Seeking Alpha
Portfolio strategy, short ideas, value approaches, global shipping and trade
Profile| Send Message|
( followers)  

Paragon Shipping (NASDAQ:PRGN) has been badly beaten by the markets along with the entire shipping sector. Paragon reported a loss of $16.8M for Q2-11 (reported August 8th), mainly due to a $14.8M loss on sale of assets due to depreciating equity valuations.

The entire sector has been down due to a weak overall shipping market; however, Paragon Shipping has suffered more than most of its peers, with a 58.5% drop in stock price over the past 3 months.

I believe that the market has over-reacted regarding this shipping company, and that the intrinsic value of the company is far higher than what the street is currently offering with a market cap of $17M.

click to enlarge images

Debt Coverage:

Most shipping companies are saddled with an enormous amount of debt, and Paragon is no exception. According to the most recent quarter (Q2-11), PRGN has $254.7M of total debt, with $31.88M due within the next 12 months. This is backed up by $45.24M in cash, and $633M in vessels, leaving a net debt of $209.5M, and a 33% debt-to-vessel assets. PRGN has generated $24.5M in operating cash flow over the past 6 months which coupled with cash reserves are more than sufficient to cover near-team debt hurdles.

Liquidation Valuation:

Paragon’s fleet consists of 11 available drybulk vessels (1 Handy max, 8 Panamax, 2 Supramax), with 2 additional Handysize vessels set for delivery in Q4-11, 3 vessels (2 Handysize, 1 Kamsarmax) scheduled for delivery in mid-2012, and 2 containerships scheduled for delivery in Q4-13 (likely to be resold to Box Ships).

Discounting the vessels that will be delivered in FY12 and 13 (although the debt reflects some advances on these vessels), Paragon has a total of 3 Handysize (2 new, 1 at 16 years), 8 Panamax (average age of 7.8 years), and 2 Supramax (average age of 4.5 years).

The most recent report (August 11) that I can find lists 5 year Panamaxes as worth $28.5M on the open market. 5 year Supramaxes are worth $26M, while new Handysizes are going for roughly $25M each.

This gives PRGN a value of $52M with its Supramax fleet, $50M with the two new Handysize vessels, and approximately (60% of 5-yr valuation) $137M with the Panamax vessels. The 16 year Handysize will be written off as worthless in my simple analysis.

This gives PRGN a vessel liquidation valuation of $239M. With the debt of $209.5M removed, PRGN is left with $29.5M over a market cap of $17M (liquidation upside of 73.5%).

If this doesn’t convince a purchase of PRGN, there’s still more upside below-

The Underlying Prize (Box Ships):

Paragon Shipping currently owns 21.3%, or 3,437,500 shares, of Box Ships (NYSE:TEU). Based on current market prices ($9/sh), this investment alone is worth $30.9M, and was not included in the above valuation analysis.

Box Ships recently declared a quarterly dividend of 15 cents a share, which gave PRGN an income of $516k. Box Ships’ most recent quarter reflected 296 fleet calendar days, and due to increased fleet size, this figure will be closer to 630 days (100% utilization) in future quarters.

Box Ships also owes PRGN $30M under a recent credit-facility, this credit-facility was also not included in the above valuation analysis.

Stronger/Smarter Management:

Although Greek shipping companies commonly raise new capital through vigorous dilution of shares, Paragon has issued shares at a much lower pace. Over the past two years, PRGN has issued net 7M shares, reflecting a dilution of only 13.4%, while the related stock price has fallen 72.5%.

PRGN paid a dividend of 5 cents for four consecutive quarters until the company was forced to suspend payments to provide stronger debt coverage. Unlike Starbulk Carriers (NASDAQ:SBLK), who chose to perform a massive equity dilution, Paragon chose to suspend the dividend. The stock price has fallen 58.5% since this announcement last spring.

Summary:

I believe that the market is behaving irrationally to give a solvent company a market valuation of $17M, when underlying investments alone (if sold today) are worth $31M ($61M if loan is considered). Vessel market values can be debated, but if PRGN can sell their vessels for 33% of book value, they will fully cover their debt obligations.

Source: Paragon Shipping: Value Play in Box Ships Equity