Samudera Shipping Line Ltd

Not out of the woods yet Implementing bunker surcharge. We visited Samudera Shipping (SS) for an update recently. Management is implementing a bunker surcharge of between US$25 to US$50/ton soon. This should help mitigate the cost inflation associated with high bunker prices. However, as this surcharge is taking place in 3Q07 and will only have one quarter of contribution, we do not see this as having a meaningful impact on our forecast. Incidentally, bunker prices have fluctuated between US$370 to US$390/ton recently, up from about US$300/ton in Jan 07. Repositioning via new vessel acquisitions. Management also indicated that they are currently in negotiations to purchase 2 container vessels, with the expected date of completion in 2008. These vessels would have capacities of up to 2,000 TEUs and cost S$40m each. SS should be able to finance this acquisition as it has approximately S$90.1m of cash as at 2Q07. However, with a low gearing, we expect SS is likely to want to consider debts to part fund this proposed acquisition. This acquisition is in line with SS's targeted 4 container ship acquisitions strategy. In addition, this acquisition would also help in implementing management's strategy to increase the proportion of ships they own to one-third, together with one-third of their fleet on long term charter and one-third on spot charter. Once achieved, SS is likely to be insulated from changes in bunker rates and charter costs while maintaining flexibility to change the ships' sizes according to the needs of their clients. Growing the Vietnam market. In Sept, SS established a presence in Vietnam via the opening of a new office in Ho Chi Minh City. SS holds a 51% stake in this JV. Last year, Vietnam contributed approximately 107,000 TEUs or 7.5% of the 1.43m TEUs handled by SS in FY06. SS intends to leverage on Vietnam's economic growth and grow its contribution to the group, as well as to explore opportunities in industrial shipping and logistics activities in the region. Maintain HOLD rating. Taking into consideration the measures SS has successfully implemented to pass on rising costs to its customers and a better 2H07 versus 1H07 (due to firmer demand for ships arising from year end festive season), we are maintaining our fair value estimate at S$0.40, based on P/B ratio of 0.7x. With the stock's last done at S$0.39, we reiterate our HOLD rating