Stanislav Oleynikov

How to Evaluate Excel Maritime's Confusing Earnings Report

To Anthony:

Fundamentals of dry bulk shipping industry is a different story. I believe long-term prospects are very bleak, but current speculative frenzy to hoard iron ore in China will probably move BDI higher this week. So, dry bulk shippers, as a group, have a good chance of going higher short-term. That is why, it would be better to have an offsetting long position in the sector at the moment, than just to short EXM.

What is perfectly clear is that Excel Maritime is significantly overvalued compared to peers. The most important reason for this discrepancy is because a lot of investors have trouble deciphering its financial statements. I am trying to address this issue.

Fresh Valuations of Dry Bulk Shipping Companies

Mark Anthony:

I used the same assumption, calculating fleet values of all the companies, listed in the article. If EXM is undervalued, as you beleive, than other stocks must be even more overvalued.
Book values are meaningless, as they are not marked to market. The true value of a 2005 capesize vessel is same, no matter if was bought for $150 mln. in 2008 or for $60 mln in 2005. In 2009, we are close to $60 mln., agian.

I would be happy to discuss valuations of any particular type of ships. Current values in the second hand market of dry bulk vessels are the result of expected DCF based on current view on long-term sustainable freight rates. They are close to 2006 and are higher than in 2003. Distressed sales hasn't hit the market yet. Particulary all owners around the world got waivers on their loans. However, they are expected to appear next year, driving the market lower.

So, shipowners in good financial position, like DSX are going to benefit. EXM has the worst financial situation among all US listed shippers. According to the waiver deal, EXM has to divert all the generated excess cash flow toward early repayment of the debt.

Fresh Valuations of Dry Bulk Shipping Companies

Windsun33:

From the last DEF 14A filling:

Shares Beneficially Owned (1)
Name Number Percentage
Sophocles N. Zoullas (2) 569,676 1.2%
Joseph M. Cianciolo (3) 72,230 *
David B. Hiley (4) 67,896 *
Douglas P. Haensel (5) 66,230 *
Alan S. Ginsberg (6) 95,515 *
Alexis P. Zoullas (7) 21,667 *
Jon Tomasson (8) 66,230 *
Forrest E. Wylie (9) 66,230 *
Directors and Executive Officers as
a group (8 persons) 1,025,674 2.2%

So, insiders own just 2.2%

Fresh Valuations of Dry Bulk Shipping Companies

To Anthony:

Here's a link to ship by ship calculation of market fleet value for EXM:
seekingalpha.com/insta...

If you don't agree with anything in the EXM ship by ship valuation, I can explain every number and show recent comparable deals in second hand market.

The main reasons for similar fleet market values for EXM and EGLE:

1. Fleet values include ordered, but not yet delivered newbuildings. EGLE has a lot of them. Net debt is increased for the remaining payments for these newbuldings.
2.EXM has 7 vessels in the fleet which are not owned, but leased and at a rate above current market.

Fresh Valuations of Dry Bulk Shipping Companies

To Alan Young,

In my opinion, the company is worth as much as the market values its assets. At the moment, anyone with sufficient capital can form a company, buy some dry bulk ships and make an IPO that would result in ownership of stock valued several times higher than initial investment if this new company is valued in line with EXM.
It just takes some time. In 2007 and first half of 2008, such discrepancy lead to numerous IPOs of bulkers. Such companies, like SBLK, SB, PRGN, NMM and infamous DWT appeared exactly this way. If the discrepancy between the NAV and the market price of public dry bulk shipping companies stays for the next several months, such new companies will emerge again, pulling available capital away from existing stocks.

Fresh Valuations of Dry Bulk Shipping Companies

To John Cordes:

China has been importing record volumes of iron ore for the last four months. Based on already made fixtures, this trend is going to continue for the next couple of months. A lion's share of these imports came from traders hoarding ore in anticipation of higher prices. The amount of imported iron ore significantly exceeds demand from Chinese steel mills even running at full capacity. Such situation is not sustainable. Iron ore stockplies are at all time high at the moment and going to increase. Chinese government has already started to implement measures to curb speculative hoarding. Besides, as shipping rates increase, such operations become less attractive to traders.
As a result I believe iron ore shippings to China are going to decrease in not so distant future.
However, the rest of the world may start to restock iron ore supplies, as was stated in today's report of Omar Notka of Dahlman Rose, upgrading dry bulk shippers. However, I beleive that this amount is just a fraction of Chinese imports and is not going to have any significant impact on shipping rates.

Why I Prefer Excel Maritime to DryShips

Ironically, EMX has much more severe covenant violation problems than DRYS at the moment.

Genco Shipping: A New Bubble in the Making?

