IPO Preview: Diamond S Shipping Group

Mar.12.14 | About: Diamond S (DSG)

Summary

One of the largest owners and operators of medium range, or MR, product tankers in the world.

Slightly profitable while the others are losing money.

Priced at a price-to-sales premium and doesn’t pay a dividend.

Based in Greenwich, CT, Diamond S Shipping Group (Pending:DSG) scheduled a $210 million IPO on the NYSE with a market capitalization of $710 million at a price range midpoint of $15 for Wednesday, March 12, 2014.

The full IPO calendar is available at IPOpremium.

SEC Documents
Manager, Joint managers: Jefferies, BofA Merrill Lynch
Co-Managers: DnB Markets, HSBC Corporation, SEB Enskilda, Global Hunter Securities Co, Fearnley Securities, Stifel

Summary
DSG provides seaborne transportation of refined petroleum and other products in the international shipping markets.

DSG is one of the largest owners and operators of medium range, or MR, product tankers in the world.

DSG's time charters (leased for over a year at a time) have attractive fixed base rates for the life of the charters, and 20 of its time charters provide for profit-sharing.

Valuation
Glossary

Valuation Ratios

Mrkt

Price /

Price /

Price /

Price /

% offered

Cap (MM)

Sls

Erngs

BkVlue

TanBV

in IPO

Diamond S Shipping Group

$710

4.0

266.1

0.92

0.996

30%

Compare

Valuation Ratios

Mrkt

Price /

Price /

Price /

Dividend

Annualized Dec 9 mos

Cap

Sls

Erngs

BkVlue

Yield

Diamond S Shipping Group

$710

4.0

266.1

0.92

none

Teekay Tankers Ltd. (NYSE:TNK)*

$393

2.2

-15.5

1.38

2.55%

*mix of short- or medium-term fixed-rate time-charter contracts and spot tanker market trading

Nordic American Tankers Ltd (NYSE:NAT)**

$698

2.2

-7.0

0.85

4.54%

**Annualizing Sept 30-6 mos. Depends mostly on spot rates

Click to enlarge

Over the last three months TNK and NAT stocks have been on an upswing.

Conclusion
Compared to TNK and NAT, DSG is slightly profitable while the others are losing money. DSG is priced at a price-to-sales premium and doesn't pay a dividend.

DSG expects to take delivery of 10 new ships between September 2014 and December 2015.

The stocks of both TNK and NAT have been in an upswing the past three months.

The current rating on DSG is neutral to positive.

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above:

Business
DSG provides seaborne transportation of refined petroleum and other products in the international shipping markets.

DSG is one of the largest owners and operators of medium range, or MR, product tankers in the world, according to Fearnley Consultants AS, or Fearnleys. DSG employs a chartering strategy for the majority of its fleet which positions it to benefit from a freight rate recovery while maintaining an attractive base level of cash flow regardless of market conditions due to the fixed monthly revenue DSG receives from its time charter agreements.

Fleet
DSG's current fleet consists of 33 MR product tankers built at leading Korean and Japanese shipyards.

All of DSG's product tankers in its current fleet are on the water today, trading in the market and earning revenue.

Charters
Thirty of DSG's MR product tankers are under time charters with the remaining three operating in the spot market.

DSG's time charters have attractive fixed base rates for the life of the charters, and 20 of its time charters provide for profit-sharing.

The fixed base rates provide DSG with stable cash flow and limits its exposure to rate volatility while the profit-sharing provisions allow it to share in the charterer's voyage profits when spot rates, on a time charter equivalent basis, are higher than the base charter rates and DSG's charterers are able to earn voyage profits in excess of that base charter on an annual basis.

DSG does business with large, well-established charterers such as GlencoreXstrata, Trafigura Beheer BV, or Trafigura, A.P. Moller-Maersk A/S, or Maersk, and Tesoro Corporation, or Tesoro, Shell Tankers Singapore Ltd., or Shell, and Stena Weco A/S, or Stena, and their respective affiliates.

As of December 31, 2013, the average remaining charter length of DSG's current fleet was two years.

Growth plan
DSG believes that there are significant growth opportunities to pursue in the current market environment, as asset values remain significantly below their historical averages and the product tanker market remains highly fragmented.

As part of DSG's growth strategy, DSG recently acquired three additional tankers from CarVal, an investment arm of Cargill, Incorporated.

DSG plans to further expand its fleet, in part from the proceeds of this offering, through the purchase of ten newbuild product tankers from a Korean shipyard that have contractual delivery dates between September 2014 and December 2015.

Because the majority of the current fleet is employed under time charters, DSG will consider installing any new technologies when the vessels trade in the spot market, are re-contracted or undergo scheduled drydocking.

The leading industry consulting firm believes the entire medium range fleet will grow 4% annually between 2014 and 2016.

Seasonality
DSG operates its vessels in markets that have historically exhibited seasonal variations in demand and, as a result, in charter hire rates.

The product tanker market is typically stronger in the winter months as a result of increased oil consumption in the northern hemisphere.

In addition, unpredictable weather patterns in the fall and winter tend to disrupt vessel scheduling and supplies of certain petroleum products.

The oil price volatility resulting from these factors has historically led to increased oil trading in the winter months.

DSG could experience difficultly re-chartering its time charters that expire during the relatively weaker fiscal quarters ending June 30 and September 30 at similar rates or at all, which would adversely impact its business, financial condition and operating results.

Dividend Policy
No dividends are planned.

Competition
DSG operates in markets that are highly competitive and based primarily on supply and demand. DSG competes for charters on the basis of price, vessel location, size, age and condition of the vessel, as well as on its reputation and that of its Manager.

DSG competes primarily with other independent tanker vessel owners and with major oil companies that own and operate their own vessels.

DSG's competitors may have more resources than DSG and may operate vessels that are newer, and therefore more attractive to charterers, than DSG's vessels.

Ownership of tanker vessels is highly fragmented and is divided among publicly listed companies, state-controlled owners and private shipowners.

5% stockholders
WL Ross Group, L.P.​ 32.2%
First Reserve Management, L.P.​ 27.2%
CarVal Investors, LLC 18.3%
Chengdong Investment Corporation 8.6%

Use of proceeds
DSG expects to net $193.1 million from its IPO. Proceeds are allocated as follows:

To fund up to $190 million of the purchase price for ten newbuild product tankers being built by a Korean shipyard, with any remaining proceeds being used for other acquisition expenses and general corporate purposes.

Disclaimer: This DSG IPO report is based on a reading and analysis of DSG's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.