Seeking Alpha
Profile| Send Message| ()  

Genco Shipping's (GNK) share price decreased by almost 5% after a Deutsche Bank analyst downgraded the shipping company on the basis of macro as well as micro factors. The analyst believes that the Net Asset Value of the company is on a decline. Also, the company is expected to face some liquidity problems in 2014, unless the economy shows signs of a recovery. Despite that, the shares have rallied 16.7% since Q2 due to the improvement in the rates of Capesize and Panamax. However, the analyst expects that the market will witness a weak spot in early 2013, especially the Cape sector.

GNK Highlights:

GNK currently owns 53 vessels, with a total DWT capacity of 3,810,000 MT and average age per vessel of 7.3 years. The current world average of fleet age is 11 years. Out of those 53, 9 are capes, 8 are panamaxes, 17 are supramax, 6 are handy max and 13 are handy size. Most of the ships at GNK operate on an "index-based" system. Index-based charters are a bit different from spot charters, where the stock becomes a pure play on the Baltic Dry bulk Index. Index-based charters are period charters in which the amount charged for vessels is revised twice a month to account for the changes in the different indexes - i.e. Baltic Capesize Index (BCI), BPI (Panamax), BSI (Supramax) and BHI (Handysize). Therefore, a rise in BCI will lead to an increase in the rate for Capesize vessels on the date settled for adjusting the rates.

GNK is the parent company of Baltic Trading (BALT). It owns 25% of BALT's shares. However, due to a dual share structure, GNK still has 83% of the aggregate voting power in BALT, which means that GNK has total control over the management. BALT holds two Capes, 4 Supramaxes and 3 Handysizes. All of them trade on spot charters.

Given that it owns a fleet that runs on index-based charters and its subsidiary, BALT, has vessels operating on spot charters, GNK is exposed considerably to BDI. The recent rise in the BDI came from a rise in BCI and BPI. Given that 32% of the total fleet of GNK consists of Capes and Panamaxes, the stock did benefit from the rally.

There has recently been a surge in the shipping activity, which was shown by the BDI rally. The BDI went up by almost 40% in the last 30 days. The index moved from 722 points on September 19 to 1,010 points on October 19. Some attribute this rise to the stimulus packages announced by central banks in different parts of the world. QE3 by the Fed is a case in point. Chinese regulators also implemented an expansionary monetary policy to speed up the GDP growth in the country.

Others perceive it as a temporary rise, given the approval by China to the infrastructure project worth $156 billion. What remains to be seen is if the current improvement in BDI is a temporary one or a complete revival of a down and out Dry Bulk Industry.

Downgraded:

The company was recently downgraded by Deutsche Bank after their analyst lowered its expectations for Net Asset Value (NAV). NAV is considered to be an essential tool in gauging the performance of a shipping stock.

The shipping industry has been plagued by the problem of overcapacity. In the 2008 boom, many shipping companies ordered vessels in large quantities in order to fulfill the rising demand. However, the crisis in 2009 slowed down the economic activity considerably, and the vessels that arrived (in the usual time period of 2 years after order) were unwanted because the added capacity was not matched by demand. This led to a decrease in fair prices of the ships and, hence, the NAV.

As of June 30, 2012, the combined carrying value of the GNK and BALT fleet was $2,729,000. Excluding BALT's fleet, the value turns out to be $2,369,488. The fleet fair market value was reported to be $1,102,638. This means that the impairment amount is around 53% of the carrying value.

Given a cash balance of $246 million, investment assets of $87 million, and total debt of $1.69 billion, the NAV turns out to be $-255 million. The NAV/share turns out to be -$5.8.

The analyst has reduced his estimate from $ -5/share to $ -6/share.

Also, the market is concerned because the stock price has been exceedingly high lately, despite a decline in the fair value of assets. According to UBS, the dry bulk fundamentals remain under pressure from oncoming supply of vessels, which stands at 20% of the on-water fleet. Also, the macroeconomic weakness is heightened. The demand for commodities is weak. The only exceptions have been iron ore and coal. The world has seen a surge in demand for iron ore as China, the largest consumer of steel in the world, increased its imports recently. Also, coal exports have picked up in the US. GNK, having index-based charters, has benefited as a result. The stock has outperformed the S&P since June 30.

Liquidity was the third reason cited for the downgrading of the stock. The following table shows the debt maturities in the coming years:

The analyst believes that the company will have enough cash to survive until 2013. However, it is absolutely crucial that the demand for drybulk recovers in 2014, or else the company will face serious liquidity problems.

Conclusion:

The Dry Bulk Industry is going through its worst ever time. The weak global demand for dry bulk, increasing capacity that has not been offset by the scrap rate, and adverse liquidity conditions, has hurt the overall shipping industry. According to the sell-side, the future looks bleak as well. Given such conditions, we will not recommend taking any position in GNK. It is recommended to wait for some catalysts that can influence the overall industry. Persistent rise in demand for iron ore or coal exports could be one such catalyst.

Source: Genco Shipping Downgraded: Drybulker Has Negative NAV And Liquidity Problems