Fresh Valuations of Dry Bulk Shipping Companies

Stocks of dry bulk shipping companies had a huge run up recently. How expensive have they become from fundamental perspective? Below is a table with key parameters for some of the most actively traded pure-play companies in this segment.

Stock	GNK	EGLE	EXM	DSX	SBLK
Recent price per share	18.17	6.59	9.17	15.20	3.48
Shares outstanding (in mln.)	31.7	47	71.8	75.4	60.3
Market capitalization (in $ mln.)	576	309.7	658.4	1146.1	209.8
Fleet market value (in $ mln.)	1137.7	1314.9	1302.8	875.2	364.2
Fair value of above the market charters (in $ mln.)	328.1	227.4	207.3	280	251.3
Net debt (in $ mln.)	1260	1328.3	1420.3	257	250.3
NAV per share	6.49	4.55	1.25	11.91	6.06
Enterprise value/ Charter adjusted fleet value	1.25	1.1	1.38	1.21	0.75

Fleet values include ordered newbuilt vessels. Net debt was calculated as the difference between liabilities and assets, excluding book value of the fleet and advances for new vessels. Non-cash accounting items, such as the value of above and below the market charters, fair value of interest rate swaps and other similar records were also excluded from assets and liabilities. The debt was increased by the amount of the remaining payments under the contracts to acquire new vessels.

The data for GNK, EGLE and DSX are based on the Q1/09 quarterly report, while for EXM and SBLK on the annual 2008 report. However, market values for vessels and above the markets charters were adjusted to include expected cash flow for the quarter. So, the market value for a 2005 supramax is assumed a little higher for EXM than for EGLE.

As can be seen from the table, most dry bulk companies trade at a significant premium to NAV. A notable exception is Star Bulk Carriers Corp. However, a great deal of its fortunes are tied to profitable long-term charters it signed last year. Apparently, investors are very worried about counterparty risks. Nonetheless, SBLK looks like the most attractively valued company in dry-bulk segment.

The most overvalued company has surprisingly become EXM. Even GNK, which historically had premium valuation due to supposedly good corporate governance, is left far behind.

The most obvious reason is confusion with recent equity infusion. Excel Maritime sold 25.7 mln. shares for $1.75 per share. Also, the seller, who is, by chance, the chairman of the board, got 5.5 mln. warrants with an exercise price of $3.50 per warrant, free. As a result, the number of shares outstanding increased by almost 60%. It looks like EXM's stock price has not adjusted to this new number yet.

What lies ahead for the dry bulk shipping industry? I believe that the prospects are bleak. Huge orderbook is going to keep the rates quite low for several years. This issue is debatable, however. What is quite clear is that some companies in this sector are overvalued in comparison to others. Such discrepancies usually disappear over time.

Disclosure: Short EXM

Comments

[ArtfulDodger:]

Good work, Stanislav Oleynikov. Thank you for your opinion on the dry bulk industry, too.

Keep it up, please.

May 19 09:11 AM

[Windsun33:]

The recent feeding frenzy on the dryshippers seems to keep feeding off of its' own hype. The runup lately has been far beyond what any sane person would buy into :)

May 19 09:31 AM

[John Cordes:]

Agreed, however the hype is in the perception that China will drive up commodity prices and therefore charters. So are you recommending a long position on SBLK? or merely pointing out a discrepency in an over priced/over sold sector?

May 19 12:27 PM

[Augustus:]

Darned good article and effort. Thanks for posting it.

May 19 01:47 PM

[Alan Young:]

Nice analysis, as far as it goes.

It does make sense to use the NAV as the most important valuation tool when business is slow. However, look at the Baltic Dry Index ($BDI), which tracks the rates shipping companies can charge for charters on the spot market. It's on a very bullish trend, and just crossed its 200-DMA. This means more cash flow for bulkers--immediately!

Naturally, investors want to own the ships when they are making more money. There's no "overvaluation," at least at the moment. This could change as more new ships come online, or if demand softens, but investors certainly must be aware of that.

These companies were hugely UNDERvalued because of poor cash flow; now, I believe, they are generally more fairly valued.

May 19 03:11 PM

[Stanislav O...:]

To John Cordes:

China has been importing record volumes of iron ore for the last four months. Based on already made fixtures, this trend is going to continue for the next couple of months. A lion's share of these imports came from traders hoarding ore in anticipation of higher prices. The amount of imported iron ore significantly exceeds demand from Chinese steel mills even running at full capacity. Such situation is not sustainable. Iron ore stockplies are at all time high at the moment and going to increase. Chinese government has already started to implement measures to curb speculative hoarding. Besides, as shipping rates increase, such operations become less attractive to traders.
As a result I believe iron ore shippings to China are going to decrease in not so distant future.
However, the rest of the world may start to restock iron ore supplies, as was stated in today's report of Omar Notka of Dahlman Rose, upgrading dry bulk shippers. However, I beleive that this amount is just a fraction of Chinese imports and is not going to have any significant impact on shipping rates.

