A Look at Dry Bulk Company Valuations

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 |  Includes: BALT, DSX, ESEA, EXM, FREEF, GNK, NM, NMM, NNA, OCNF, PRGN, SB, SBLK, SHIP
by: J. Bruun

The dry bulk market is still depressed after the global financial crisis. Too many ships are on order, there are too few demolitions, there’s too little growth in demand relative to supply and there's a fragmented market.

I am not ready to say that the worst is behind us but in the long term I think one will do well from the long side in this sector. I just can't say if you need to wait 1 or 3 or 5 years. So for now I think the best opportunity is for relative value positions. Either way I hope below can help people invest from either the short, long or neutral angle.

Management summary

I have spent the last weeks on completing an analysis of the majority of US listed dry bulk ship owners and a few of the overseas. The conclusions are the following:

  • The market capitalization of the companies analyzed is roughly equal to the Net Asset Value of the respective balance sheets at market prices including value of long term charters. If JinHui listed in Norway is excluded this is the case. If it is included then the companies trade at a 2% discount to NAV.
  • There are significant variations around this average and what seems to determine the premium or discount to NAV best is the amount of long term charters at a premium that the company has entered into. This is even though they are included in the NAV so it can be argued that the markets overstate the value of long term charters perhaps because they lead to higher short term income and lower/better PEs. There are however, also companies that are undervalued despite their good charter coverage.
  • For the patient investor shorting the cheap names and going long the expensive names while waiting for the valuation gap to narrow as long term charters mature is an attractive proposition.

Valuation model

As I have argued in the past (here and here) the most appropriate valuation model for ship owning companies is a net asset value calculation. The reason for this is:

  • Industry has close to perfect competition
  • To a large extent identical assets within each ship segments
  • Price takers
  • Low barriers of entry
  • Global business

Valuation calculation

  • + Market value of existing and undelivered ships using actual recent transaction data and interpolating for missing ship sizes and ages.
  • - Upcoming installments for ships on order
  • + Net current assets (Cash and similar - liabilities)
  • - Debt
  • + Market value of long term charter agreements (charter rate - market rate) * duration discounted with 10% and in some cases 5% for very solid counter parties
  • + Other. Some companies own stakes in other (listed) companies
  • = Net Asset Value

Interpretation

Some of the companies are very leveraged and if you for instance commit 1 USD to EGLE you get exposure to 6.4 USD of ship assets. This means that when calculating the NAV you are comparing two large numbers (assets vs liabilities), which leads to a high degree of uncertainty on the NAV.

As an example a company has assets of 100 USD and liabilities of 90. This means a NAV of 10. Given there is a certain level of uncertainty on the assets side of say 5% and no uncertainty on the liabilities side the NAV may be between 5 or 15 (95 - 90 or 105 - 90). If the company instead had 100 of assets and no liabilities then the NAV is 95 or 105. This means that the higher the leverage the higher the risk of making an inaccurate NAV calculation.

The solution to this is to express the mis-pricing in terms of % relative to ship values and not market cap, which in above example is both 10%.

Valuation results

  • * Value to loan is calculated as (ship value + long term charter values + other) / (debt +/- net liquid assets + installments)
  • ** Ship exposure / USD investment is calculated as (ship value / market cap)

There are very large valuation differences versus NAV depending on the company. As a group the market cap is almost equal to the NAV. This leads me to have trust in the valuation model. Below I will discuss each company.

The overvalued companies

Genco Shipping & Trading Limited (NYSE:GNK)

Has a very large debt burden and it almost exceeds the value of its ships. This makes it highly speculative and it is also in breach of some of its loan covenants as I understand it. All but three of its long term charters will expire in 2011, which will depress earnings. Perhaps the reason the market lets this company trade at such high premium to NAV is because it is like an option. If things turn around you will have high upside and if not you only lose your principal.

GNK owns part of BALT.

Active in all ship sizes.

