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60°North Investments tries its best to provide insightful articles on especially smaller companies around the world. With years of experience and relentless learning in the field of investments and a mindset towards life-long learning, 60°North Investments hopes to help investors spot and... More
  • Globus Maritime - Significant Upside Potential For Patient Investors 6 comments
    Jul 24, 2014 8:32 PM | about stocks: GLBS

    NOTE: The author wishes not to speculate with macro factors. Simply stated, the author sees the company staying profitable in even worse macro environment and believes that patient investors can reap significant benefits when the industry sooner or later picks up.

    Globus Maritime (NASDAQ:GLBS) is a dry bulk shipping company which provides services worldwide. It doesn't have the longest operating history as it was founded in 2006. The company owns and operates 7 dry bulk carriers (one Kamsarmax, two Panamax and four Supramax vessels), the oldest one being a -98 Panamax (which was dry-docked until June 3rd according to Q1) while all others are 2005 or newer. (Source: Globus Maritime website)

    The whole shipping industry is getting hit more or less the same way as day rates are continuing on depressed levels. For the company's Panamax and Supramax vessels the Baltic Indexes are even more depressing than the overall BDI*, currently being 581 for Panamax index and 661 for Supramax index (Source: DryShips). As 5 out of 7 of the vessels are running on spot rates, the company's earnings are due to fluctuate with the Baltic Indexes. Two of the vessels, one Kamsarmax and Supramax are both booked at least until January 2015 with daily rates of 14,250USD and 16,000USD, above the rates that their other vessels have (ranging from 11kUSD to 14.25kUSD as of May 30).

    The company currently has 90.6mUSD (down 1% QoQ) of debt and 7.1mUSD (up 20% QoQ) of cash. Shareholders equity runs at 61.4mUSD (up 2% QoQ). According to the revolving credit facility from Credit Suisse (similar covenants in other loans as well), the company must maintain cash level of at least 5mUSD (lowered from 10mUSD previously), although in the event of paying dividends the requirement increases to 7mUSD. From March 31 2014 onwards the debt bears interest at LIBOR + 1.2% margin, down from 2.1% previously (1 year LIBOR currently at 0.55%). They also have a loan with outstanding principle of 13mUSD from DVB Bank with quarterly installments of 0.4kUSD and final 5mUSD payment due in March 2019. This loan bears at LIBOR + 2.5% p.a. Besides these two loans, the company has a third loan with outstanding amount of 17mUSD from Commerzbank with quarterly installments of 0.5kUSD and final 12.6mUSD payment due in June 2017. The company has breached the covenants of the debts in past years but has been able to negotiate with the banks.

    From 2009 to 2013 Globus has made EBITDA between 13.8mUSD and 33.8mUSD. With today's depressed day rates, the company is still running profitably (Q1 2014 EBITDA at 3.3mUSD / 53% of net revenue). Even more impressive is the company's ability to generate consistent cash flow. In 2009 when day rates were above 20kUSD the company made 33mUSD in operating cash flow, and in 2013 with TCE rates being just under 10kUSD the company had OCF of 12mUSD. When the maintenance capex requirements have been very low, almost all of the OCF is free cash flow.

    Risks

    Ship impairment is something many fear with shipping companies. Globus took an 80mUSD impairment cost in 2012 which represented 33% of the book value of the vessels (242mUSD before, 140mUSD after). After the impairment it's reasonable to believe that the ship values aren't at least massively off. However, if asset values in the market continue declining the company might be at risk of taking another impairment.

    And since we're talking about a shipping company, the cyclicality of the industry is definitely something many people consider negative and/or risky. Even though this might be true, it can also create buying opportunities for patient investors. However, still lower day rates would hurt Globus as well. If one buys the argument that the company is well-managed and is able to refinance its debt if necessary, bankruptcy shouldn't be where the company is heading and therefore sell-offs can be viewed as even better buying opportunities unless the situation changes for worse regarding loans.

