Note: This is my latest update report on Navios Maritime Partners (NMM). This update is also relevant for those who are interested in Navios Maritime Holdings (NM). I recommend reviewing my recent reports for a more comprehensive review of this position.
Past Research Review
18 January: Navios: Trash or Treasure
My SA ratings on NMM have remained consistent throughout the year at "Very Bullish." This has been a longer-term position of mine, with significant losses incurred during 2018 as market sentiment soured.
Source: Seeking Alpha, Author Ratings, NMM
Navios Maritime Partners Overview
Image Credit: Splash 24/7
Navios Maritime Partners (NMM) is a publicly traded partnership with a primary focus on dry bulk and container vessels with attached charters. NMM was previously listed as my 'top idea' for 2018, but performance was very weak during 2018 as markets were cynical despite steady operations.
NMM has had a decent year, up about 30% including dividends, but the stock is down terribly y/y, posting over 32% losses, even with the dividends.
Source: Google Finance, NMM, 1-Year Chart
A random chart-watcher could easily be forgiven for thinking that the dry bulk market must be worse than last summer/fall. NMM must have lost lots of cash flows? Healthy contracts must have expired? Management must have made clear mistakes? The balance sheet must have worsened? Net asset value must have fallen? Wrong. Everything about NMM, including the underlying dry bulk market, has significantly improved y/y, yet the stock has lost over 32% even when including dividend payouts.
What's going wrong with NMM? Primarily sentiment. Despite dry bulk rates posting the highest levels in over five years just the past couple weeks (Capesize peaks closer to 8-year highs), markets have failed to reward dry bulk firms with the best positioning such as Star Bulk Carriers (SBLK), Genco Shipping (GNK), and NMM. Both SBLK and GNK are also down around 30% y/y (note: I am personally long all 3 of these names), but the primary difference is the depths of the discount. Including cash flows generated during Q3-19, I expect NMM's net asset value ("NAV," i.e. assets minus debts) to be roughly $45/unit, with the current unit pricing of $18.08 driving a discount of 60%.
NMM has a unit count of approximately 11.2M, for a market capitalization of just over $200M. Their current dividend yield is 6.6%.
NMM Earnings & Cash Flow: Bulkers Set to Surge
NMM directly has 32 dry bulk vessels and 5 containerships in the current market. The bulkers are primarily on the spot market (full fleet list here) with the exception of three Capesize charters into 2022-2023. They have 7 Capesize vessels on index charters and one in a spot pool. Almost all of their Panamax ships are on short-term charters currently and transition into index-linked employment during Q4-19.
The index-linked ships in particular will benefit the most from the recent surge in rates. As shown below, taken from our private analytics platform, the current Q3-19 running average (as of 6 September 2019) was $28.6k/day for Capesize vessels and $15.8k/day for Panamax. The lower 'Estimate' figures are what regular spot players can expect (i.e. time lagged from market).
Source: Value Investor's Edge, Live Analytics Platform, Market Rate Tracker
Just NMM's 7 index-linked Capes alone will generate roughly $17.5k/day more q/q, or about $11M altogether (i.e. $17.5k x 92 days x 7 ships). That is enough to drive EPS up nearly $1.00/unit on a q/q basis, just from 7 ships alone! For reference, NMM reported an adjusted loss of $0.13/unit for Q2-19. The sole spot Cape adds another $1.5M ($25k Q3 - $8.6k Q2) x 92 days).
NMM also has the majority of their Panamax fleet fixed around $2k/day higher q/q (11x ships @ $2k/day), plus another 4 Panamaxes ($6k/day higher) and 1 Supramax ($3k/day higher) on indexes. These ships add another $4.5M.
Altogether, earnings should improve at least $17M q/q, driving EPS of at least $1.40 for Q3-19. The majority of analysts aren't paying attention, and the majority of earnings forecasts are laughably low. Kudos to Randy Giveans of Jefferies who is also watching and most recently expects EPS of $1.28 for Q3-19. Clearly, Jefferies can see some of the value we do, and I expect we'll see a major upgrade from them if markets remain strong and NMM completes their refinancing.
NMM Valuations: 40% Price to NAV, 3.5x EV/EBITDA
NMM should earn over $30M in operating cash flow during Q3-19 alone, driving NAV north of $45/unit (NMM trades at just 40% of their adj. Q3 NAV). Adjusted EBITDA should be north of $40M ($160M annualized), which means that NMM currently trades under 3.5x EV/EBITDA.
There are definitely some strong underlying rates for Q3, but investors should keep in mind that this is NMM's performance with an arm behind their back due to fixed charters on the majority of the Panamax fleet and lower fixed rates on the 5x containerships (rates revert $6k/day higher on all 5 containers effective 1 January 2020). If NMM traded between 5x and 6x EV/EBITDA, the stock would land between $53 and $68/unit, upside of 193-276%.
Those valuations seem absurd, but they are simply a reflection of how cheap these units have traded. I prefer NAV as a metric, but keep in mind that middle-aged dry bulk ships are currently valued over 40% below their 15y average levels, so even 100% NAV is quite cheap on a historical comparison. If NMM's fleet increased in valuation by just 20%, their NAV would move into the mid-$50s. It is difficult for most market participants to fathom such upside, but it happened before in 2008-2009: between November 2008 and April 2010, NMM was nearly an 8-bagger (including dividends). Valuations have returned to similarly absurd depths, 8x probably isn't realistic, but 3-5x is certainly possible in any moderate upside scenario.
Source: Google Finance, NMM, max chart, arrow added
Additional Bonus: Containership Rates, January 2020
Beyond the dry bulk market strength, NMM also benefits from strong fixed cash flow from their containers. Revenues are set to surge effective 1 January 2020, when rates shift from $24.1k/day to $30.1k/day.
