Recent quarterly results confirm the bullish thesis.
More upside potential coming in the next year.
Distribution is the thorny issue which management seem to avoid discussing, despite earlier promises.
This is my 12th article on Navios Maritime Partners L.P. (NMM) since I started covering it back in Sept of 2016. It has been a rollercoaster ride, as it has been for many maritime companies. Some of my articles have been fairly negative on NMM, but most have been optimistic.
Here are the ratings for this year:
Third-quarter results showed that fundamentally, NMM keeps getting stronger and stronger. I applaud management for this. Lessons were learned from 2016 when the market hit an all-time low, and NMM's debt burden even left investors and analysts wondering if NMM would make it. A complicated corporate structure, with intercompany transactions with no "Chinese walls" did not help the matter.
I believe this has resulted in a severe lack of trust in the investment community.
I hope other investors, either long or considering to go long NMM should take the time to not only read results and presentation slides but should also go through the transcripts from the conference calls. There, analysts are supposed to try to get answers to some of the things companies often decide not to divulge. If the analyst happens to work for a large bank that is doing business with the company, it is unlikely that the analyst is going to rock the boat. I would love to see more independent analysts asking tough questions. Especially at conference calls at companies like NMM, as we can assume that no investors actually show up at their Annual General Meetings.
After having read the transcript from NMM's 3rd Quarter conference call, here are some comments I have with regards to the call.
NMM gamble on IMO 2020
In less than sixty days from today, all ships have to comply with IMO 2020 on low sulfur fuel. It means that shipowners can either buy Fuel oil with less than 0.5% sulfur content, or they can use the cheaper Intermediate Fuel Oil 380 cst, which guarantees sulfur content lower than 5%.
The spread in the price of these fuels keeps going up. In early September, this spread was around $150 per ton. It is now, at the time of writing, as much as $200 per ton.
Management of NMM has decided against investing in scrubbers. They would rather gamble on a falling spread in the price between low and high sulfur content fuel. From the information publicly available, NMM has not, contrary to many other shipowners, disclosed which vessel in their fleet is by now fitted, or scheduled to be fitted with scrubbers. I have contacted the IR department of NMM with questions regarding this. So far they have not answered me.
Here is NMM's CEO and Chairman Angeliki Frangou's view on scrubbers, which she stated in the conference call:
We have only one vessel being retrofit for scrubber. All our vessels are in the water, generating revenue. You can see that this scrubber margin can collapse if prices of fuel goes up. So, this is kind of a situation that Navios as a group, we have not taken a position. I mean, we have in NMM one vessel that we did install scrubber at a cost-plus profit.
She goes on to say:
On a percentage overall on the Capes, we say that over 80% of the Capesize fleet do not have scrubbers. For sure, scrubbers are not the long-term solution.
I have not checked if this is right, but I do question their policy of doing nothing, with regard to the imminent changes to IMO rules.
This gamble could cost NMM dearly in the next 12 months. It is very possible that refineries will all revamp and in a couple of years, this will be the most commonly available fuel. However, at this stage, traders and refiners are most likely going to take advantage of the situation that this spread offers.
Returning money to shareholders
NMM has so far used $4.5 million to repurchase approximately 3% of the outstanding units. That is good. The total number of units is now just below 11 million units.
With regard to the distribution, Frangou said the following:
We declared a quarterly distribution of $0.30 per unit, representing a current yield of approximately 6%. Our common unit coverage for the quarter is 7.8 times.
As the largest investor in NMM, does she calculate her yield based on daily stock prices or does she use the price at which she bought the shares?
It is convenient to use the knocked down price of $20 when "calculating how much she ought to pay her shareholders", but it is worth remembering that before NMM did a 1 for 15 reverse split, this company was trading at $160 per share (in April 2015).
Today's NMM is a considerably larger and financially a more solid company than it was in April of 2015.
Unless, you just initiated a position in NMM at $15 per share, and that is good for you as NMM is up 38.3% since my last bullish article of 13th August, it is in my opinion not very useful to talk about a 6% yield.
