The shipping industry has been hammered since 2008 with basement spot rates and several bankruptcies including Korea Line earlier this year. Following Dryships (NASDAQ:DRYS) recent purchase of OceanFreight (NASDAQ: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 (NASDAQ: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 (NYSE:EXM). However, this could be a potential play for several strong balance sheet market leaders such as Genco (GNK), Dryships (DRYS), Diana Shipping (NYSE:DSX) or International Shipholding (NYSE: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.