Source: Navios Maritime Partners, Fleet List, highlights added
This shift alone will add $11M of free cash flow (roughly $1/unit) for the next four years, nearly enough to support a potential doubling of the current dividend just by this fixed move alone.
Refinancing: Almost Complete
NMM has held their dividend steady for the past six quarters as they have been chipping away at refinancing their 2020 Term Loan B. They are now nearing completion of this transaction (I expect financial close this October), and management has previously suggested they will look into dividend raises once this is complete.
NMM has already repaid $113.2M of this facility, and they have fixed replacement loans already. NMM is expecting to outright reduce debt of over $60M YTD. Their original TLB was at LIBOR+5%, so with 3m LIBOR currently at 2.13%, this reduction alone ($60M total cash paydown during 2019) saves them nearly $0.10/qtr. in cash interest.
The remainder of the $358M has been refinanced at an average rate at least 1.5% lower than their legacy TLB, saving another 12-15 cents per quarter.
Source: Navios Maritime Partners, Q2-19 Presentation, Slide 7
Just the net interest savings alone from the refinancing supports raising the dividend by over 70%. Add in the containership cash flows and NMM could raise the dividend from $0.30/qtr. to over $0.75/qtr. without even requiring an additional penny from their dry bulk business. If NMM decides to return some of their dry bulk cash flow, they'll blow the roof off the payout.
Navios Containers - Rates Improving
Navios Containers (NMCI) is one-third owned by NMM and was designed to be a bottom-cycle investment play. Navios timed their investment into Panamax containers to absolute perfection, but the stock has been demolished. Investors either aren't paying attention or they have major trust issues with Navios. The current ownership structure is shown below:
Source: Navios Maritime Partners, Q1-19 Presentation, Slide 15
Let's check out the rates for NMCI's core vessel focus. They certainly must be terrible right? Wrong! Rates are surging and are currently just a hair off 5-year highs. NMCI is positioned to roll their fleet onto increasing contracts and should have near-100% utilization (view fleet employment here).
Source: Harper Peterson, 5y Container Chart, 4.25k TEU, highlights added
Rates are much stronger y/y, so NMCI naturally should be higher? Nope. It's down around 50% y/y.
Source: Google Finance, NMCI, 1-Year Chart
If NMCI traded remotely close to its fair valuation of $4.00, NMM would receive another couple dollars in NAV benefit. If NMCI starts to pay a dividend in 2020, NMM will be a major beneficiary and can pass this cash flow along.
Current NMM Valuations: Reaffirm 60% NAV Discount
The following chart breaks down our current valuation of NMM shares per their adjusted NAV. Prior to giving them credit for the 5 far above-market container charters and the long-term Capesize charters, NMM has an adj. NAV of $34.31, according to my calculations. Inclusive of the charter valuations, NMM sits at an adj. NAV of $44.88/unit.
Source: Value Investor's Edge, Live Analytics Platform, NMM Valuations
Based on today's close of $18.08, NMM trades at just 40% of adj NAV, despite gaining investors a huge 52% return since our last public update on 10 June 2019. NMM could return another 50% for investors and still sit at absurd discounts of more than 40% to NAV.
Recent NM Management Shift: Does it Help?
Navios Maritime Partners has traded at extreme discounts primarily because investors are scared that CEO Angeliki Frangou would resort to abusive measures in a desperate attempt to save struggling parent Navios Maritime Holdings (NM). First, NM is no longer in dire straits due to their own surging cash flows, but more importantly, following a recent transaction, NM has transferred their ship management along with NMM's GP to a private firm controlled by Angeliki Frangou.
This move was good for Ms. Frangou as it ensures she will retain control of the Navios Group operations regardless of what ultimately happens to NM, but it is arguably also a good thing for NMM. Why? Because the heavy uncertainty surrounding the NM 'overhang' has now been reduced. Yes, Ms. Frangou is still in charge, so there are still risks regarding her full alignment with NMM, but the (potentially) skewed incentive for her to save NM at NMM's expense is not a major factor anymore.
If NM did end up going bankrupt, there is now no risk of disruption to any of NMM's ship management services, and there is no uncertainty regarding the fate of the General Partner control. Navios Containers is also the beneficiary of a similar transfer. Although I believe Frangou clearly did better in this deal versus NM equity stakeholders, I believe NMM and NMCI are indirect winners.
Conclusion: NMM Uplift Underway, 2nd or 3rd Inning
We are finally starting to see an uplift in NMM's valuations, but they remain at a huge discount, whether viewed in terms of P/NAV (approx. 40%) or in terms of EV/EBITDA (under 3.5x Q3-19 levels). Their discount to NAV (60%) compares to a wide peer basket discount of about 6% and a 'struggling peer' discount basket (GNK, Scorpio Bulkers (NYSE:SALT), SBLK) of about 23%.
NMM is my largest position by far, currently comprising about 20% of my speculative portfolio. My adj. basis is now $19.64/unit as I bought heavily in 2018 and didn't buy huge in 2019 (since the position was already way outsized, more than 2x my next largest stake).
NMM has returned more than 50% off its recent lows, but I believe we are barely in the 2nd or 3rd inning of a recovery streak that could closely resemble the run we saw from 2008 to 2011. My current 'fair value estimate' is $35/unit, 94% upside, which already includes a conservative discount to NAV to account for market weaknesses or execution delays.
If markets remain bullish and asset values improve, we could see substantially higher levels in the $50-60s or higher. Conversely, if rates rapidly fall and assets weaken, the bear case valuations would fall to the mid-$20s. It's very rare to see an investment opportunity where bear case outcomes still offer 30-60% upsides.
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Disclosure: I am/we are long NMM, NMCI. 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.
Additional disclosure: I collaborate with James Catlin on a Marketplace service.