May 19 03:35 PM

[Stanislav O...:]

To Alan Young,

In my opinion, the company is worth as much as the market values its assets. At the moment, anyone with sufficient capital can form a company, buy some dry bulk ships and make an IPO that would result in ownership of stock valued several times higher than initial investment if this new company is valued in line with EXM.
It just takes some time. In 2007 and first half of 2008, such discrepancy lead to numerous IPOs of bulkers. Such companies, like SBLK, SB, PRGN, NMM and infamous DWT appeared exactly this way. If the discrepancy between the NAV and the market price of public dry bulk shipping companies stays for the next several months, such new companies will emerge again, pulling available capital away from existing stocks.

May 19 03:52 PM

[Mark Anthony:]

Interesting analysis. But the author has been deadly wrong on EXM, on two fronts. First the author does not understand the fundamental reason why the dry bulk shipping sector is fundamentally bullish. I actually made perfect call when BDI bottomed at 666:
stockology.blogspot.co...
and I continued to express confidence in the dry bulk shipping sector in the middle of February, 2009 when the market was so persimistic:
seekingalpha.com/artic...
The biggest reason that the dry bulk sector is fundamentally bullish, as I pointed out, correctly in the Obamium article, and as understood by more and more people now, is China's thirsty of natural resources and raw materials, and China's eagerness to get rid of what it has too much, the US dollars, in exchange of what it needs, the raw material commodities.

The second front that the author was wrong was about EXM's relative valuation to other shipppers. I entered the dry bulk sector in late November/early December of 2008, bought lots of DRYS near $3 per share. But by mid/later January, 2009, when DRYS was priced twice as much as EXM per share, I decided that EXM was actually a much better valuation than DRYS. Since then I consistently call EXM as the best valuation in dry bulk shipping sector. The reason EXM is such a good valuation is it has a much cheaper total fleet tonnage relative to its total market capitalization.

I do not know how the author arrived at the "Fleet Market Valua" as listed in the table. For example, EXM has 4M tons of shipping capacity while EGLE has only 1.9M tons, less than half EXM's. But the author assigned both companies a $1.3B "fleet market value".

Most people bearish on shipping cited the presumed large number of new order ships to join the fleet soon. Such analysis is frauded. The new ship orders exist only on paper, not in ship building yards. I do not see the ship building industry drawing any unusally large amount of demand on steel plates and other raw material. If ship builders are not purchasing a lot fo steel and other materials, then they are not delivering a lot of new ships, regardless what's listed on the paper.

In any case, I see EXM going up much much higher from current price level, the author is best served covering his short in EXM at the earliest opportunity.
seekingalpha.com/artic...

May 22 02:47 AM

[Stanislav O...:]

To Anthony:

Here's a link to ship by ship calculation of market fleet value for EXM:
seekingalpha.com/insta...

If you don't agree with anything in the EXM ship by ship valuation, I can explain every number and show recent comparable deals in second hand market.

The main reasons for similar fleet market values for EXM and EGLE:

1. Fleet values include ordered, but not yet delivered newbuildings. EGLE has a lot of them. Net debt is increased for the remaining payments for these newbuldings.
2.EXM has 7 vessels in the fleet which are not owned, but leased and at a rate above current market.

May 22 11:23 AM

[Windsun33:]

Dryships seems to get all the market attention, but to me that is the worst - or at least most overvalued - of the lot.

And can some guru explain this about EGLE? Doesn't that math seem a bit fuzzy?

% Held by Insiders: 87.11%
% Held by Institutions: 44.90%

May 24 02:09 AM

[Stanislav O...:]

Windsun33:

From the last DEF 14A filling:

Shares Beneficially Owned (1)
Name Number Percentage
Sophocles N. Zoullas (2) 569,676 1.2%
Joseph M. Cianciolo (3) 72,230 *
David B. Hiley (4) 67,896 *
Douglas P. Haensel (5) 66,230 *
Alan S. Ginsberg (6) 95,515 *
Alexis P. Zoullas (7) 21,667 *
Jon Tomasson (8) 66,230 *
Forrest E. Wylie (9) 66,230 *
Directors and Executive Officers as
a group (8 persons) 1,025,674 2.2%

So, insiders own just 2.2%

May 24 10:20 AM

[Mark Anthony:]

Stanislav:
Your "calculation" of EXM's fleet market value was frauded. It was not even a calculation. You just throw in a bunch of numbers without justifying how they were obtained. If you were attempting to obtain EXM's book value, you should just reference to EXM's latest quarterly filings:
www.excelmaritime.com/...
The EXM filing says the shareholder equity at the end of March 31, 09 was $1.219B, or about $17 per share book value.

