Diana Shipping: Safest Shipping Play, Trading At A Discount [View article]
Forgive my candidness, DSX’s operating cash flow (OCF) has entered into a secular downward trend as the very favorable long term charter contract signed in 2007/2008 gradually expire. Some Capesizes’ charter rate is as high as $48000 - $75000 per day while the current rate is only around $13000, loss of cash flow per Capsize vessel is approx. $12.5M to $22M. In 2011, DSX generated an OCF of $170M (after adding back $17M working capital use), so chartering one Capesize ship in spot rate will decrease OCF by 10% each, not to mention those Panamax charter rate of over $20000 vs the current spot rate of only $10000. The adverse impact brought about by the expiry of old charter will be most prominent coming in 2nd half of 2012 to 2014. See below for the vessel employment bar chart:
Based on my rough calculation, OCF will decrease to $120M or below in 2012 and $55-60M in 2013, 1/3 of 2011’s OCF. My calculation reveals a surprising sticky cost structure that DSX incurred cash expense of $85.4M, $86.2M, $69.26M and $72.23M for 2011, 2010, 2009 and 2008 respectively. If the current fleet (17 Panamax, 1 post Panamax, 8 Capesize, 1 Newcastlemax) is chartered at the current spot rate for 1 yr charter of $10000 for Panamax, $13000 for Capesize and $16000 for Newcastlemax, revenue will decrease to only $105M, with a cash expense of $90M (more cash expense incurred for the Newcastlemax), OCF will be a abysmal $15M and could wipe out by any working capital use. But to the credit of mgt, DSX has locked up some very profitable long term contracts in the past to help it survive the current unprecedented crisis facing the dryship industry.
However, on the contrary, when the day the rate recovering finally comes, say 2015, the benefit will not be immediately felt until the unprofitable charters entered in the nadir year of 2012-2014 fully expire in 2015-2016. So, 2017 could be the year when the freight rate recovery finally reflects in the financial performance. This is the factor that holds me back from entering too much and too early. For a 5 year wait, a 300% return is required for my patience and DSX needs to rise to $28.8 if entering at the current price of $7.2. It is overly optimistic.
Based on my study of supply demand dynamics and historical movement of BDI, I currently forecast BDI at 3000 for 2017 and a stock price of $15 for DSX. Of coz, in a bull market with optimistic sentiment, stock price could always overshoot but what I forecast is a base case scenario, a high probability event.
Diana Shipping: Safest Shipping Play, Trading At A Discount [View article]
J Mintzmyer might be too optimistic to assume the freight rate to begin rebounding in mid to late 2013. DSX management revealed in Q1 conf call that they didn’t expect the time to come until early to mid 2014 the earliest. Their estimate is supported by the existing order book that the supply glut will only alleviate commencing 2014. However, the rate will stay at depressed level unless the oversupply condition is gradually reversed by pickup of demand and/or old vessel scrap to reduce the overall capacity. Nonetheless, don’t expect too much from the demand side as China and other emerging economies like India are slowing down, both are the engines for explosive demand growth in 2003-2007 super-cycle, the day when China grew at double digit may never returns. At the same time, we also have the Eurozone crisis.
For supply side, although the existing order book shows that new supply will dramatically reduce in 2014 and beyond, if the ship-owners are to add ships once they see signs of industry bottoming out, the industry will just stay in abysmal condition. To avoid this, a healthy ecosystem is required, beginning from shipbuilders ceasing to make ridiculously cheap new shipbuilding offer to ship-owners. The good news is that many Chinese shipbuilders are going of business. Also, the Greeks, controlling 15% of the vessels worldwide are in deep financial crisis and do not have the financial muscles to place new ship orders. On the other hand, the major banks engaging in shipping loan are embattling European banks such as Commerzbank and HSH which are scaling down their loan book, the ship-owners could hardly get any new credit for vessel addition. However, given the long useful life of vessels, the supply glut between 2009-2012 will have profound, a decade long effect on the supply-demand equilibrium and keep hold back the rate.
The conclusion is that while the dryship is set for recovery in late 2014 (Oct-Dec normally the peak season of a year) and onwards, it will only be a mild one, if any.
As for the investment thesis of DSX, the current mkt cap of $600M implies a market value of $22.2M per vessel ($600M/ 27 vessel (excluding 1 Newcastle-size delivered after 3.31.2012)) as cash cancels out debt. Currently a 5 yr old Panamax and Capesize is sold for $23M and $35M respectively, with a fleet of 27 vessels comprising of 17 Panamax and the remaining Post-Panamax or Capesize and an average life of 5.X yrs, the current valuation represents slight discount, roughly 15% discount to adjusted market value of vessels, a good entry considering the vessel value has dropped 2/3 from the peak in early 2008 and not too much room for further devaluation due to the fact that shipbuilders are going of business and the gap between scrap value and newship value is close to historic low.
