Article from Investment Trust Newsletter November 2024. For full access to all articles and back copies, please SUBSCRIBE HERE.
TUFTON ASSETS
(SHIP, US$1.285)
Tufton Oceanic Assets has changed its name slightly to Tufton Assets after passing its continuation vote easily at its AGM, as expected. The change of name was purely to reflect changes at the management company and is of no real significance. The trust will continue to own its portfolio of around 20 second-hand commercial sea-going vessels, leased to various shipping operators. The trust’s shares have traded fairly close to US$1.30 since mid-July, when the trust announced the return of a small amount of excess cash to shareholders - completed in August - and they are trading on a discount to NAV of 19.6%, offering a yield of 7.8%.
The trust still has reasonable scale, with US$433m of assets, and is continuing to perform well. The NAV total return was 5.9% for the third quarter, which is fairly consistent with the growth recorded in the first half of the year. Since inception the trust has delivered an annual net rate of return of 14.7%, which is ahead of its 12% target. For shareholders the bulk of this return comes in the form of dividends, which are running at the rate of US$0.025 per quarter and are covered 1.6x by forecast income over the next 18 months. The trust has already demonstrated that it can deliver a good repeatable income stream from its activities, and it argues that a lack of shipyard capacity plus high newbuild prices continue to limit the level of fleet growth. This provides a supportive backdrop for charter yields, based on the scarcity of suitable vessels, and the managers point as well to the withdrawal or non-competitiveness of older fuel-inefficient vessels, and speed reductions to comply with tightening environmental regulations. Some specific geographical factors have also come into play, such as the reduced use of the Suez Canal due to the threat of attacks by Houthi rebels in Yemen in response to the continued Israeli military operations in Gaza. Overall, the supply and demand fundamentals look supportive for global shipping rates, and Tufton says it continues to consider attractive investment opportunities, underpinned by strong yields, especially in container ships. What is interesting here though is that the managers are also measuring these potential returns against the gains from returning capital to shareholders at NAV, and the management mindset seems different to normal here because of the structure of the trust, which is not intended to be evergreen and to continue indefinitely.
Tufton recognises that ultimately the current shipping industry will have to change, like the car industry and other forms of transport, and that when it does decarbonise, older vessels could quickly become much less valuable and then obsolete. On that basis the stated investment strategy is to begin realising the company’s asset portfolio from 2028, although the board will also consider further returns of capital sooner if no suitable investment opportunities are available. In the meantime the focus is on owning fuel-efficient vessels that are most likely to be in demand, and the managers believe the strong investment environment can persist for a few more years yet. They are backing this view too with their own money. Principals and staff of the investment manager acquired 160,741 ordinary shares at the end of September. As at 30 June, Tufton stakeholders (principal shareholders, employees, non-executive directors and former shareholders of the managers) already owned 4.9% of the issued share capital of the trust.
We think there is a lot to like about SHIP, which can certainly add a different dimension to income portfolios, but we also understand there may greater scepticism now around specialist alternative asset trusts that can easily run into highly specific industry problems or be damaged by quickly changing trends and demand patterns. The investment trust sector has provided a number of case studies of good ideas gone awry, such as battery storage trusts and song royalties. In this case the threat of a Trump re-election ushering in a new period of trade protectionism and thereby reducing global trade flows is a credible risk, although perhaps balanced by the recent economic stimulus package in China.
There is also a competitor trust to consider, Taylor Maritime Investments (TMI, US$1.015), which launched in 2021 and is a fairly similar size to SHIP, actually slightly larger with US$491m of gross assets. It is on a much wider discount though of 32.7%, with a marginally higher dividend yield of 8.0%, and this reflects its status as a somewhat racier proposition, with more debt and a busier management style. TMI grew considerably in 2022 when it acquired the Grindrod shipping operations, since when it has been focused on rationalising the fleet, now 34 vessels, and reducing debt. TMI says that the acquisition has generated an overall profit of US$49m, representing a 15% return, but we think it has added complication in a sector which is already highly specialised and where many investors will be seeking a more easily understandable proposition. Sophisticated investors might consider both trusts, but for those new to the sector we think SHIP may be a safer first port of call.
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