Box Ships (TEU), the container spin-off of Paragon Shipping (PRGN), recently declared its first dividend of $0.15 per share, which nets a 7.25% yield at today’s market price. However, if an investor digs deeper into the 2Q report this widely unnoticed gem is revealed: “the Company expects to pay a dividend of $0.30 per share starting with the third quarter of 2011.” 30 cents represents a yield of 14.5% at Wednesday’s closing price ($8.28). 15% is unbeatable anywhere besides MREITs, so some very important questions arise. Isn’t the shipping industry in trouble/ how is TEU positioned? Is the dividend sustainable? Is the payout ratio feasible to support $1.20 per year? Will the stock consistently return 14.5%? In case you don’t feel like reading below, the answers are TEU is positioned well, the dividend appears sustainable, and I expect the yield to normalize back to 7%-8% - aka two-bagger next quarter. If you want more depth -- read below and feel free to question the analysis.
Shipping Industry in Trouble
Anyone who has been following shipping stocks knows that we are in dark, dark times. However, containerships present a rare profit opportunity in an otherwise devastated sector. Weren’t tankers similarly positioned? Weren’t VLOCs a niche play just the other day? Yes - but this company is a bit different — and here’s why: The container market is currently crashing bad with historically low rates, unprofitable companies, and a large order book on the horizon. However, there is a strong outlook for growing demand for containerships, and TEU is the place to be.
How is TEU Positioned?
Wait a minute? The market is bad for containerships right? Yes… and no. Although some companies such as Neptune Orient (OTC:NPTOF) are struggling to turn any profit, and others such as Diana Containerships (DCIX), a recent Diana Shipping Inc. (DSX) spin-off, fail to produce meaningful results, TEU is well set. TEU just wrapped up the 2Q-11 with 3.79 vessels operating for 296 operating days total. The company reported revenue of $7M and net income - NOT EBITDA - of 16 cents per share. Where is the 30 cents going to come from? The initial fleet had not been completely delivered and a new purchase was delivered in August. TEU now has 7 ships with a potential for 640 operating days (100% utilization). Not only will the operating days go up, but the TCE will enjoy a boost as well ($25k projected, increase of 5%). Expect 35-37 cents of EPS for 3Q-11.
What about the time charters? TEU must have locked in some “golden” rates that are expiring right around the corner? We’ve all seen this movie before, but fortunately this one isn’t too bad. TEU’s largest charter is locked until May 2016, 3 charters expire in mid 2014, and two expire in August 2012. The two that expire in August 2012 are already the two lowest revenue-generating charters ($20k/day). The current market rate for their size is $16k, and could continue to drop. However, the rates were north of $20k less than 2 months ago, so maintaining the same (or scoring a better) charter rate isn’t out of the question.
Debt is currently valued at 43% of assets, but TEU had the luck of buying most of its fleet while the market was struggling. These ships should not show the massive market to book discrepancies that are common in other companies. The interest rate coverage is currently 5.52, not accounting for increased cash flow next quarter.
The revenue/profit picture should not change much between now and mid-2014, and while that is disappointing for some who seek rapid growth, with a current anticipated yield of 14.5% and with a payout ratio of 83% (NI) and a FCF payout (EBTDA) of around 45%, the stability is almost guaranteed through mid-2014.
It’s still pretty early (just over 4 months of post-IPO operations) to judge the management; however, their recent purchase of the 7th containership is very promising of good control to come. Fair-value was paid for the ship, there was less than 6 weeks between purchase and delivery, and a 3 year market-premium contract was attached. The best part? There was no additional equity dilution to finance this purchase. The only risk I see here is that TEU is 21.3% owned by PRGN so there might be potential conflict of interest regarding the containership purchase when PRGN’s 2 new ships come on-line in 2014. However, the PRGN ownership might turn out to be a good thing because TEU is now PRGN’s cash cow, and it will do everything it can to protect the sustainable income.
Potential for Large Equity Gains
I don’t think many people even know that TEU exists, let alone the dividend prospects. Once the near-15% yield is online and investors realize the sustainability, I expect the yield to normalize much closer to the 7%-10% range. This represents solid dividend income coupled with equity-upside. You heard it here first.
Disclosure: Long TEU.