The Bull-Case Scenario For Seanergy Maritime Holdings

Ryan Reed profile picture
Ryan Reed
35 Followers

Summary

  • Baltic Dry Index (BDI,) and Baltic Capesize Index (BCI,) reaching multi-year highs.
  • BCI and BDI have both historically hit highs just before a recession.
  • Seanergy Maritime Holdings is a pure-play Capesize company with 10 Capesize ships in their fleet.
  • Company fleet valuation looks to gain $12.5 million in Nov 2019 with the scrubbers and ballast water treatment system installations completed.

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A Brief Overview of Seanergy Maritime Holdings

Seanergy Maritime Holdings Corp. (NASDAQ:SHIP) is the only pure-play Capesize ship-owner publicly listed in the US. Seanergy provides marine dry bulk transportation services through a modern fleet of 10 Capesize vessels, with an aggregate cargo-carrying capacity of approximately 1,748,581 DWT and an average fleet age of approximately ~10.3 years.

The Company is incorporated in the Marshall Islands with executive offices in Athens, Greece and an office in Hong Kong. The Company’s common shares trade on the Nasdaq Capital Market under the symbol “SHIP,” and its Class A warrants under “SHIPW,” and the Class B warrants under “SHIPZ.”

The Cost of Maritime Shipping for Dry Bulk and the Baltic Dry Index / Baltic Capesize Index

There are a number of factors which makes for a strong case for stock value growth over the next two quarters. To begin, one of the most important factors for maritime companies which haul dry products like SHIP, is the Baltic Dry Index and the Baltic Capesize Index. Both the Baltic Dry Index (BDI,) and the Baltic Capesize Index (BCI,) have reached multi-year highs. The BDI has reached multi-year highs not seen since 2013 as seen in the chart below, and the BCI reaching the former late-2017 high’s.

(Source: Investing.com)

The Supply and Demand Outlook for Maritime Shipping

Another very important factor for maritime fleets, and all businesses in general, is the supply and demand of the products/services supplied. Winter time typically leads to higher shipping rates historically (BDI, BCI,) and the demand is expected to be greater than supply this year especially due to the IMO 2020 requirements, causing ships to be out-of-commission while they’re being retro-fitted with scrubbers. The scrubbers are being installed to help clean sulfur in the fuel to lower nitrous oxide and sulfur oxide emissions. By the end of October 2019, five out of the ten ships in Seanergy’s fleet will have completed the scrubber installation.

Demand is also going up for dry haul ships due to the Vale mining company resuming operations several weeks ago, after a mining accident crippled operations in January earlier this year. Iron Ore is the commodity which Seanergy is most commonly sourced for shipping, and the amount of Brazilian Iron Ore being exported per week has resumed to 7.5 million tons from the 2.5 million tons low experienced after the collapse of the Brumadinho mine.

(Source: CNBC TV Broadcast on 8-16-2019)

Seanergy’s Maritime Fleet and Value Analysis

Seanergy has several ships which will become active over the coming months, with most of those already in and coming into service being contracted for three to five years. Several of these active ships will be priced on the BCI rate which varies daily, with some of them being able to lock-in the price at a fixed rate for a period of time based on the Capesize FFA for the selected period.

Here’s an excerpt regarding TCE for Q3 from Seanergy in their August 2nd, 2019 6-K filing;

“Since the beginning of the third quarter of 2019, 62% of our fleet available days have been fixed at a daily TCE of approximately $23,800 per ship per day, marking an increase of 184% as compared to the fleet average TCE rate of $8,368 in the first half of 2019.”

That said, let’s take a look at the 10 ships in Seanergy’s fleet.

(The following footnotes are from the SEC 6-K Filing from SHIP Aug 2nd, 2019)

(1) "Scrubbers on selected ships to be installed between July and October 2019."

(2) "[Partnership] Chartered by a major European utility and energy company from September 2019 for a period of 33 to 37 months with an additional period of about 11 to max. 13 months at charterers’ option. The daily charter hire is based on the BCI. In addition, the Company has the option to convert to a fixed rate for a period of between three and 12 months, based on the prevailing Capesize Forward Freight Agreement Rate (“FFA”) for the selected period."

"The scrubber installation on the M/V Partnership is currently ongoing..."