    Debt is obviously something to watch. In Q1 they paid back 1.4mUSD and they're due to pay still 11mUSD more during 2014. Perhaps the biggest concern at the moment is the 2015 principal payment of 42.4mUSD. If the company makes 10mUSD in FCF this year, now has 7mUSD in cash, is able to sell one ship for 10mUSD and pays 11mUSD still in 2014, it will have around 15mUSD in cash in beginning of 2014. This means the company will either have to refinance the debt and this way move the maturity a few years out or issue new shares for example (which is not the desired option at these price levels to be clear). It's worth noting, if the company was to default on any of its debts, that would allow other lenders to declare a default under a cross-default provision. Without better knowledge and until otherwise proven, one can expect the company to be able to handle the situation as it has been able to handle it previously.

    Besides the above risks, the company is obviously small in terms of market cap and fleet size which can both be seen as risks, especially the fleet size. The stock trades in NASDAQ with average daily volume of 11k shares and therefore the liquidity might not be enough for investors considering large positions. Also perhaps worth noting, the company is run from Athens, Greece and by Greek managers. The author hasn't noted any alarming signs of irresponsible management and gladly hears comments regarding management quality.

    Cases

    With daily operating expenses fluctuating around 4kUSD and other costs such as depreciation, administration and interest expenses running in total at around 2.5-3mUSD per quarter, the company breaks even (net profit) with day rates roughly around 7kUSD. Because the company is run by disciplined management, administrative costs can be expected to remain about the same even when day rates start picking up, meaning that the increases go more or less straight to the bottom-line. If and when daily TCE rates pick up to for example 15kUSD levels, the company is due to make +20mUSD in EBITDA and most likely almost the same in FCF.

    With debt being paid back at a rate of +10mUSD p.a., in the end of 2016 the company should have around 50mUSD net debt (assuming no new debt, i.e. no additional vessels purchased). Assuming EBITDA of 20mUSD and EV/EBITDA multiple of 7-8 the company would trade with an EV of 140-160mUSD and market cap of 90-110mUSD (upside of 170-230% in 2.5 years).

    In a bear case the day rates remain depressed (even decline) and the company's ability to pay down the debt slows down to 5mUSD p.a. after paying back 10mUSD in 2014. In 2016 the company would have net debt of roughly 60mUSD. With EBITDA of 10mUSD and EV/EBITDA 7, the company's EV would be 70mUSD and market cap 10mUSD (downside of 70% in 2.5 years).

    Overall, even though there are significant risks, the author sees the company as a very potential investment opportunity at current (33mUSD market cap) levels.

    What to follow

    -Baltic Dry Indexes should be watched if one wants to get an idea of where the day rates are heading.

    -Debt level and the amount it reduces quarterly. Also follow what the company reports regarding the 2015 42mUSD payable.

    -EBITDA, FCF, TCE rate levels

    * Baltic Dry Index provides an assessment of the price of moving the major raw materials by sea. Taking in 23 shipping routes measured on a timecharter basis the index covers handysize, supramax, panamax and capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain. (Source: Wikipedia)

    SEC Filings of company figures etc.

    Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in GLBS over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: The author doesn’t currently hold a position in the company but intends to establish a position in the next 30 days. Please do your own due diligence, there’s a risk of losing one’s principal. It is advised to keep position sizes in such limits which one is capable of losing. Comments and discussion are warmly welcomed.

    Themes: long-ideas Stocks: GLBS
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Comments (6)
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  • Konsta Lindqvist
    , contributor
    Comments (27) | Send Message
     
    Interesting find. Thanks. Seems very cheap, especially considering that there has been 33% impairment in 2012. Despite that selling 0.52 PB with FCF generation.

     

    The debt situation is worrisome though. Over 40 million by 2015 seems tight.

