Scorpio Bulkers: Avoid This Poorly Positioned Firm

Nov. 03, 2015 9:47 AM ETEneti Inc. (NETI)15 Comments

Summary

  • Scorpio Bulkers is a dry bulk pure play, with 26 vessels currently on the water and an additional 34 newbuilds with scheduled deliveries through Q3-16.
  • SALT was initially a private equity darling, but saw its share price destroyed due to a horrendously timed leveraged bet on a dry bulk recovery followed by massive equity dilution.
  • I believe SALT is a clear avoid at $1.40 due to its tough position between saving the balance sheet and attaining necessary scale.
  • SALT is "worth" $2.19 per share based on current asset valuations, a premium of 56% over today's share price, but this is a classic value trap.

Overview

Scorpio Bulkers (SALT) is a dry bulk pure play, with 26 vessels currently on the water and an additional 34 newbuilds with scheduled deliveries through Q3-16. SALT also has 10 short-term, time-chartered vessels on the roster. SALT was initially a private equity darling, but saw its share price destroyed due to a horrendously timed leveraged bet on a dry bulk recovery followed by massive equity dilution. Following the release of Q3-15 earnings yesterday morning, I am updating my analysis of SALT to reflect the latest fleet and cash flow developments. I believe SALT is a clear avoid at $1.40 due to its tough position between saving the balance sheet and attaining necessary scale.

Additionally, management has shown that they have little regard for minority shareholders and I do not trust them as good stewards of value. On the plus side, SALT's fleet modernity is unrivaled, with an average age of less than 1 year fully-delivered, and zero vessels older than 1 year. At a price of $1.40 per share and 344M shares outstanding, SALT has a market capitalization of approximately $482M. SALT currently has a strong balance sheet, but this will rapidly shift as SALT is scheduled to pay out $792M for installment payments between October 2015 and September 2016.

Increase in Insider Ownership

Between July 31 and October 1, insider Scorpio Services Holding Limited ("SSH") has boosted shares by 5.4M, or roughly 32%. SSH now owns approximately 6.5% of SALT. At face value, these purchases appear to represent a huge vote of confidence, but with private equity giant, Monarch Capital, sitting on a 38M share stake (11.3%), this represents just another move in a toxic power struggle.

For investors who may have forgotten, SALT demonstrated its equity management ineptitude last spring via a panic dilution at $1.50, followed

This article was written by

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BS in Economics, MA in Public Policy (International Economics), pursuing Doctoral in Public Policy (Intl Relations). J is an established independent research provider and hedge fund consultant in the maritime shipping sector.

Mintzmyer founded Value Investor's Edge, a top-ranked deep value research service in May 2015, with the goal of establishing a top-tier community of deep value investors and activists. Value Investor's Edge subscribers leverage exclusive in-depth analytic reports and community investment experience to discover disconnects in global shipping and a variety of other beaten down sectors.

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