Star Bulk Carriers: Cruising Ahead on a Comparative Advantage

Comparative advantage can be readily witnessed in specific country output: Germany, beer; France, wine; Switzerland, watches; United States, media; Colombia, coffee. And then there's Greece, which has long demonstrated a persistent comparative advantage in bulk-ocean shipping. It's an advantage we expect Athens-based Star Bulk Carriers Corp. (Nasdaq: SBLK), a major transporter of iron ore, coal, grains, bauxite, fertilizers and steel products, to perpetuate well into the relevant future.

Star Bulk is a newbie to both the world's shipping lanes and the U.S. equity markets. The company, incorporated in the Marshall Islands on Dec. 13, 2006, and is the product of its Nov. 30, 2007, merger with Star Maritime Acquisition Corp., a special-purpose acquisition company, leaving Star Bulk as the stand-alone entity. It subsequently received Nasdaq-listing approval, with trading commencing Dec. 3, 2007.

In its new form, Star Bulk operates a fleet of eight dry bulk carriers, and has a definitive agreement to acquire two dry bulk carriers. The fleet consists of three capesize, one panama and six supramax dry bulk vessels, with an average age of 11 years and a combined cargo carrying capacity of 927,800 deadweight tons. Vessels are classified into four categories based on their carrying capacity in deadweight tons: handysize (10,000-39,999 DWT), handymax/supramax (40,000-59,999 DWT), panamax (60,000-99,999 DWT) and capesize (higher than 100,000 DWT).

Last week, Star Bulk reported its first public financial statements. Net income posted at $1.61 million, or $0.05 per share for the fourth quarter, compared with $620,000, or $0.02 per share, in the same quarter last year, on reported total revenue of $3.69 million. But since Star Bulk is such a different animal compared to last year, the numbers are essentially meaningless.

But that's OK. Investing, as has been often stated (at least in this column), is about the future. And Star Bulk's future looks as enticing as the Cote D'Azur on a still mid-summer's day. The three brokerages that follow Star Bulk — Stephens Inc., Dahlman Rose and Maxim Group — form a consensus EPS of $1.38 on revenue of $135 million for fiscal-year 2008, which produces a very Ben Graham-like 8.7 forward price-to-earnings ratio, compared to a peer-group — comprising Diana Shipping Inc. (NYSE: DSX), Genco Shipping & Trading Ltd. (NYSE: GNK), Eagle Bulk Shipping Inc. (Nasdaq: EGLE) and Quintana Maritime Limited (Nasdaq: QMAR) — P/E of 10.6.

Star Bulk's other notable comparative advantage to its peer group is returning cash to shareholders. Last week, Star Bulk adjusted the minimum dividend for the first quarter of fiscal 2008 upward to $0.35 per share from $0.325 per share, producing an annual dividend of 11.7%, compared to a peer-group average of 6.6%. What's more, the board of directors approved a plan to repurchase up to $50 million of common stock and warrants over 2008.

Inquisitive investors will ask, “Is it wise to pay a $1.40-per-share annual dividend when 2008 EPS is expected to be $1.38?”

The short answer is “yes.” The shipping industry sports significant operating leverage, meaning fixed costs tend to be very high, while variable costs tend to be very low, which produces high rates of depreciation (a non-cash expense), so cash flow rather than earnings is the more important variable. Replacing earnings with operating cash flow, dividends and proposed share repurchases are easily covered, with dividends consuming only 56% of projected 2008 operating cash flow.

But we are talking investing here, not a Harlem Globetrotters versus New Jersey Generals basketball game, so there is risk associated with reaching for that tempting yield. The biggest risk is that world economic growth rates stagnate. Many commentators are wary that the industry could be on the precipice of a down cycle because of recent activity in Baltic Dry Freight Index, a measure of dry-bulk shipping rates.

The BDI dropped nearly 50% from November through January, but advanced 26% in February. (It's a volatile index.) Concurrently, Star Bulk's shares commenced trading at $15.50 a share in early December, dipped to $8.66 in late January and have recovered to near $12 today. So as the BDI goes, so seems to go Star Bulk. Investors are concerned the BDI could do another about face, especially given the precarious state of the U.S. economy, and shipping rates could again tumble.

Such concerns may be overdone. World GDP growth is expected plug ahead 3% this year, an unspectacular but still yeoman's rate. According to trade credit insurer Euler Hermes ACI, United States, Japan and Euro-zone growth will fall to below 2%, but India and Asia are expected to keep surging at an 8% rate, while the Middle-East, Latin American and Eastern European should keep cruising along at a respectable 4% to 5% clip. In other words, bulk carriers still have plenty of business, evidenced by the fact that Star Bulk's fleet is 100% chartered through 2008.

Given its P/E ratio, dividend payout (you don't raise the dividend unless your confident about your future), charter rate, share price and likelihood of thriving during an economic slowdown among the G-7 countries, Star Bulk (SBLK) has a comparative advantage over many other options confronting investors today.

Comments

[dennis Loeser:]

Two additional items the writer on Star Bulk didn't mention is SBLK debt to equity ratio is a very low (for the industry) 22%. Also, SBLK has warrants outstanding to purchase new shares at $8 a share. The exercise of these warrants would reduce the debt to equity ratio even further. This also allows the possibilty for growth through acquisition. For instance it recently purchased a vessel for May delivery that will throw off $100,000 a day in cash flow. How much of this is going to be free cash flow is yet to be determined by management. Anyway It is my questimate SBLK can grow itself by a multiple of 3 before even touching the outer limits of its borrowing capabilities. The second one is Mr. Nobo Su. Mr. Su is one of the wealthiest men on Tiawan owning according to published sources an additional 110 vessels. The question then arises is why Mr. Su (Mr. Su is only a director of SBLK) using a public vehicle when he used to be so private? I am not privy to the answer however if I can follow Warren Buffet because he has shown how to make money in a public arena, Why not follow Mr. Su who has done it in a private arena. Remember the re purchase of $50 million in stock will increase Mr. Su's equity posiion in Star Bulk (unless he sells shares himsef) to over 30%. more reasons I agree with the writer of this article that it is wise to own shares in SBLK Full disclosure as an investor own 10,000 shares as an asset manager in excess of 100,000 shares

2008 Mar 05 05:24 PM

[DSX Lover:]

Any idea of how much SBLK paid for the latest ships? The Panamax just received is chartered at only $18K per day when the BDI index is $69K per day. Would really like the see current financials to see the effect of debt on the newly purchased ships. So Far DSX is safer in the sector with Newships, lowest debt/assets among all companies in the sector, stable long-term charter rates and 8.5% dividend. For a play in the spot BDI index DRYSHIPS is the best play despite, questionale actions by Mr. Economou, of bleeding the company with other investments, and overcharging for services on ships performed by other companies owned by him but not consolidated in Dryships.

2008 Mar 11 10:38 AM