To nutflush:

You should've studied more carefully presented data. Cash and short-term assets were of course taken into consideration.

Dry Bulk Shipping: Recent BDI Rise Is Heartening

The only commodity that is really important for drybulk shipping, at least as far as Chinese import and capesize market are concerned, is iron ore.

Last year China imported only about 6 million tonnes of coking coal and about 36 million of power coal. It compares with more than 410 million tonnes of iron ore imports.

The amount of other commodities in dry bulk shipping routes to China is marginal.

What really important for shipping rates is supply vs. demand picture. This issue was not address in the article.

There was really significant activity in chartering ships to haul iron ore to China in the last several weeks. Over 150 spot capesize vessels are heading to China at the moment. It compares with virtually zero activity in the spot market two months ago and may easily lead to oversupply of iron ore in Chinese ports again by spring.

But even such frantic chartering activity could not significantly rise spot capsize rates above OPEX level. Current spot level of $15,684 looks decent (though it only a fraction of the rate required by overleveraged US listed bulkers like GNK, EXM, DRYS, which bought a lot of their levels at huge bubble prices, to stay afloat).
However, not a lot of currently idle capesize vessels are able to get this kind of rate at the moment. BCI index is actually determined by rates on several shipping routes. In Europe, where it is hard to find an available capesize vessel, it is possible to charter a ship for $24,096 a day in the moment. But in the Pacific, where most of the trade is actually concentrated (on Australia to China route), the spot rate is only $6,036, still below OPEX level. This is the region where most of the idle vessels are located in the moment.

Genco Shipping: A New Bubble in the Making?

To bsharvy:

5-year PEG is laughable because earnings are going to decline significantly for the next several years.

My calculation of NAV does include cash flow since the last statement. It is included in the valuation of vessels and charters.

Only deposits on vessels are in the balance sheet. The remaining payments will increase liabilities, of course.

Genco Shipping: A New Bubble in the Making?

Lacerta sale was reported in a number of industry sources. For example, in BRS:

www.brs-paris.com/mark...

It will probably be reported by DRYS later.

Genco Shipping: A New Bubble in the Making?

To Tallulah:

1) The discussion of shipyards going under is mostly concentrated around emerging greenfield shipyards. Established shipyards have an extensive backlog are not expected to have financial difficulties in the near future. Besides, South Korea, the largest shipbuilder in the world has a bailout package for shipyard industry. New emerging shipyards, account for no more than 30% of orderbook for 2010 and not a material number of 2009 deliveries.

2) The number of deals in S&P market went down and it is quite natural at the beginning of downturn in a cyclical industry. If current situation is not a classical example of the end of a cycle in shipping industry, when rates are at a multiyear low and orderbook is at a multiyear high, than I it is hard to imagine how it could be.

3) I have to admit that I don’t have exat figures regarding scrapping capacity. However, some sources I read regarding India and Bangladesh suggest that it will be hard to imagine recycling 500 ships in 2009. It this happens, however, it won’t be good for drybulk shipping market anyway.

4) Genco didn’t order these ships from the shipyard. It was a resale from a Turkish owner. Genco just cancelled the deal, but the vessels will be delivered from the shipyard anyway.

Genco Shipping: A New Bubble in the Making?

Also, market values of vessels, which are used as collateral, are usually determined by reports of shipbrokers. Their current estimations are somewhat lower than those, presented in the table.

Genco Shipping: A New Bubble in the Making?

To Tim Plaehn:

The question is, whether China revival will be sufficient to emply drybulk all the drybulk ships. I didn't expect that China growth will be sufficient even during the boom. The vast majority of ships in the orderbook for 2009 will delivered and 2010 is not going to fall far behind even after all cancellations.

Of course, GNK cashflow in 2009 is probably going to be sufficient to pay dividends (if charter contracts will be honored), however I don't think than is going to pay any dividends for the foreseeable future. It is clearly in violation of loan covenants and a typical deal with lenders in such cases invovle restrictions on paying dividends. Have a look at EGLE and OCNF.

Genco Shipping: A New Bubble in the Making?

To bsharvy:

P/E ratio makes sense if earnings are sustainable. If gains are on-time by nature, it is not logical to apply any multiple. Charter rates, that were singed during the boom are not sustainable.
Do you really believe in the growth of earnings for next 5 years? It is laughable.

By saying that a drybulk shipping company is just a bunch of ships, I mean that it is just a holding company for some standardized and marketable assets. It has no competitive advantages or any other kind of intangible assets, other than the ability of the management to make investment decisions.

When making calculation of the value of charters and ships, I took into consideration expected cash flow from 9/30/2008. That is why, Q4/2008 earnings are included in valuation. Remaining payments for new vessels are included in the balance sheet.