Castor Maritime: The CEO Feeds The Bears
Summary
- In a new filing with the SEC, the company confirms that recent stock increases are "significantly inconsistent" with CTRM's performance.
- CTRM discloses a full-year loss for 2020.
- CTRM shares outstanding increased by 440% during the first quarter.
Castor Maritime Holdings (NASDAQ:CTRM) is a relatively small Cyprus-managed Marshall Islands shipping company, listed on the Nasdaq.
CTRM has had a very exciting first quarter. The company more than doubled its fleet to 14 vessels (including 3 yet-to-be-delivered), primarily comprised of bulk carriers but also including two Aframax tankers, more than tripled its book value, more than quintupled shares issued and increased its market capitalization by 20 times. Not many companies, especially in an old industry like shipping, have shown such amazing growth in such a short time.
However, as the reader can see from the preceding paragraph, the growth in market capitalization and the share price have hugely out-paced even the great growth in the underlying business and consequently the CEO, Petros Panagiotidis, has felt it necessary to warn that recent increases in the share price are
significantly inconsistent with any improvements in actual or expected business prospects, operating performance, financial condition or other traditional measures of value, including our loss per share of $0.03 for the year ended December 31, 2020.
This article is the story of CTRM's amazing quarter and includes my views on where the company goes from here.
Growing the Balance Sheet
CTRM has several times issued combinations of shares and warrants to fund its expansion. It did so again in early-mid January, as explained in its latest prospectus, filed today (April 1), (the "April Prospectus").
At the time, CTRM's share price was trading close to the issue price of the shares/exercise price of the warrants (both $0.19), so the issues were not particularly extraordinary.
However, then CTRM had a most extraordinary piece of luck. Their stock price caught the attention of the Reddit and StockTwits crowd, who were eagerly looking for re-opening trades, and it soared!
While this price move did not assist CTRM as regards the share issuances, as they had already happened, it did ensure that not only all the January $0.19 warrants were exercised, but also some $0.35 warrants remaining from 2020 were exercised. According to an SEC filing by CTRM on 1/26/21 (the "January Prospectus"), CTRM's shares outstanding went from approximately 131 million on 12/31/21 to approximately 509 million shares outstanding on 1/25/21, with 199 million of warrants still to be exercised.
Naturally this huge flood of issuance brought a lot of money into CTRM and its book value appreciated by more than 230% from 9/30/20, according to my calculations in February, which assumed all warrants to have been exercised.
Shorts & Stock Illusion
While this 230% increase in book value was impressive, it paled beside the increase in market capitalization. From the beginning of the year until the early February peak, market capitalization (on a fully diluted basis), grew from $24.89 million to $1.38 billion, a 5,400% increase. Naturally, this divergence drew the interest of short investors and short interest increased rapidly:
(Source: NASDAQ)
The increase in short interest and the increase in market capitalization were in fact self-reinforcing. Most retail financial news websites and brokers used the 12/31/20 shares outstanding number of 131 million to calculate short/float rather than the diluted float of 708 million (which more accurately showed the number of shares available to cover) and so, for example, the 1/15 short/float number was given as 19.6% instead of the correct 3.65%. The inability to keep up is hardly surprising given the unprecedented pace of share issuance.
(Source: Company filings & author's calculations)
This misperception caused retail investors to buy in in the hope of a short squeeze, which led the market capitalization to diverge further from book value, which drew in more shorts, which increased retail investors hopes of a short squeeze and so on in an upward spiral. This behavior caused by an incorrect understanding of the number of shares available can be thought of (and I will refer to it) as stock illusion - a close counterpart of money illusion, where people's perceptions of the value of money fail to keep up with the reality of inflation.
The Unraveling Begins
Fortunately for this author, the strange situation caught the attention not only of the shorts, but also of Seeking Alpha's contributor and estimable shipping expert, Henrik Alex, who published an article entitled "Castor Maritime: Trading At A 500%+ Premium To Net Asset Value After Epic Momentum Rally". This drew my attention to the discrepancies and to the January Prospectus, whereupon I wrote to demonstrate that, because of the huge amount of additional issuance and potential issuance (because the January Prospectus allowed a further $700 million of stock to be issued), a short squeeze could not happen. The article, "Castor Maritime: Squeeze Will Sink Under A Wave OF Share Issuance", describes the various share and warrant issuances in more detail than is available here.
The January Prospectus, as mentioned above, set out the correct number of shares and warrants outstanding or exercisable as of 1/25/21. Most brokers, and some (but far from all) websites updated their shares outstanding, and all derivative calculations, to the 509 million mentioned in the January Prospectus (although still not including the warrants) and so the stock illusion began to abate. Now, only a few die-hard believers still tout the short squeeze theory on Reddit and StockTwits and I believe that they will soon be disillusioned by (1) CTRM's recent confirmation in its Q4 earnings press release (the "Q4 Report") that almost all warrants have been exercised and the stock count is just under 708 million, as I projected, and (2) NASDAQ's forthcoming release of the 3/31/21 short interest, which I do not expect to be materially different from the 8.35 million shares reported for 3/15/21.
If there is no squeeze, why is the share price still so high?