(3) “[Championship] Sold to and leased back on a bareboat basis from a major commodity trading company on November 7, 2018 for a five-year period. We have a purchase obligation at the end of the five-year period and we further have the option to repurchase the vessel at any time." (4) "Chartered by a major commodity trading company from November 7, 2018 for a period of 60 months, with an additional period of about 16 to max 18months at charterers’ option. The daily charter hire is based on the BCI. In addition, the Company has the option to convert to a fixed rate for a period of between three and 12 months, based on the prevailing Capesize FFA for the selected period."

(5) "[Lordship] Chartered by a major European utility and energy company from August 2019 for a period of 33 to 37 months with an additional period of about 11 to max. 13 months at charterers’ option. The daily charter hire is based on the BCI. In addition, the Company has the option to convert to a fixed rate for a period of between three and 12 months, based on the prevailing Capesize FFA for the selected period." It [Lordship] has completed the scrubber installation as well as the ballast water treatment system installation as of Aug 1, 2019.

(6) "[Premiership and Squireship,] Chartered by a major commodity trading company from about November 2019 for a period of min. 36 to max. 42 months with two additional periods of min. 11 to max. 13 months each, at charterers’ option. The daily charter hire is based on the BCI."

(7) “[Knightship,] Sold to and leased back on a bareboat basis from a major Chinese leasing institution on June 29, 2018 for an eight-year period. We have a purchase obligation at the end of the eight-year period and we further have the option to repurchase the vessel at any time following the second anniversary [June 29, 2020] of the delivery under the bareboat charter."

Fellowship, Geniuship, Gloriouship, and Leadership are currently chartered out on a spot price basis. However, Leadership is out of operation at this time as it

"...is undergoing her scheduled survey and dry-docking in the same yard [as Partnership.]"

In addition to this information, Seanergy also states in the 6-K that;

"...we have agreed with one of our existing charterers, to install various energy saving devices, including a Mewis Duct on one of our vessels. The charterer will fully fund all the upgrades and the optional period under the underlying long-term time charter will be extended by 8 to 9 months. Through the optional period the Company will be entitled to receive a premium over the agreed index-linked hire depending on the improvement in the fuel consumption realized."

Per the CEO, “Stamatis Tsantanis,” in the 6-K filing;

“Upon completion of the upgrade program in November, five scrubbers and three ballast water treatment systems will be installed on our vessels, increasing the valuation of the fleet and the Company’s NAV by approximately $12.5 million.”

Breaking Down Revenue, Capital Expenditures, and Operating Expenses

As of June 30th, 2019, cash and cash equivalents, including restricted cash, totaled $12.9 million USD.

A good chunk of this recently came from a public and private offering priced at $20.5 million in May 2019. They also obtained two new loan facilities, and rescheduled $3.3 million USD in principal payments due in 2019 under certain existing loan facilities. The former actions improved their cash flow by approximately $33 million USD.

To put the operating expenditures and revenues into perspective, here is a breakdown taken from their August 2nd, 2019 6-K filing with the SEC.

(Source: August 2nd, 2019 SHIP 6-K filing from SEC.gov)

We see here that before EBITDA, there is a ~1.8:1 cash inflow versus outflow when looking at operating revenue versus operating expenditures.

Q3 Earnings Projections

Using the previous information, and the statement from the CEO that,

“Since the beginning of the third quarter of 2019, 62% of our fleet available days have been fixed at a daily TCE of approximately $23,800 per ship per day, marking an increase of 184% as compared to the fleet average TCE rate of $8,368 in the first half of 2019.”

we can extrapolate that roughly 60% of the operating days for Q3 should come to an approximate time-frame of ~530 days by using Q2’s 883 operating days as our basis. Assuming the worst-case scenario that the remaining 40% of operating days were still at the Q2 TCE rate of $9,104 / day, the math works out like this.

530 days x $23,800 = $12,614,000

353 days x $9,104 = $3,213,712

Now, we add these two together, which brings our total to $15,827,712 USD.

Compare this to the Q2 TCE ($9,104,) multiplied by (883,) days of utilization, which is a little over half of the Q3 projection at $8,038,832 USD.

This purports we could see a ~$7.78m boost Quarter-over-Quarter. Remember, this is also using the worst-case scenario for the remaining 40% of utilization days, so the boost could very well end up higher assuming the utilization days are nearly the same or more for Q3.

(Source: August 2nd, 2019 SHIP 6-K filing from SEC.gov)

Q4 Earnings Projections

Based on the information earlier that I referenced from CEO in the 6-K Aug 2, 2019 SEC filing, the company will have increased their Net Asset Value (NAV,) by $12.5 million USD come Nov 2019 once the 5 Scrubbers and 3 Ballast Water Treatment Systems are finished being installed. So while CapEx is being used until then, it should be seen in the asset value respectively for Q4, and may even show in Q3 given their filing for Q3 2018 was in the 3rd week of November.

