Singapore's NOL begins US spin-off

American Eagle Tankers begins roadshows today for its NYSE listing.

The Salomon Smith Barney-led deal opens presentations in Singapore and will price after a lengthy roadshow, the week beginning 25 June. At the mid-point of the deal's indicative range, the company should raise about $114.7 million and see Neptune Orient Lines' (NOL) wholly-owned stake drop to 73.4%, or 70.6% pending the exercise of the greenshoe.

Backed by co-leads ABN AMRO and Morgan Stanley, the company (roughly 32% owned by Temasek) is planning to offer 4.725 million ordinary shares and a further 2.025 million in the form of Singapore Depositary Receipts on a ten for one basis. The greenshoe will comprise a further 1.012 million shares.

On an indicative price range of $17.60 to $19.50 per share, observers say that at its mid-point, American Eagle Tankers (AET) is being pitched on a price/earnings multiple of about five times 2001 earnings and a price to book value of 1.12 times. At this level, it falls in line with its parent, currently trading on a p/e ratio of about 5.6 times and price to book value of 1.05 times.

Analysts conclude that pricing compares favourably with international comparables such as US-based Teekay Shipping, currently trading at 4.9 times 2001 earnings and a price/book of 1.6 times.

The company's sole line of business is oil transportation services in the Atlantic basin. It presently operates a fleet of 24 Aframax tankers, 20 of which are double-hulled and have an average age of 6.5 years. By the end of 2003, it is hoping to become the first major crude oil tanker operator to run an exclusively double-hulled fleet.

American Eagle Tankers has three main operations: lightering, voyage chartering and long-term chartering. The first involves the transfer of crude oil from long-range large tankers to smaller tankers capable of entering shallow water ports. Voyage chartering involves the transportation of oil from loading port to discharging port, and long-term chartering involves leasing company's tankers on a pay per-day basis.

Analysts explain that the main benefit of having such a young fleet lies in the premium rates oil companies are willing to pay to avoid the embarrassment of environmentally damaging oil spills.

Indeed, according to Jefferies & Co's Houston-based analyst Magnus Fyhr, this factor is underpinning the sector fundamentals, now at their strongest point since the 1970s. "We think the outlook is very favourable for the entire tanker market and the key driver is supply," he says.

"This follows the introduction this April of a new IMO restriction on the trading of vessels over 25 years in age," he continues. "The restriction has been implemented on the back of increasing global concerns about oil spills from ageing vessels such as the Erika, which broke up off the coast of France and the Exxon Val Diez which went down in 1990 and prompted the US to only allow double-hulled vessels."

Given that over 30% of the world's fleet is 20 years or more in age, demand for modern vessels is expected to underpin stock valuations. "The only reason multiples are currently compressed," he adds, "is because some investors aren’t sure the current cycle has legs. This has always been a highly cyclical market sector but we believe the current cycle is a little different from the norm."

A second analyst underlines the successful progress of an US IPO for tanker operator General Maritime, scheduled to price on Monday. "This deal appears to be going well," he says. "It shows that there's appetite for tanker stocks and that in an uncertain market, investors are migrating to defensive sectors such as energy."

Asian-based analysts also believe that the flotation of AET will unlock value in its parent. Says one, "We have a buy recommendation on the stock because we think extreme pessimism about a global slowdown has been overplayed. If you take a more positive view, one of the obvious beneficiaries would be a shipping company."

Yet despite the stock's underperformance relative to analysts' expectations, NOL has still managed to outperform the Straits Times Index, closing Wednesday at S$1.54 a share, up 15.24% year-to-date versus a 12.855% decline in the index.

Proceeds from the deal will be used for fleet expansion. For the year ended December 31 2000, AET recorded operating revenues of $271.9 million up from $177.6 million the previous year.