While the share price has declined from the nose-bleed levels of February, it is still (at $0.72 as I write) extraordinarily high on most metrics. The Price to Book calculation is the easiest to analyze. This is the February calculation referred to previously, updated for the Q4 Report and current share price:
This compares to 0.93 for Star Bulk (SBLK) and 0.89 for Eagle Bulk (EGLE), both larger and more established bulk shipping competitors, (source: ETrade).
On a sum of the parts basis (which is, in essence, similar to book value but with assets marked to market and depreciation/amortization excluded), we get a remarkably similar valuation:
The calculation uses actual purchase price for 2021 delivered vessels, this comparable for the pre-2021 vessels and the Q4 Report for other numbers.
Price to Earnings is not easily applicable as CTRM, like many peers, made a loss in 2020.
Blue Sky Future
According to the active and spirited discussions on Reddit and StockTwits, the largely retail investor base (with the exception of the die-hard disciples of a short squeeze referred to above) believes that the value of CTRM lies not in its present book value or parts value, but in its future. Money will flood in, the story goes, as the world recovers and the shipping industry booms.
It is undeniably true that:
- The dry bulk sector of the shipping market is booming;
- CTRM was extremely fortunate to receive the infusion of cash described above; and
- CTRM has acted with alacrity to use the cash to purchase vessels and commence charters.
It is also true, in this author's opinion, that CTRM is leanly run, from an expense & management viewpoint, and has a low level of leverage for a shipping company. However, even given these positives, it is difficult to justify the current price levels. The April Prospectus gave us a large amount of detail on likely 2021 revenues.
Based on that and based on current charter rates from Fearnleys, I have modeled likely 2021 earnings.
(Source: Fearnleys)
One caveat on these numbers, I have used general TCE rates to cover any periods when rates have not already been contracted, but for at least the Panamax vessels we know that CTRM is unlikely to achieve these rates because they (being quite old) are not compliant with IMO 2020 sulfur emission regulations and they do not have scrubbers installed so charters will have to pay extra for low sulfur fuel MGO).
(Source: Fearnleys)
Therefore, my numbers are likely over-optimistic. We do not yet have the compliance information for the 2021 purchased vessels.
7.17 price/revenue compares to 1.64 for EGLE and 2.14 for SBLK. If we take the average of EGLE and SBLK (1.89) and apply it to the $71.26 revenue number, that implies a share price for CTRM of $0.19.
However, 2021 is a ramp up year for CTRM. Let's imagine a full year with a full fleet all chartered out at market rates.
Even in this perfect scenario (and again disregarding the environmental problem), CTRM is trading at almost 5 times revenue. Using the same peer comparison as above, we get an implied share price of $0.28 per share.
The CEO bursts the bubble
Of course, the company and its CEO (and they are synonymous in this case since the CEO is the company's only employee) are fully aware of this over-valuation.
On March 30, the company withdrew the January Prospectus (which would have allowed to issue up to $700 million of common stock and/or other securities and then on April 1 replaced it with the April Prospectus, which allows the company (1) to issue an unlimited amount of common stock and other securities, including through an at-the-money issuance, and (2) to do a reverse stock split (without which the company is very likely to be de-listed from the NASDAQ on 6/28/21).
In the April Prospectus, the CEO commented on the extreme volatility of the share price, noted that he believed that the investor base was largely retail and then noted that recent increases in the share price are
significantly inconsistent with any improvements in actual or expected business prospects, operating performance, financial condition or other traditional measures of value, including our loss per share of $0.03 for the year ended December 31, 2020.
As the reader can see from my above analysis, I entirely agree with him.
But why?
What caused the CEO to make such a declaration? I think there are two main factors:
1. If he does intend to proceed with an ATM issuance at or around the current share level, he will be issuing shares at a level which he believes to be "significantly inconsistent with any improvements in actual or expected business prospects, operating performance, financial condition or other traditional measures of value, including our loss per share of $0.03 for the year ended December 31, 2020." Should there subsequently be lawsuits over the shares being issued at an unfair price, the fact that he told prospective purchasers, publicly and in writing, that the price is too high is an excellent defense.
2. As outlined above, CTRM's growth has consistently been funded by new issuances of share and warrants. While the share price is at such elevated levels, it seems extremely unlikely that he will be able to find underwriters for new offerings, and therefore that he will be constrained in funding future growth.
With regard to this second factor, investors should be aware of two issues relating to the CEO's personal (including, here, his wholly owned Liberian companies) incentives:
- He has a relatively small interest in the common stock of the company - only 0.2% of the then outstanding common stock, according to the January Prospectus. Even at these elevated stock prices, that is less than $750,000.
- He receives substantial fees and income as the company grows, including a 1% fee on every vessel bought or sold and 1.25% of all charter revenue, again according to the January Prospectus.
Thus his personal incentives lean toward growth of the fleet rather than to growth of the market capitalization.
Conclusion
I believe that CTRM's share price will trend down toward levels consistent with its fundamental level and comparable to industry peers - probably between $0.25 and $0.30. I believe that the CEO's intervention to confirm the current overvaluation will accelerate that downward trend.
This article was written by
Analyst’s Disclosure: I am/we are short CTRM. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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