News Article 25/03/2005

Tanker company valuations and TMSA (Tanker Operator- March 2005- p.6)

25/03/2005 - Tanker Operation March 2005 p.6

Throughout recent history, shipping companies quoted on the stock markets have lamented about the valuations carrying insignificant good will premiums.
In other industries, brand names or leading companies enjoy premiums of multiples of their asset valuations. Not so in shipping. One reason for the low premiums is that few companies have been able to show a formula for sustained earnings above their competitors in similar market conditions.
This is because unless they have locked in employment or some regional advantage through fleet size, they cannot guarantee that they will earn more than competitor in similar markets, neither can they convince the stock market that they can buy vessels and sell them at more opportune times consistently.
Another reason is that the assets are almost identical.

Unlike hotels, which have locked in location value, oil reserves with similar location value, and manufacturing plants with design efficiencies, most companies in shipping have similar design vessels; successful designs are not usually proprietary to any single company. Furthermore design progress in shipping has been slow.

Another reason has been that a ship bought by a stock listed company is rarely valued any higher than when it is in the hands of a less well-known company.
This is partly due to the expectation of no premium in earnings but more specifically, because important criteria such as technical vessel utilisation, management and operating costs and incident liabilities are rarely seen as being significantly differentiated between the larger shipping companies.
Most stock listed companies in shipping are success stories because the poor ones get ignored or fail quickly due to the brutal historical supply demand cycle.
To avoid the roller coaster of charter market driven valuations without any "brand" premium for the successes of the past, companies need to ensure that they can demonstrate sustainable managerial efficiency.


With the OCIMF TMSA we now have a potential for brand premium provides by the new oil company self assessment initiative. With a rating applied to the management of each company offering vessels to oil majors, and with the scrutiny on oil majors and their selection process in any incident, there is a definite underpinning for rewarding companies that can justify a high score.
However as it stands the demands stipulated by OCIMF in this initiative do not address the cost of operating efficiently.
So we leave out operating efficiency if we rely completely on TMSA ratings. Operating efficiency is left to the individual company since it is in its self-interest to address the issue. However few owning companies address management issues as systematically as if their income depended on it unless they are assessed externally because their earnings are volatile enough to keep their attention fixed on commercial issues.


Key constituents of management efficiency are well known and much has been written about them.
Leadership, recruiting, planning, execution, culture, teamwork, are all subjects that are well covered in managerial studies. However you cannot easily rate leadership, recruiting skills, planning, execution, culture or teamwork. You can however rate managerial infrastructure.

Similarly it is not easy to rate the efficiency of a city in helping businesses perform and attracting good people. You cannot rate entrepreneurial drive, work ethic, loyalty, organisation, and friendliness to newcomers. However you can rate the infrastructure. The facilities related to justice, law and order, transportation, communication, education, entertainment, taxes, rental rates, language.
Similarly in management, infrastructure can be rated and is a very good indicator in itself.
For example, lines of communication, briefing facilities, risk monitoring, risk escalation policies, performance monitoring, matching of skills to responsibilities, cost control policies.
Owner managers have been notoriously out of step with managerial infrastructure in the maritime industry.
Although a lot of these issues have been addressed from a compliance stand point with ISM this is like rating the efficiency of Easy Jet on its compliance with FAA rules.
Other industries, mostly for reasons of steadier profit margins have been very closely underpinned by managerial efficiency.

Sarbanes Oxley, TMSA and other similar legislation may further add to the need to change this if you take into account the considerably higher liabilities and disruption to earnings that are at risk in the maritime industry than in the average stock portfolio company.