In the broad 3Q market slump, coupled with a huge shipping stock sell-off, several strong value-plays have emerged. While researching Paragon Shipping’s (PRGN) recent spin-off of Box Ships (TEU), I discovered what I predicted would be a short-term two-bagger, but I avoided recommending Diana Containerships (DCIX) due to “disappointing results.”
Following a tip from Seeking Alpha member Spaede, I decided to conduct a similar in-depth look into DCIX. Based on my analysis, I believe that following the release of Q3-11 results, DCIX stock price will correct to a dividend yield of roughly 7% with momentum bolstered by an incredibility strong net cash position. This correction represents a 71.4% increase from the current stock price.
Diana Containerships (DCIX) began public trading due to a December 2010 announced spin-off from Diana Shipping (DSX). At an initial spin-off market price of $13, and a current market price of $4.58, these shares have lost 65% of their original value. In June of 2011, DCIX announced a pricing of 14.25M additional shares at $7.50. Since this spin-off, DCIX has lost 39% of its market value per share. Additional information on DCIX can be located in their 19 October 2010 prospectus.
Book Value / Net Cash Position:
As of 3 August 2011, Diana Containerships has a book value of $206M with $44.7M net cash. Based upon stated shares outstanding of 23,076,161 trading at a price of $4.58 (market cap of $105.7M), DCIX has a P/B of roughly 0.51 and an ex-cash price of $2.64 per share.
DCIX has not yet had a full operating quarter with its 5 container ships; however, 2Q11 offers a window into the potential results. With an average of 2.4 operating vessels and 214 operating days, DCIX earned time charter revenues of $4.25M. With all 5 vessels employed through mid-2013 at an average gross rate of $21,270 per day minus a 2.25% commission, DCIX is projected to haul in revenue of $9.6M for Q311 (92 days * 5 vessels * 98% utilization * $21.27k).
Assuming constant ratio of voyage expenses (2.1*138.5k), vessel operating expenses (2.1*1.82M), and depreciation (2.1*936k) with $1M in G&A expenses, projected Q311 operating income is $2.5M (9.6M-7.1M). Interest and finance costs should be close to zero, and interest income will provide a positive impact to earnings. My projection is an EPS of 10.8 cents, a forward P/E of 10.6, and an ex-cash P/E of 6.1.
As stated in the 13 June 2011 offering prospectus, Diana Containerships plans to distribute “approximately 70% of available cash from operations during the previous quarter after the payment of cash expenses.” Since the $2M depreciation is a non-cash expense, approximately $3.15M ($4.5M*70%) will be available for quarterly distribution which gives an annual yield of 12% (20.7% yield on ex-cash equity).
Concerns for Future Dilution:
The June 2011 offering brings up an “elephant in the room,” which has scared many investors away. Will DCIX be a dilution machine with frequent equity offerings that result in sharply decreasing share prices? In page 35 of the June 2011 prospectus, DCIX states, “we may also issue additional shares of common stock… [which] may create downward pressure on the trading price.”
This is pure speculation, but an analysis of parent company Diana Shipping (DSX) suggests that the offering was a one-time event to bolster the balance sheets. Since 2007, Diana has issued 18.25M shares, and since 2008, Diana has issued 6.65M shares. This represents a 3-yr annual dilution of 2.9% (4-yr of 6.6%), which is extremely low for the shipping industry. With similar management philosophies as the parent company, it is unlikely that DCIX will experience further dilution, especially with current market prices.
With a projected dividend yield of 12% and guaranteed charter stability through mid-2013 backed by an extremely strong balance sheet, I believe that DCIX is trading for less than 50% of its intrinsic value. If Q3-11 results are similar to what I have predicted, I believe that a strong positive price correction will occur when the results are released.
Disclosure: I am long PRGN, DSX, TEU, DCIX.