Please note, EXM is NOT putting its ships out in a yard sale. It was ridiculous to reference recent stress sale of ships by stressed ship owners as fair value of these ships. As the BDI index recovers these ships are worth much more due to their revenue generating capacity. Current cape size rate is $45000 per day, or it generates more than $16M a year revenue using the spot rate. These ships are worth much much more than the numbers you listed.

I invest in EXM because of the future revenue generating capacity of its fleet, NOT because EXM is selling all of its ships in a yard sale. You are making a big mistake using yard sale prices to evaluate how much EXM should be worth.

May 25 05:15 PM

[Stanislav O...:]

Mark Anthony:

I used the same assumption, calculating fleet values of all the companies, listed in the article. If EXM is undervalued, as you beleive, than other stocks must be even more overvalued.
Book values are meaningless, as they are not marked to market. The true value of a 2005 capesize vessel is same, no matter if was bought for $150 mln. in 2008 or for $60 mln in 2005. In 2009, we are close to $60 mln., agian.

I would be happy to discuss valuations of any particular type of ships. Current values in the second hand market of dry bulk vessels are the result of expected DCF based on current view on long-term sustainable freight rates. They are close to 2006 and are higher than in 2003. Distressed sales hasn't hit the market yet. Particulary all owners around the world got waivers on their loans. However, they are expected to appear next year, driving the market lower.

So, shipowners in good financial position, like DSX are going to benefit. EXM has the worst financial situation among all US listed shippers. According to the waiver deal, EXM has to divert all the generated excess cash flow toward early repayment of the debt.

May 26 12:14 AM

[SA Investor:]

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May 29 11:45 AM

[Mad Hedge F...:]

Check out DRYS. The Athens based, Dry Ships Inc (DRYS), which operates a fleet of 40 coal and iron ore carriers, has done almost as well. After my call to buy it in December at $4, after a crash from $110, (www.madhedgefundtrader...), it popped to $18, and currently is churning around $7. The company launched three equity fund raisings since then, bringing in over $1 billion to pay off debt. It slashed operating expenses, cancelled orders for new ships, and wrote off defaulted charter contracts. The always colorful CEO George Economou, says he now has $1.67 billion in cash and is prowling for takeover targets. Keep this great trading vehicle on your radar screen as a supper leveraged call on the recovery of the global economy.

May 29 07:25 PM

[nutflush:]

On May 26 12:14 AM Stanislav Oleynikov wrote:

> Mark Anthony:
> Book values are meaningless, as they are not marked to market. The
> true value of a 2005 capesize vessel is same, no matter if was bought
> for $150 mln. in 2008 or for $60 mln in 2005. In 2009, we are close
> to $60 mln., agian.
>
> I would be happy to discuss valuations of any particular type of
> ships. Current values in the second hand market of dry bulk vessels
> are the result of expected DCF based on current view on long-term
> sustainable freight rates.

Stanislav - I would like to respectfully disagree that the ships that are currently crewed and in operating order by a reputable shipper with the front and back office capability to contract it's ships for immediate use are valued the same as ships selling on the secondary market. Good management, "sales forces" and crews would build value in the company moreso than the price the bare ship would sell for on secondary would they not? Obviously in some cases, ships that are 100% chartered have a predictable income flow (minus appropriate market risks of fuel, piracy, etc.) and can be valued more easily. But if I could afford to buy a capesize vessel tomorrow at $X, it couldn't possibly be producing income the day after. Would you mind commenting on this?

Secondarily, you mentioned shippers in good financial positions will benefit most. Would you mind posting your thoughts specifically on the financial position of GNK? Thanks.

Mark

May 29 10:20 PM

[clarkth4:]

Stanislav - How are you getting your Market Value for Excel's Vessel Fleet? Is it based off a dollar per DWT?

-Tom

Jul 01 12:27 PM

[clarkth4:]

Stanilsav,

Can you give me more color on this valuation?


On May 22 11:23 AM Stanislav Oleynikov wrote:

> To Anthony:
>
> Here's a link to ship by ship calculation of market fleet value for
> EXM:
> seekingalpha.com/insta...
>
>
> If you don't agree with anything in the EXM ship by ship valuation,
> I can explain every number and show recent comparable deals in second
> hand market.
>
> The main reasons for similar fleet market values for EXM and EGLE:
>
>
> 1. Fleet values include ordered, but not yet delivered newbuildings.
> EGLE has a lot of them. Net debt is increased for the remaining payments
> for these newbuldings.
> 2.EXM has 7 vessels in the fleet which are not owned, but leased
> and at a rate above current market.

Jul 01 05:14 PM