Adjusted Return's  Instablog

Paragon Shipping's (PRGN) Q1 numbers, just out, provide an opportunity to examine whether one should take into consideration only NAV (at market values) when valuing dry bulk shipping companies or whether one should factor in other elements, such as management quality or operational efficiency. The table below compares PRGN's Q1 income statement with that of Safe Bulkers (SB).

Income Statement for the Three-Month Period Ended March 31, 2011 (in $1,000)

	Safe Bulkers	Paragon Shipping
REVENUES:
Revenues	43,045	29,020
Commissions	-771	-1,530
Net revenues	42,274	27,489
EXPENSES:
Voyage expenses	-51	-125
Vessel operating expenses Drydocking	-5,744	-5,530
		-751
Depreciation	-5,583	-8,760
General and Administrative; Management fees	-1,938	-2,830
		-1,376
Early redelivery (cost)/income	101
Bad debt		-168
Gain on sale of asset	-
Operating income	29,059	7,949
OTHER (EXPENSE) / INCOME:
Interest expense	-1,716	-2,400
Other finance costs	-57
Interest income	286	41
Loss on derivatives	-6	-179
Foreign currency gain (loss)	-169	15
Amortization and write-off of deferred finance charges	-89
Net income	27,308	5,425
Earnings per share	0.41	0.09
Weighted average number of shares	65,881,600	56,282,522
Debt ($1000)	486,000	328,000
Vessels Q1	16	13
dwt	1,443,800	747,994 +2x3,426 TEU

SB had about a 70% larger fleet than PRGN on a dwt basis and better charters, so the difference in revenue is logical. But revenue doesn't matter since we are looking at costs. Despite a much smaller fleet, PRGN managed to accrue twice as much commissions, twice as much G&A expenses (SB includes management fees in G&A - they didn't have drydocking in Q1) and a bit more in vessel operating expenses - all including large chunks of related party costs, some non-cash. More interestingly, SB has 50% higher debt but pays about 30% less interest than PRGN.

The point is that no matter what great asset or charter deals a company is seen to be making, such super rents may be eroded by (sometimes purposefully) inefficient operation. A discount to any NAV is certainly warranted then. 

SB and PRGN are simple to understand and this comparison is easy and revealing. It would be interesting if someone would add to the comparison companies better regarded than PRGN, such as DSX, NMM or GNK, controlling for size and age of fleet. At least Paragon's accounts are detailed and do balance, something it is difficult to say for OCNF for example, which appears to be a black hole. 

EDIT: Q2 2011
Income Statement for the Three-Month Period Ended June 30, 2011 (in $1,000)

	Safe Bulkers	Paragon Shipping
REVENUES:
Revenues	41,974	25,094
Commissions	-788	1,446
Net revenues	41,186	23,648
EXPENSES:
Voyage expenses	-756	-103
Vessel operating expenses Drydocking	-6,521	-4,696
		-1,059
Depreciation	-5,645	-8,150
General and administrative Management fees	-1,954	-2,724
		-1,236
Early redelivery (cost)/income
Bad debt		-84
Gain/loss on sale of asset		-14,796
Impairment		-5,000
Operating income	26,310	-13,289
OTHER (EXPENSE) / INCOME:
Interest expense	-1,558	-2,939
Other finance costs	-43
Interest income	242	205
Loss on derivatives	-6,145	-1,222
Foreign currency gain (loss)	-222	-15
Amortization and write-off of deferred finance charges	-89
Equity in net income of affiliate		482
Net income	19,107	-16,777
Earnings per share	0.27	-0,28
Weighted average number of shares	70,116,022	58,254,929
Debt ($1000)	427,000	253,000
Vessels	16	11
dwt	1,443,800	747,994

Same comments: while Paragon has a fleet much smaller than the one of Safe Bulkers, its expenses are much higher (ignore revenue line, and one-off items).