Tufton Oceanic Assets has completed a $91m initial public offering on the London Stock Exchange with ambitious investment return and dividend targets for a company with a conservative chartering strategy.
The company first revealed plans for a $150m float in February and its listing was finalised at the end of a year that has seen more than 100 companies go public in the UK's capital for the first time since 2014.
Andrew Hampson, managing director of asset backed investments for Tufton Oceanic, believes there are attractive opportunities in shipping to buy assets at a significant discount to their depreciated replacement cost and lock in long-term employment producing mid-teen cash yields.
The capital markets newcomer is looking to set its IPO funds to work within the next nine to 12 months and plans to invest across the dry cargo, tanker and containership markets, as well as the general cargo space.
It is sighting an initial dividend yield of 5% in the first 12 months, with 7% pencilled in after that. At the same time, it is targeting an internal rate of return (IRR) of 12% per year.
Tufton Oceanic says the figure is in line with its track record in an industry in which it has invested more than $1bn during the past four years.
Segment: Chemical Tanker
Year built: 2008
Employment: 10-year Bareboat Charter at $11,250 per day
Capital committed: $32.6m
Equity investment: $16.6m
Assumed debt terms: 50% debt ($16m) at 5% all-in interest and 10-year profile
Estimated residual value and basis for the estimate: $19.4m based on depreciated replacement cost on a 30-year life
Estimated net average cash yield: 11% per year
Estimated net initial rate of return: 12% per year
Segment: Containership
Year built: 2004
Employment: Five-year time charter at $9,250 per day
Capital committed: $8m
Equity investment: $8m
Assumed debt terms: No debt
Estimated residual value and basis for the estimate: $7m based on 80% depreciated replacement cost, assuming a 25-year life
Estimated net average cash yield: 15.7% per year
Estimated net initial rate of return: 15.0% per year
Source: Tufton Oceanic Assets IPO prospectus
“This asset class took much longer than most to recover from the global financial crisis,” Tufton Oceanic portfolio manager Paulo Almeida said.
"Due to the supply-side improvement of the past few years in both shipping and shipbuilding, we believe that the current risk-return profile in shipping is superior to many other asset classes.
“We also believe this is the first listed equity anywhere that aims to offer institutional investors exposure to a diverse portfolio of ship types with low revenue volatility and low to moderate leverage,” he said.
Cash yields
Tufton Oceanic has invested $956m since 2013 in 54 vessels, with its deals from 2015 up to the first half of 2017 showing net unlevered cash yields of 12.6%, according to its IPO prospectus.
Over a longer time frame Tufton ABI, which started operations in 2005, has generated equity value of $255m from secondhand vessel acquisitions with an average IRR of 13.6%.
However, the new listed vehicle is specifically for fresh investments and has gone public without any vessels in its fleet.
Tufton Oceanic has set out firm rules on its investment strategy, restricting it from buying cruiseships and capping its exposure to any one vessel type.
No single vessel can account for more than 25% of its net asset value (NAV), while no investment will be made that results in spot market exposure exceeding 25% of NAV. At the same time, no asset class can make up more than half of the company’s NAV, the prospectus explains.
Borrowing will also be restricted, with gearing capped at 40% of a ship’s charter-free value, while the term of loans will not be greater than the length of underlying contracted cash flows.
Tufton Oceanic does not expect to be short of investment opportunities, with between 3% and 5% of the $657bn global fleet changing hands each year, the prospectus says. It has bought several ships from the German KG (limited partnership) system since 2014 and expects “further deal flow from this source over the next two to three years", it says.
Since 2015, Tufton Oceanic has invested $587.4m in 34 secondhand ships, comprising nine chemical tankers, two product tankers, six handysize bulkers, eight containerships, two suezmax tankers, two supramax bulkers, a heavylift ship and four general cargo vessels.
It says its average cash-on-cash yield on those transactions is 12.6%.
This year, the London Stock Exchange has seen 102 IPOs raising close to £15bn ($20.12bn).
According to data supplied to TradeWinds, the number of IPOs in London is up 56% this year with the money raised increasing by 160% from 2016.
