Excel Maritime Carriers: Trading Below Liquidation Value

| About: Excel Maritime (EXM)

Excel Maritime has taken a beating in the recent market, falling more than 40% in the past three months. Although the shipping industry is in a major slump, the BDI, the main market indicator of charter rates, is at the same level that it was at three months ago.

Due to the rapid stock price decline of most shipping companies, many companies are trading at, or even below their liquidation value. I recently posted an article that suggests that an industry-wide consolidation phase is about to take place. I also wrote articles that broke down the valuations of Starbulk Carriers (NASDAQ:SBLK) and DryShips (NASDAQ:DRYS). However, EXM trades at a larger discount than either of these companies and does not have the additional burden of questionable management practices.

Financial Results

In the most recent financial quarter (Q2-11 reported on 28 July 11), EXM reported revenue of 91.96M (14% decrease year/year) and a total loss of $16M ($0.19/share). In the previous year’s quarter, discounting one-time accretive items, EXM lost $11.43M ($0.14/share).

In the most recent 6 month period (Jan-Jun 11), EXM reported revenues of $189.24M (10.4% decrease y/y) and a total loss of $17M ($0.20/share). In the previous year’s 6 month period, discounting one-time accretive items, EXM lost $12.5M ($0.16/share).

Financial Stability

EXM has a “scary” current ratio of 0.56 which is exacerbated by a large maturity of long-term debt due in late 2011. If EXM fails to renew this credit arrangement under a new facility, there is the potential for forced liquidation of vessels and/or bankruptcy. According to my analysis explained below, bankruptcy would result in a premium payout to shareholders at current market prices.

Valuation Play

Due to the recent market slump, book value cannot be trusted as an accurate valuation metric of ships; therefore, I used two alternate valuations approaches. Approach #1 assumes that all ships are only worth 50% of their carrying book value, which presents a rather inaccurate (but highly conservative) liquidation value. Approach #2 uses a shipping brokerage site to track recent sales of similar ships in an attempt to get accurate market valuations. Since January 2011 is the most recent month of sales available, I have knocked an additional 15% off of January’s prices. January had a BDI of $1600-$1100, and the current BDI is $1256, so I believe this is also a very conservative estimate.

Approach 1- Simple liquidation value:

EXM has a net debt of $1.03B backed up by vessel valuations of $2.65B. Assuming 50% liquidation values, this gives EXM a leftover value of $295M. The current market cap for EXM is $204M, which represents a liquidation discount of 31%. To break even, the vessels must be marketable for at least 46.5% of their book value.

Approach 2- Market-rates liquidation value:

--14 Kamsarmax vessels with an average age of 4.86 years (range of 4-6 years) – comparable to 5-year Panamax (Kamsarmax are actually about 10-20% larger DWT, but more data exists for Panamax) @ $39M - 15% = $33.1M valuation X 14 vessels = $463.4M

--21 Panamax vessels with an average age of 13.95 years (range of 7-18 years)—comparable to 15-year Panamax @ $21.8M - 15% = $18.5M valuation X 21 vessels = $388.5M

--7 Capesize vessels with an average age of 5.7 years (range of 0-12 years)—comparable to 5-year Capesize @ $56M - 15% = $47.6M valuation X 7 vessels = $333.2M

--2 Panamax vessels, both of which are 6 years old – comparable to 5-year Panamax @ $39M – 15% = $33.1M valuation X 2 vessels = $66.2M

--4 Handymax vessels with an average age of 20.5 years (range of 13-26 years) –comparable to 20-year Handymax @ $13M - 15% = $11M valuation X 4 vessels = $44M

This approach leaves EXM with a total valuation of $1.295B – debt of $1.03B = liquidation valuation of $265.3M. Compared with the current market cap of EXM ($204M on 2 August 11), this represents a liquidation discount of 23.1%.

Trading Ideas

I believe that there are three potential up-sides to trading EXM:

1- --(Best Case) The market recovers and EXM is a profit making machine with a P/E of under 1. Dividends will be resumed and debt will no longer be a large overhang based on cash flows and earnings.

2- --(Strong Trading Profits) EXM is purchased by a financially strong entity such as Diana Shipping (NYSE:DSX), which is looking to cheaply expand its fleet. Diana has available cash of $373M and is cash-debt positive, so I think this option is financially viable.

3- --(Small Profit) EXM goes bankrupt and is forced to sell off all of their ships. This leaves the investor with a potential estimated premium of 23.1% based on August 2nd stock prices.

I firmly believe that both valuation approaches used above are conservative, and that EXM is an obvious valuation play at current prices. This is my opinion only, and any investor should also do their own market research before making an investment decision.

Disclosure: I am long EXM, SBLK, DRYS, DSX.