If we assume that Q4 will hold similar TCE to Q3 with the BDI/BCI daily charter rate, this will allow ships that are lent out at the spot price to hold higher value than the previous Q2 TCE referenced above ($9,104.)

During Q4 we’ve historically seen the BDI/BCI hit its peak for the year during this quarter. So we could very well see even higher TCE prices factor into Q4 Earnings given this historical trend, giving an even larger boost to vessel operating revenue.

Bullish and Bearish Wildcard Factors

The US-China Trade War is an on-going concern and any negative outcomes could have a negative impact on trade, however SHIP should be fairly resilient to the US-China relations, as most of the dry goods handled seem to deal with South America, Europe, and Asia regions.

With the fears of an upcoming US and China recession, and some countries already suspecting they’re in one, I believe this is a wildcard that could be Bullish or Bearish. In the past, the US has been the country that has led the global economy into a recession due to being the #1 GDP globally, however China is set to overtake the US #1 spot within 2019 and is past-due for a recession after the huge boom they’ve seen since their tremendous growth initiative nearly three decades ago. If we look at the 2008-2009 recession, the BCI/BDI rates went up to see an all-time high just before the recession hit as warning indicators were going off. It has also been purported to be a leading indicator of a recession. Given the warnings seen as of lately which would indicate we are heading toward a recession, it is possible this ends up once again compounding the already very bullish setup for BDI/BCI pricing for the next 6 - 18 months assuming the indicators are giving us that much runway before it officially hits, and thus a bullish price factor for maritime shipping companies during this runway period.

The China-Hong Kong conflict however I could see being a bearish wildcard for SHIP particularly, given they have an office in Hong Kong. While the executive offices are based out of Athens, Greece, the global markets overall are likely to feel the impact of the tensions here turning sour and into a potentially violent conflict, which could compound the pain for SHIP. These two factors would lead me to believe this could further hurt the share price, but given how oversold it is now and undervalued fundamentally based off what we know from the breakdown earlier, it may not hurt SHIP as much as other maritime shipping companies.

US-Iran relations could cause the BDI/BCI rates to go up if Iran seizes more ships or if war to erupt, however the impact could be negligible to SHIP given they would go around the capes of the coastline of the continent due to their immense size and the Persian Gulf being more isolated from their shipping routes. While this could have a bearish impact, I would imagine the cost of shipping going up to benefit SHIP more than hurt them should they need to reroute any ships around the area.

In Summary

All things considered, the market will move the way the market wants to move, however it would appear that Seanergy Maritime Holdings Corp. is fundamentally undervalued.

They have recently finished their stock offering / dilution, bringing the amount of shares available from roughly ~7 million to ~25 million when factoring both B and C class warrants. Given the gain in price and the pullback in July and August, I believe that we’ve seen a good majority of the warrants exercised given they were zero-cost warrants, which would explain the pullback in the share price.

Seanergy has also recently received a notice from the Nasdaq Capital Market advising they need to address their share price being under $1.00 by Jan 2020. Given the positive outlook in both cash on hand and future earnings, they may not need to do a reverse-split if the price spikes up with Q3 and Q4 earnings, however would benefit from doing so ahead of time to alleviate negative pressure to the share price. Historically it’s more common to see the R/S occur closer to the date given to handle it from the respective exchange, so it’s a guess on whether it happens sooner or later, if at all.

However, SHIP is a low-float stock with ~24 million shares outstanding, and only ~14.6 million shares publicly floating. This means that any news catalyst, negative or positive, will move the stock significantly compared to some other larger maritime shipping companies making it a high risk / high reward investment.

Average daily volume is approximately ~453,000 shares, which makes liquidity unfavorable for day trading without a news catalyst or unless you intend to scalp small lots of shares. This equates to roughly ~$240,000 worth of shares moving a day at the former .55¢ close.

Please understand these concerns when investing, as this can negatively impact those who wish to quickly liquidate their positions and hold more than several thousand shares.

This article was written by

Ryan Reed profile picture
35 Followers
I am an entrepreneur who utilizes day trading as a source for venture capital growth to tap into for my business endeavors, as well as an IT consultant with over 10 years experience in the field.
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Disclosure: I am/we are long SHIP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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