division.

It prefers to hold on to the ships for better offers because of the softer demand and the lower prices of vessels which have fallen by 10% to 20% this year.

Most of the vessels being built by the company are in line with demand of the offshore oil and gas industry, which is the main client for its ship chartering unit.

The unsold vessels will be used to increase this revenue from this division. Its aim is for the chartering unit to contribute half of the group revenue by the end of next year, from around 40% currently.

Sealink is currently bidding for around RM300 million worth of chartering contracts locally, mainly from Petrolium Nasional Bhd (Petronas), and between RM100 million and RM200 million overseas, particularly in Southeast Asia.

Sealink, which has capacity to build 15 to 17 vessels annually, has seen its shipbuilding order book fall below RM100 million from RM140 million in the last quarter or just 40% of 2008 revenue, given the lower sale of new vessels. Of RM490 million worth of vessels currently being built, the company is looking for buyers for RM390 million of these vessels.

The company shipbuilding unit is affected by the economic downturn, where financing is still an issue for its potential customers who are mostly from Europe, Middle East and Australia.

While demand for vessels locally is still strong, Sealink is not keen to sell to its direct competitors in the chartering business. The move to have a larger fleet for its chartering division that offers higher margin seems to be the right strategy.

In the first half of 2009, Sealink’s vessel chartering division reported a lower operating margin of 48.1%, compared with 62.3% last year but it was still significantly higher than the 28.8% recorded by its shipbuilding unit.

The company has some RM120 million to RM130 million of charter contracts in hand currently, which will keep it busy until 2011. Currently, its chartering division has 33 vessels and Sealink might add four or five vessels to the fleet. About one third of its vessels are operating on long term charter contracts, ranging from one to seven years.

Despite the continued short supply of vessels for the oil and gas industry, Sealink could face stiff competition from established players in the ship chartering business.

Another concern is the decline in chartering rate with the Baltic Dry Index (BDI), which provides the indicator for ship chartering rate, having slipped to 2,427 points on Aug 26 after reaching its peak this year at 4,296 on June 4.2009. The BDI had peaked at 11,793 points in May 20 last year (2008).