DSX is the best among the dryship companies as they didn’t buy aggressively during the 2007-2008 boom, scrap dividend and hoard the cash in bank to avoid financial distress and shareholder dilution of significant new share issuance and give them flexibility for expansion at mkt low. They have the management that investors can trust.
While I have been in for a little of DSX, I am waiting for crisis valuation for more aggressive buying. Actually DSX is also waiting for more share buyback when they think the stock price is significantly undervalued, at current price, they are investing in adding more vessel instead of share buyback as disclosed in Q1 conf call.
Diana Shipping: Safest Shipping Play, Trading At A Discount [View article]
http://bit.ly/MrcYRq
Based on my rough calculation, OCF will decrease to $120M or below in 2012 and $55-60M in 2013, 1/3 of 2011’s OCF. My calculation reveals a surprising sticky cost structure that DSX incurred cash expense of $85.4M, $86.2M, $69.26M and $72.23M for 2011, 2010, 2009 and 2008 respectively. If the current fleet (17 Panamax, 1 post Panamax, 8 Capesize, 1 Newcastlemax) is chartered at the current spot rate for 1 yr charter of $10000 for Panamax, $13000 for Capesize and $16000 for Newcastlemax, revenue will decrease to only $105M, with a cash expense of $90M (more cash expense incurred for the Newcastlemax), OCF will be a abysmal $15M and could wipe out by any working capital use. But to the credit of mgt, DSX has locked up some very profitable long term contracts in the past to help it survive the current unprecedented crisis facing the dryship industry.
However, on the contrary, when the day the rate recovering finally comes, say 2015, the benefit will not be immediately felt until the unprofitable charters entered in the nadir year of 2012-2014 fully expire in 2015-2016. So, 2017 could be the year when the freight rate recovery finally reflects in the financial performance. This is the factor that holds me back from entering too much and too early. For a 5 year wait, a 300% return is required for my patience and DSX needs to rise to $28.8 if entering at the current price of $7.2. It is overly optimistic.
Based on my study of supply demand dynamics and historical movement of BDI, I currently forecast BDI at 3000 for 2017 and a stock price of $15 for DSX. Of coz, in a bull market with optimistic sentiment, stock price could always overshoot but what I forecast is a base case scenario, a high probability event.
Diana Shipping: Safest Shipping Play, Trading At A Discount [View article]
For supply side, although the existing order book shows that new supply will dramatically reduce in 2014 and beyond, if the ship-owners are to add ships once they see signs of industry bottoming out, the industry will just stay in abysmal condition. To avoid this, a healthy ecosystem is required, beginning from shipbuilders ceasing to make ridiculously cheap new shipbuilding offer to ship-owners. The good news is that many Chinese shipbuilders are going of business. Also, the Greeks, controlling 15% of the vessels worldwide are in deep financial crisis and do not have the financial muscles to place new ship orders. On the other hand, the major banks engaging in shipping loan are embattling European banks such as Commerzbank and HSH which are scaling down their loan book, the ship-owners could hardly get any new credit for vessel addition. However, given the long useful life of vessels, the supply glut between 2009-2012 will have profound, a decade long effect on the supply-demand equilibrium and keep hold back the rate.
The conclusion is that while the dryship is set for recovery in late 2014 (Oct-Dec normally the peak season of a year) and onwards, it will only be a mild one, if any.
As for the investment thesis of DSX, the current mkt cap of $600M implies a market value of $22.2M per vessel ($600M/ 27 vessel (excluding 1 Newcastle-size delivered after 3.31.2012)) as cash cancels out debt. Currently a 5 yr old Panamax and Capesize is sold for $23M and $35M respectively, with a fleet of 27 vessels comprising of 17 Panamax and the remaining Post-Panamax or Capesize and an average life of 5.X yrs, the current valuation represents slight discount, roughly 15% discount to adjusted market value of vessels, a good entry considering the vessel value has dropped 2/3 from the peak in early 2008 and not too much room for further devaluation due to the fact that shipbuilders are going of business and the gap between scrap value and newship value is close to historic low.
DSX is the best among the dryship companies as they didn’t buy aggressively during the 2007-2008 boom, scrap dividend and hoard the cash in bank to avoid financial distress and shareholder dilution of significant new share issuance and give them flexibility for expansion at mkt low. They have the management that investors can trust.
While I have been in for a little of DSX, I am waiting for crisis valuation for more aggressive buying. Actually DSX is also waiting for more share buyback when they think the stock price is significantly undervalued, at current price, they are investing in adding more vessel instead of share buyback as disclosed in Q1 conf call.