Based on my average cost, my yield on NMM is 3.4%. I am not complaining, although it probably sounds like it. I get it. The company had to improve the balance sheet, renew and grow the fleet. All that is fine. However, with a present coverage of 7.8, that would translate to a yearly potential distribution of $9.36.
With the refinancing done and an annual expected saving of about $11.5 million in interest, that equates to a bit over $1,00 per share too.
Then there is $50 million receivable from the dissolution of Navios Europe I. Interestingly, management did mention on the conference call that NMM expects to convert the receivables into the ownership of five container vessels plus cash. No details were given as to how much NMM has to pay for these shares. Another intercompany transaction is coming. Let's see how much cash they actually get. I would not hold my breath or expect a large amount of this receivable to be in the form of cash. For the purpose of trying to figure out how much she could return to shareholders, let's assume none of this will actually be returned, but rather reinvested in more steel (a.k.a. ships).
Last, but not least, there is the matter of the bump up in rates on the 5 containerships on charter to HMM. This is coming into effect in January 2020, with rates reverting to their original rate of $30,100 per day from their current $24,100 per day. Providing HMM does not try to renegotiate, or try to keep a lower rate against offering a longer duration on the charter, NMM will receive an extra $10.65 million of free cash flow each year for the next four years. That is nearly $1 per unit of potential money which could flow back to shareholders.
I would like to remind readers of my article on April 23rd, 2019, titled "Navios Maritime Partners: Buybacks And Clever Strategy To Pay Off" with the following screenshot:
I do not want to be the devil's advocate, but distribution is not the same as returning money to shareholders. Her statement is only a few months old. Not a few years. Therefore, when she was asked a simple question by analysts, why was it so difficult for her to answer that they would increase quarterly distribution. Or perhaps she has changed her mind again.
With a likelihood of higher free cash flow in 2020, they could distribute more than $11 per unit.
Walk the walk - don't just talk the talk.
If this time is not the right time, when is it?
The shipping market is very unpredictable. It seldom stays high for very long.
Dry bulk market adjustment
The dry bulk market is now profitable for shipowners. Baltic Dry Index peaked this year at 2,500, but has since fallen considerably. Yesterday the BDI closed at 1,656. That is a drop of nearly 34 in a fairly short time. I keep reminding readers that the spot market in bulk shipping, both dry and wet, is highly volatile.
We can see how this drop in the BDI translates into lower daily earnings by looking at Fearnley Shipbrokers Weekly market report of 6th November.
Source: Fearnley Shipbrokers
If we look at the forward values, we can see that there is very little optimism about Capesize earnings next year, since there are only buyers at USD15,000 per day level. This is as can be seen considerably less than the current spot level, and as Ms. Frangou commented, much too low for NMM (or any other owner for that matter) to tie down a Capesize for one year period time charter.
Projections for dry bulk trade for 2020 do look positive. There is still an expected growth of 2% in seaborne trade of bulk commodities, and with deliveries of new bulk carriers coming down from 50/60 million deadweight ton per year to the present level of only 31 million this year, the next one to two years does look very promising indeed.
What is impossible to project is how trade disputes will eventually work out. America's President has been talking about $50 billion worth of purchases of agri-products from the USA. This may help freight rates. Global ocean transportation of coal is expected to increase next year from 994 million tons this year to over 1 billion tons. Iron ore, the biggest market mover, is also expected to grow by 2.1%.
NMM is clearly out of the woods now. All indicators of higher free cash flow (read: the ability to distribute money) are in place.
I suggested in one of my comments to the 31st October announcement of NMM's 3rd Quarter results, that we could have a competition here on SA where we could guess what the total distribution will be in 2020.
I suggested $2 per unit. Obviously, from reading my article, it is clear that they will in all likelihood be able to distribute a lot more. I just don't see them doing it. Hopefully, I am wrong.
How much do you think they will distribute?
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Disclosure: I am/we are long NMM. 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.