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Safebulk Shippers (NYSE:SB) is a relatively new play in the drybulk shipping game. Currently, Safebulk operates 15 vessels and will be receiving delivery of seven more at different intervals between now and 2013.The drybulk industry has been terribly volatile during the course of the recession with rates dropping substantially from their highs in 2008 and recovering quite a bit in 2009. Since then rates have come down a bit again and I believe that a play can still be made on the recovery of the industry.

Safebulk Shippers has net income of $24.4M for the six months ending June 2010. This is significantly down from rates in the corresponding 2009 period. This is due to a decline in shipping rates, but is also due to company receiving a large amount of money throughout the year 2009 for early redelivery fees that they were able to collect.

Clearly there is still pressure on shipping rates due to the slow nature of the global recovery and the present fears of oversupply in the industry; however, I feel that Safebulk Shippers will be able to overcome these obstacles through a combination of factors.

1) Their huge margins. Operating margins were 81.7% in 2008, 76.5% in 2009, and are currently 68.9% for the first six months of 2010. Such high margins should be able to allow the company to continue earning profits despite uncertainty regarding prices in the future. While it is not the best sign for margins to be shrinking as they are, they are still sufficiently high to provide a wide margin for continued earnings.

When looking at the average daily operating costs of $4,362 and compare them with the average Time Charter Equivalent rate of $29,706 that the company receives for operating its vessels in the most recent quarter, it is clear to see that there is a large margin for rates to fall before the company is in any dire position.

2) Their superior financial position. When compared to several other peers in the industry, Safebulk shippers is not under immediate threat of being crippled by its large outstanding debt like some of its peers who loaded up on debt during the boom years before the recession. This could put it in a prime position to take advantage of potential opportunities that may present themselves in the future if conditions get worse.

3) Their young fleet. Safebulk shippers vessels have an average age of 3.55. This means that over the next several years Safebulk shippers will most likely have to spend less in repairs and replacements for its vessels given that they are all still relatively new.

4) Their ability to charter their fleet in advance. 88% of the remaining days of 2010 have already been filled, 61% of available days in 2011 have been filled, and 53% for 2012. This is guaranteed income in the future and if the contracts are cancelled, SB will collect a large upfront early redelivery fee as was the case in 2009.

The company is expected to make $1.63 this year and $1.64 next year and clearly there is earnings growth potential as the company expands its fleet by 50% over the next three years. Even if the company only earns one half of the projected amounts for 2010 and 2011, it would still be trading at a P/E ratio of 9. This means that an investor has huge downside protection in the event of reduced earnings in the future given the current P/E ratio of 4.7.

If that is not enough to convince you, consider its 7.7% yield, which is equivalent to $0.60 a year. Clearly the earnings are more than enough to cover the dividend and the cash flow of the company appears to be able to sustain it, though one cannot be quite certain of this until the company releases its next annual report.

I believe that Safebulk Shippers is an attractive investment opportunity that has a large amount of downside protection with large upside potential, even if no recovery takes place within the industry. While you wait you will receive the 7.7% dividend, at least temporarily. This seems to be one of the “heads I win, tails I don’t lose much” situations that Mohnish Pabrai loves and looks for.

Disclosure: Author has been long SB since June 2010

Source: Safe Bulkers, Inc.: Risk/Reward Disproportionate?