     

    Company seems to be controlled by the chairman (Firment Trading Limited). Don't know if positive or negative. At least has skin in the game, but might also be a possibilty for discriminating minor shareholders.
    25 Jul, 04:42 AM Reply Like
  • 60° North Investments
    , contributor
    Comments (12) | Send Message
     
    Author’s reply » Appreciate the feedback and comments! As you noted as well, even with these low rates the company is still generating nice FCF. I might obviously be wrong (and be missing something more crucial), but the thesis relies on the assumption that the company will be able to handle the debt, especially the 42m during 2015, one way or another (refinance to a later maturity, issue stock, sell vessels + FCF). Do you happen to have any similar cases in mind where profitable company in this kind of industry needs to refinance debt?

     

    I don't have really any views about the credibility of the management. According to the latest annual report in April 2014 CEO Feidakis owns 50.9% through Firment Trading and F.G. Europe. One note about management though: compensation seems to have been pretty fair at least from 2011 to 2013 (from 2009 until 2013, share based payments were highest in 2009 @ 1.7mUSD which was in my opinion reasonable given the company made 33mUSD in EBITDA).
    Senior mgmt (including 1 or 2 persons?) aggregate salaries + stock comp: 0.2mUSD + no shares (2013), 0.2mUSD + 72k common shares + 3k preferreds (2012) and 0.8mUSD + 33k common shares (2011).
    Non-executive directors got less in aggregate compensation.

     

    To me, doesn't at least seem excessive in terms of compensation. Of course, that doesn't rule out other possible ways of screwing minority shareholders up.
    25 Jul, 07:19 AM Reply Like
  • Konsta Lindqvist
    , contributor
    Comments (27) | Send Message
     
    No don't have any experience from similar situations regarding debt and actually not much from the industry either. (Looked into VLCCF 1-2 years ago though) But since the cash flows are there, the refinancing seems probable. Still there is a risk of stock issue etc. but of course the price is also cheap. Compensation seems fair enough.

     

    Could be a good bet, especially if the dry bulk prices will recover.

     

    Have you considered what the fleet could be worth in liquidation? It seems that there has been some indications of upwards price movements in vessel prices.

     

    http://bit.ly/1lKjbWS
    http://bit.ly/1lKjbWU
    http://bit.ly/1lKjbWW

     

    Very quickly skimming through it seems that the fleet could be valued at least 100 million $. (My ingenious formula was about: small vessel (supramax)=10, big vessel (panamax&kamsarmax) =20 :)) Anyway the current book value might not be so far off, which would give some downside protection.
    27 Jul, 04:01 PM Reply Like
  • 60° North Investments
    , contributor
    Comments (12) | Send Message
     
    Author’s reply » Like you say and I mentioned in the article, there's a risk of having to issue stock or sell more ships than the one that is on sale. How big is that risk? I'm thinking small enough for this to be a nice bet. This could surely be a bad assumption, so if anyone has any insights into how similar situations have played out previously, I'm all ears.

     

    I decided not to take a deeper look into what exactly might be the current value of the fleet in a liquidation. For me, it's not what my case relies on. I believe the impairment in 2012 took down the value of the fleet close enough to a number that is still today approximately the value of their fleet. Like you say, the fleet's liquidation value gives downside protection in the worst case scenario. I'd emphasize that the company's seemingly low-cost structure and ability to generate FCF in these levels and even lower is what makes the thesis attractive (in other words I'm not hoping the company to decide it's better to liquidate).
    28 Jul, 08:45 AM Reply Like
  • Dan Auerbach
    , contributor
    Comments (8) | Send Message
     
    Has there been any news over the last week that I can't find that might help explain the 10% drop?

     

    I haven't done my due diligence yet, but it's certainly getting, perhaps, more attractive by the day.
    29 Jul, 09:20 PM Reply Like
  • 60° North Investments
    , contributor
    Comments (12) | Send Message
     
    Author’s reply » Haven't seen any news that'd necessarily explain the drop. Baltic Dry Index has been fairly stable for the past few weeks at around 750. If someone has seen something truly meaningful, would be nice to see. Otherwise I'd put the fluctuation just under relatively large volatility. For example yesterday's (29 Jul) range was 2.87 - 3.17, which most probably is just large volatility without bigger meaning behind it.

     

    Bought a position yesterday.
    29 Jul, 11:16 PM Reply Like
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