Diamond S Shipping Group IPO Could Continue Steer This Company Straight

Mar.12.14 | About: Diamond S (DSG)

Summary

DSG is a provider of seaborne transportation for refined petroleum and other products.

DSG plans to raise $210 million in its upcoming IPO, offering 14.0 million shares at an expected price range of $14-$16 per share.

We rate this firm as neutral to buy, given the company's continual improvements to its fleet and its strong leadership.

Diamond S Shipping Group Inc (Pending:DSG), a provider of seaborne transportation for refined petroleum and other products, plans to raise $210 million in its upcoming IPO.

The Greenwich, Connecticut-based firm will offer 14.0 million shares at an expected price range of $14-$16 per share. If the IPO can find the midpoint of that range at $15 per share, DSG will command a market value of $710 million.

DSG filed on February 4, 2014.
Lead Underwriters: BofA Merrill Lynch, Jefferies LLC
Underwriters: DNB Markets Inc, Fearnley Securities AS, Global Hunter Securities LLC, HSBC Securities Inc, Skandinaviska Enskilda Banken AB, Stifel Nicolaus & Company Inc

Summary
DSG is a provider of seaborne transportation for refined petroleum and other products in the international shipping market--and is amongst the world's largest owner/operators of medium range product tankers, with a fleet of 33. Thirty of the firm's tankers are currently under time charters with fixed base rates, generating stable cash flows, and twenty of the time charters also provide for profit-sharing. As of December 31, the average remaining length on the current fleet's charters was two years.

DSG plans to continue to expand its fleet to take advantage of low asset values and a highly fragmented product tanker market. The firm recently acquired three tankers from investment funds managed by CarVal Investors, and intends to use the proceeds of this IPO to partially fund the purchase of ten new product tankers that will be delivered between September 2014 and December 2015.

Valuation
DSG offers the following figures in its S-1 balance sheet for the nine months ending December 31, 2013:

Revenue: $134,416,625.00
Net Income: $2,267,644.00
Total Assets: $1,212,021,239.00
Total Liabilities: $629,655,124.00
Stockholders' Equity: $582,366,115.00

The firm's S-1 filings also provides information for the year ended March 31, 2013, including a total revenue of $175.9 million and a net income of $11.0 million.

Business
DSG charters its fleet to well-established firms including Glencore Xstrata, Tesoro Corporation (NYSE:TSO), A.P. Moller-Maersk A/S, and Trafigura Beheer BV, providing security and stability to its base revenues from charters.

DSG operates in the highly fragmented and competitive markets, and its competitors include both other independent tanker owners and large oil companies that own their own tanker vessels. The firm competes for charters on the basis of price, and vessel location, size, age and condition.

Management
President and CEO Craig Stevenson, Jr. has served in his current positions since DSG's, inception. Mr. Stevenson previously served as the Chairman of the Board and CEO of OMI, and also oversaw the sale of that firm. He is non-executive Chairman of Intermarine and a Director of the American Bureau of Shipping. Mr. Stevenson holds a degree in Business administration from Lamar University.

Notably, Wilbur L. Ross, Jr, the billionaire investor and chairman and CEO of the WL Ross private equity firm, serves as the Non-Executive Chairman of DSG's board of directors and has done so since inception. He is also the largest DSG shareholder. Mr. Ross is known for restructuring firms in various industries, and has assisted in the restructuring of over $300 billion of corporate liabilities over the course of his career. Mr. Ross served as Executive Managing Director of Rothschild Inc for 24 years before acquiring that firm's private equity partnerships in 2000. He holds an A.B. from Yale University and an M.B.A. from Harvard University.

Conclusion
We rate this firm a buy given Wilbur Ross's role at the lower end of the proposed range.

Though it's hardly making a killing, with a net income of $2.3 million on over $134 million in revenue, DSG is in the black, and we believe its instinct to expand by increasing its fleet size approximately 30% over the next two years is correct.

As charterers and government regulations enforce increasingly more stringent environmental rules on tanker vessels, vessel operators must purchase newer vessels and upgrade their older vessels to stay ahead of the curve; DSG has proven dedicated to both endeavors.

The involvement of Wilbur L. Ross in this firm is also encouraging, given his impressive personal track record.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DSG over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.