Safe Bulkers, Inc. (SB) is a Greek dry shipping company that operates 15 vessels. I had previously made the argument that Safe Bulkers, Inc. was undervalued here. Now that the company has released 3Q earnings we will continue with that analysis to see if the situation has changed at all.
The past few years have been rough years for dry bulk shippers. During the recession, the Baltic Dry Index (BDI) rose to a high of 11,600 before crashing to the mid 600s. Clearly there were some headwinds facing the industry to warrant a 95% drop in the index. These headwinds include a possibility for oversupply in the midst of a recession and falling rates.
Other drybulk shippers like Excel Martime (EXM) took on crippling levels of debt to expand just prior to the crash in rates. This was also true of a few other shippers and now they are struggling because of it. In 2009 the BDI recovered to 4600 before falling to 2400 which is about where it is today.
A large part in these declines is the drop in spot market rates to levels that were unprofitable for dry shippers. Rates have since recovered some, but are still relatively low and have fallen even lower in 2010 which is why we see a drop from 2009 to 2010 in the price of dry bulk shippers. This can be seen in the average contract prices in 2009 and 2010: $36,241 and $29,583 respectively. That’s an 18% drop.
In the 3Q Safe Bulkers shippers reported revenues of 40.8 million. That is 11% higher from the corresponding period in the 2009. This is largely due to having a 15th ship available to them that they have contracted out. Despite rising revenues, earnings decreased by 1% to 22 million.
A large amount of earnings in 2009 can be attributed to canceled contracts that the company was able to collect significant charges on. This set the bar really high for outperformance. This 22 million equates to about $0.33 EPS for the 3Q alone. For the nine month period ending Sept. 30th earnings were $78.5 million.
Safe Bulkers, Inc. will be adding 7 new vessels to their young fleet over the period of the next three years. The current average age of their fleet is 3.8 years which should equate to lower maintenance expenses and etc. over the course of time. As long as they can operate these news ships at the smallest amount of profit we should see earnings growth over the next three years due simply to fleet expansion. Including these new vessels’ availability,
Safe Bulkers has managed to contract 68% of available operating days in 2011, 58% in 2012, and 52% in 2013. This is an improved situation since I wrote last, just two and a half months ago. Remember, this includes the delivery of the new ships so it’s a promising situation for them to have over 50% of the days in 2013 already booked.
In my last article, comments were made to suggest that dry bulkers may not be operating ships for a large part of the year and that this will cost them significant sums in dry docking fees. This would also suggest that those rates listed above could be misleading to investors as to how often ships are actually contracted out. I have run the numbers and of the 274 days available to each ship in the nine months of 2010, they were operating their ships for 94% of them.
Safe Bulkers, Inc. has managed to increase its book value from $1.74 a share on of Dec. 31st 2009 to its current value of $3.38, though a large amount of this growth can probable be attributed to a recent share offering that provided the company with a lot of cash per share.
Safe Bulkers currently sports a trailing P/E ratio of about 5. That means that this company only has to achieve growth of 5% to have a PEG ratio of 1. This 5% should be attainable given that the company is adding 7 new vessels over the next three years.
With the kind of returns SB has offered, it should trade at much higher prices. Using its earnings as a metric, SB has a return on equity of 45%. Given a rough version of owner’s earnings that I calculated it has an ROE of over 50%, though this figure is rough because no cash flow numbers have been provided by the management.
These returns suggest that it should trade at 4-5x its book value which yields a price around $13-17 at a minimum. If we apply a multiple of 12 to its trailing earnings, we get a number in the near high end of this range. Clearly, SB is worth more than the $8 a share it’s trading at, even if the shipping environment remains tough as it has been. While you wait, SB pays a 7% dividend that is less than a 50% payout, so it should be relatively safe and stable while offering an attractive return that can be reinvested for an even larger attractive return.
The reason that SB has been able to deliver such strong results is because its ships are contracted on a long-term basis at set prices and not in the spot markets which have been suffering recently. Given the strong recovery in China, I am expecting shipping markets to pick up enough to address the problems of the oversupply that overshadows the industry. Also, shippers who are unable to sustain themselves at current rates and face large debt payments are likely to cancel some orders as they will be unable to afford to accept delivery of the ships. This will only help SB in the long term.
Despite the majority of ships being contracted on a long-term basis, SB does have an opportunity to benefit from rising rates if they should occur. However, this will also expose them to the possibility of lower earnings should rates fall in the near future. Between now and 2013, SB will have six ship charters that expire that can be re-chartered at the higher (or lower) rates. This bet is hedged by the contracts on their other ships still remaining in effect.
As always, this is simply to spark interest. Investors should do their own due diligence before determining to purchase any security mentioned in the article. Please feel free to leave feedback and comments.
Disclosure: Long SB