Feedback on RCL regarding their high leverage & KWH gets a big order.

Paul, RCL is one I look at about every 6 months to 1 year, then decide to pass. It looks dirt cheap on the basis of earnings. But look at it another way. Calculate the Enterprise Value, as you know, the market capitalization plus the net interest bearing debt, or debt minus cash. Calculate operating profit, or income before interest expenses and taxes. Now subtract 30% from operating profit to calculate what after tax profit would be if the company had paid off all its debt and had no interest expense.

When you divide EV by operating profit less 30% for income tax, you´re going to come up with a ratio, maybe of about 8, a lot higher than the PE. I don´t like the way the company is geared, too much debt. But, I´ll probably look again in about 6 months or a year, and who know, maybe change my mind. Hope all is going well for you.

Best regards,A knowledgeable 3 1/2 year TS.com Subscriber.

Feedback from the Quest Fund, Bangkok: Your client is not looking at RCL properly. First, the company pays no income tax because it operates on a tax free basis in both Thailand and Singapore, not because it has a heavy debt load. The tax free status is permanent in nature. Also, as for operating profit, it is not appropriate to leave out depreciation when calculating EV/EBTITDA. Yes, the company does need to replace its vessels at some point in the future, but given the current average age of around 8 yrs, the fleet has nearly 15-20 years of remaining useful life. I would also take out the value of RCL's Singapore HQ building, which has a FMV of around $60 mil, when calculating EV. Therefore, on a properly accounted basis, the FYE 2000 EV/EBITDA is closer to 3.9x.

Back From same Subscriber:Paul, I didn´t know that about the taxes. Maybe it´s worth a close look. I´m out of town, away from my files, as I was when I sent you the previous message, so really don´t know what I´m talking about here. The debt is the reason I haven´t looked at this one in the past. With regard to depreciation, the ships ultimately do have to be replaced, and I´m sure there are also capital costs associated with the ships before they´re retired. Thus, the ratio of market cap to operating profit after depreciation expense is an indication of what the PE of this company would be if it didn´t have the debt. I have virtually no exposure to the shipping industry, except for Rig Tenders, my largest position in Indonesia, and with Singapore ownership like RCL too, so don´t have a good idea how RCL´s depreciation expense stacks up against others in the industry.

I do recall that RCL is writing off capital expenses more slowly than the Indonesian company, but Rig Tenders is very conservative in its accounting too. Anyway, RCL has always appeared to be one of the most intriguing mid caps, and I think maybe I´ll work on the 56-1 next time I´m in Thailand. Finally, with regard to the building, unless the company has plans to sell it for $60 million, I don´t think I´d exclude it from EV.

Best regards,A knowledgeable 3 1/2 year TS.com Subscriber.

Feedback by Mr. Santhosh, our analyst whom wrote-up RCL at 31.75. As mentioned in the report RCL does certainly have a significant debt burden. However from my talk with the company this is a problem which they(the company) have indeed recognized and they (from what i gathered) seem to be committed to bringing down its debt position. There has been some slight improvement in this matter in the first quarter. In us dollars the first quarter results show a decrease in the long term loans net of current portion from 228.4 mil to 216.9 mil dollars. The short term debt seems to be showing the best improvement over the period. I also have a graph with me that shows how the short term debt position of the firm has gone down from close to 20 mil US dollars (97) to around 2 mil(2000). And the long term debt(net of current portion) from 300 mil (97) to 230 mil (2000).***

"On July 17, 2001 the company has been awarded a contract to supply HDPE Pipe and Fittings by PT. Newmont Nusa Tenggara, Indonesia for their Gold Mining Project. The total volume is approximate 1,162 tons with the approximate total value of  1,587,953 US$ or 71.50 Million Baht (Exchange rate 1 US$ : 45 Baht). All pipes and fittings will be exported to Indonesia by September 2001.

"Since this is an export order with good margin and it is an addition to the budget sales of 2001, this order will have significantly positive effect on the sales volume and profit of the company in 2001."

This big export order was gained through competitive bidding on the internet. KWH should be delighted how it can succesfully compete, worlwide from Thailand, with net-enabled pricing power. Today you know more why I never gave-up on KWH!

Best Regards to all our valued members,

Paul A. Renaud