Seanergy Maritime Holdings Corp (NASDAQ:SHIP)

Very similar to GNK. It has a larger exposure to the handy segment, which I think is positive due to the global fleet of handies high age / scrapping potential and small order book. It is also marginally less leveraged.

Navios Maritime Partners L.P. (NYSE:NMM)

On a ship basis this is the most grossly overvalued company. Second hand prices need to almost double to justify its current price. NMM enjoys many long-time charter agreements with high rates reaching into 2022 in one case. This and low debt allows them to pay a high dividend. So in many ways a great company, just much too expensive.

Some people also seem to have a preference for this company due to its legal structure and its tax implications.

Companies priced in line with NAV

Safe Bulkers Inc. (NYSE:SB), Eagle Bulk Shipping Inc. (NASDAQ:EGLE) and Excel Maritime Carriers Ltd. (NYSE:EXM)

I prefer SB over the others as it pays a handy dividend and has less leverage. EGLE is exclusively active in the supramax market so if you believe in this segment EGLE is the one.

EXM has long charter coverage on its Capes.

SB has long charter coverage overall, which will protect earnings in the years to 2013/14

EGLE has little charter coverage after KLC defaulted on all but one CP.

The undervalued companies

Paragon Shipping Inc. (NASDAQ:PRGN)

Recently spun off its container ships into Box Ships (NYSE:TEU). This has reduced leveraged and in my opinion this company offers excellent value. Moderate leverage, low valuation, no exposure to the cape segment where most of the new buildings are, good charter coverage in 2011-12-13 and a 7% dividend yield.

Euroseas Ltd. (NASDAQ:ESEA)

Half the assets are in container ships, which are enjoying smoother seas and the TC on most of the container ships are set to increase significantly during 2011 as the old CP expire. Low leverage, low valuation and good 5% dividend.

Star Bulk Carriers Corp. (NASDAQ:SBLK)

Has the highest dividend of 8.6%, ok leverage, and some charter coverage. The only negative is that the company is heavily exposed to capesizes but if that is what you believe in then this is the company.

FreeSeas Inc. (FREE)

Is only active in my favorite segment of handies and given its high leverage it is poised to do very well should the bulk sector improve. The risk is naturally that it doesn't, but there is some safety margin in the 119% VTL. This stock is illiquid though.

Baltic Trading Limited (NYSE:BALT)

Cheap and very safe but I will skip it due to its association with GNK as there are other at least as attractive opportunities

OceanFreight Inc. (NASDAQ:OCNF)

This company is also attractively priced but has exhibited a very dilutive management over the past years. If this has ended it offers great value especially if you are looking for the VLOC segment. It has high leverage like FREE.

Navios Maritime Holdings Inc. (NYSE:NM)

This is the holding company of the Navios group of companies. It owns part of NMM and NNA (tankers) and also part of Navios South America Logistics, which does barging and terminal business in South America. The company has a good amount of leverage, great charter coverage, low valuation and I am guessing it is the one doing the better deals when selling ships to NMM. Unfortunately it has also chartered a number of vessels with medium duration at rates I am not familiar with. This makes the valuation uncertain.

Diana Shipping, Inc. (NYSE:DSX)

Very safe company with a ton of cash, long good charter coverage, little debt and a steep undervaluation. The only negative thing I can say is that it is hard to understand why it still hasn't reinstated the dividend. Perhaps it is waiting to buy the competitors at distressed prices should the market continue to be depressed.

Relative perspectives

Yield

If you are primarily looking for yield then sell NMM and buy SBLK or PRGN. Same yield and you are substituting overvaluation with undervaluation.

If you want the safest bet then

Go for DSX. Cheap valuation and fortress balance sheet.

Maximum upside

Free has high leverage and low valuation. This is a powerful combination. Get out of GNK. High valuation and high leverage is not an attractive bet.

Looking for rising earnings

ESEA is my best candidate. Low valuation and the container ships will start earning significantly more during 2011 as old TC expire.

Disclosure: I am long FREE, PRGN, EGLE, NM and short GNK, NMM and SHIP