Shareholders in Navios Maritime Acquisition (NYSE:NNA) are stuck. Management has indicated the intention to deleverage (i.e. pay down debt) as a key priority. This can happen in the following ways:
- cash flow from operations i.e. the earnings power of the current fleet
- dropdowns to Navios Midstream Partners (NYSE:NAP)
- vessel sales to unaffiliated parties
Deleveraging Does Not Increase EPS
The "issue" is that paying down debt does not contribute to earnings and consequently EPS growth. In fact, dropdowns and vessel sales have a negative net effect on EPS, as the forgone cash flow is higher than the savings in interest payments. For example, lets assume that NNA sells a VLCC to NAP. NNA will lose the full cash flow of the VLCC going straight to its bottom line and only received distributions from NAP as a unitholder. Also, NAP may not increase distributions anytime soon, given current market conditions. In the case of a vessel sale to a unaffiliated party, all of the cash flow is forgone.
Ways for EPS to Grow
The only way EPS can meaningfully grow, assuming all else constant (i.e. no vessel acquisitions and no buybacks) is the tanker market remaining strong and vessels opening in 2016 and 2017 to be re-chartered at higher rates.
To grow EPS buy acquiring more vessels has the opposite effect of deleveraging, as debt will be required to buy vessels. NNA cannot really afford funding vessels all equity, as some cash must be kept on the balance sheet. Currently the cash balance is around $60m.
Assuming no "malintention" from NM towards its subsidiaries, NNA has tremendous upside. We have published articles before encouraging NNA to accelerate its buyback program. Now things are even more appealing. Around $40m is still left in the existing $50m buyback program. At prices below $2, NNA can retire at least $20m additional shares. Assuming FY 2015 earnings, EPS can grow to around $0.70, from $0.57. Of course, if buybacks occur at lower average prices e.g. $1.50 EPS will grow even more.
The problem with buybacks is that they also put a strain on the balance sheet and have the opposite effect of delveraging, just like buying vessels using debt.
However, buybacks can be gradual and are currently more accretive. It's a wiser use of capital than buying vessels in the opening market at today's fair market prices (in a strong tanker market). It is obviously more accretive for NNA to buyback its own stock at a 50% discount to fair market value.
Another problem is that if NNA conducts buybacks in the open market, NM's economic stake in NNA will increase and surpass the 50% threshold.
The greatest headwind and drag on NNA's share price, besides general market conditions, is the relationship with Navios Maritime Holdings (NYSE:NM). NM is burning cash and investors are concerned that NNA will be used to somehow subsidize / support NM. The same goes for NM's other listed subsidiary, Navios Maritime Partners (NYSE:NMM). Even though NMM eliminated distribution payments, uncertainty is greater than ever. How will NNA and NMM subsidize NM is not clear (options include increasing management fees, NMM buying dry bulk vessels from NM, NNA providing a loan to NM, forced merger (assuming lenders consent), etc.
A Balanced Solution?
Since we do not live in an ideal world and we acknowledge that NM needs help, we would be "ok" if NNA buys back shares from NM at a higher price even at a symbolic 10% to fair NAV (to help NM) and at the same time pursue buybacks in the open market to make up for the higher price paid to NM. After all, NNA investors want to see EPS go up. Deleveraging at the expense of EPS is not something investors want. At the same time, we agree that deleveraging is a key priority. Overall, we have mixed feelings and will be really disappointed if no actions are taken to generate shareholder value.
Disclosure: I am/we are long NNA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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