The shipping industry has been hammered since 2008 with basement spot rates and several bankruptcies including Korea Line earlier this year. Following Dryships (DRYS) recent purchase of OceanFreight (OCNF), I wrote an article discussing a possible consolidation period in the shipping industry.
Although I focused on companies with above market price liquidation values, Seanergy (SHIP) provides an exceptional target due to strong fleet coverage and a low market cap. With a market cap of $26.35 million following yesterday’s unexplained 16% run-up, SHIP has traded as low as a total cap of $21 million within the past 5 days.
A usual takeover premium is about 50% of the market price, so assuming shareholder approval, SHIP could be acquired for approximately $32M equity plus assumption of $328 million net debt totally a purchase price of roughly $360 million. I don’t wholeheartedly believe that this presents a favorable acquisition opportunity compared to other market offerings such as Excel Maritime (EXM). However, this could be a potential play for several strong balance sheet market leaders such as Genco (GNK), Dryships (DRYS), Diana Shipping (DSX) or International Shipholding (ISH).
With yesterday’s unexplained market pop, it may seem that the market is anticipating an upcoming merger or acquisition.
Seanergy has a fleet book asset valuation of $581 million, consisting of 20 vessels with a total capacity of 1.3 million DWT. the book value is obviously overstated in today’s markets, so adjustments based on current market rates (attained here and here – 15 year data is 6 months delayed so additional 15% write-off will be made) are made.
10 Handysize vessels (average age of 11.7 years) – Comparable to 10 year Handysize – 15% to compensate for 6 month delay and – 5% 1.7 years older ($14.8 million X 10 – 20% = $118.4 million)
3 Panamax vessels (average age of 17.67 years) – Comparable to 15 year Panamax – 15% delay and – 10% 2.67 years older ($21.8 million X 3- 25% = $49 million)
2 Supramax vessels (both 3 years old) – Approx. $30 million each X2 = $60 million
4 Capesize vessels (average age of 17.75 years) – Comparable to 20 year Capesize – 15% delay + 5% 2.25 years newer ($19 million X 4 – 10% = $68.4 million)
1 Handymax vessel (26 years old) – Approx. $6 million (scrapping value)
This represents roughly $302M in liquidation-valued vessels to cover $328 million in net debt, which does not present a strong take-over case with today’s spot rates. However, the BDI is on a small resurgence pattern over the past two weeks, and increasing scrapping rates (2011 is on-track to be the record dry bulk scrapping year) might lead to an increase in bulk fleet valuations.
Fleet Coverage / Low Break-Even Margins:
Seanergy has secured contract coverage for 93% of the remaining 2011 operating days and 64% for 2012. Most of Seanergy’s contracts have an upside spot rate profit-sharing clause that can provide additional upside in case of a market resurgence. Under the current reported TCE of $15,504, SHIP can still earn projected net income margins of 9.2%, and projected cashflow of $5,816 (net income- depreciation and amortization / cash flow margin of 37.8%).
SHIP doesn’t currently pay a dividend, so this represents significant cash flow that can be applied toward debt coverage. At the current low TCE, SHIP can still generate over $40M per year in operating cash flow.