Castor Maritime: Prepare For Another Equity Offering As Aggressive Fleet Expansion Continues

Summary

• Aggressive fleet expansion continues with the company reportedly having committed to purchase 15 additional vessels over the past four weeks alone.
• Aggregate cash outflows upon delivery are estimated at almost $240 million, thus resulting in the requirement to raise additional equity in a range of $100-$125 million.
• June 28 deadline for regaining compliance with the Nasdaq $1.00 minimum bid price requirement approaching. Expect the company to conduct a reverse stock split to cure the deficiency.
• With expectations for both a near-term equity raise and reverse stock split, the shares should be avoided.
• Investors looking for exposure to dry bulk shipping should rather consider buying shares of proven industry leaders like Star Bulk Carriers, Golden Ocean Group, Genco Shipping & Trading and Eagle Bulk Shipping or taking advantage of the opportunity currently provided at Pangaea Logistics Solutions.

Photo by 1001slide/E+ via Getty Images

Note: I have covered Castor Maritime (NASDAQ:CTRM) previously, so investors should view this as an update to my earlier articles on the company.

It has been just one month since fast-growing Cyprus-based shipping company Castor Maritime raised a whopping $125 million in additional capital but another equity offering might already be close at hand given the company's ongoing, aggressive fleet expansion efforts.

Over the past four weeks, the company has committed to no less than 10 additional vessel acquisitions for an aggregate purchase price of $141.5 million thus increasing its fleet of dry bulk carriers and tankers by more than 70%:

Source: Company Press Releases, Compass Maritime

Particularly the recent en bloc acquisition of five old tankers for slightly below $50 million appears to be a real bargain with these vessels likely being worth more than $60 million as indicated by Compass Maritime:

Source: Compass Maritime Weekly Report

In addition, Castor Maritime has reportedly picked up five additional second hand vessels for an aggregate purchase price of $97.6 million last week:

Source: Splash247.com

While Castor Maritime should be able to arrange inexpensive debt financing for up to 60% of the purchase prices over time, the company will first be required to take delivery of the vessels which is going to result in near-term cash outflows of almost $240 million.

According to my estimates, the company would need to raise an additional $100-$125 million to fully pay for all recent vessel acquisitions.

Given this issue, investors will likely have to prepare for another massive equity offering in the not too distant future.

Despite ongoing strength in the Baltic Drybulk Index, the company's shares have experienced selling pressure in recent weeks likely in anticipation of a follow-on offering.

But even after last month's share price decline and further increases in second hand vessel values, Castor Maritime is still trading at an approximately 30% premium to net asset value ("NAV"):

Source: Company Press Releases and SEC-Filings

Assuming the company raises another $125 million in gross proceeds by issuing 312.5 million new common shares and warrants at a unit price of $0.40, net asset value per share would increase slightly to $0.36.

Bottom Line:

Despite the Baltic Dry Bulk Index currently trading at 11-year highs, investors should continue to avoid Castor Maritime as the company's aggressive fleet expansion efforts are likely to result in another massive, near-term equity offering with the company having committed to take delivery of up to 15 vessels over the next few months.

Also keep in mind that Castor Maritime will be required to regain compliance with the Nasdaq Capital Market's $1.00 minimum bid price requirement until June 28 with the only viable option at this time apparently being a reverse stock split.

Investors looking for exposure to dry bulk shipping should rather consider buying shares of proven industry leaders like Star Bulk Carriers (SBLK), Golden Ocean Group (GOGL), Genco Shipping & Trading (GNK) and Eagle Bulk Shipping (EGLE) or taking advantage of the somewhat unfortunate situation at Pangaea Logistics Solutions (PANL).

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Comments

[Lucky?]

Just ran into this a few minutes ago and gave it a look.

This is my 10 minute opinion so take it for what it's worth.

It looks like after the recent raise the NAV is around .32 cents and earnings for the year will be around .07 cents (no more major stock sales....running with 900M shares outstanding).

Plenty of shipping companies can be had for P/E's around 5 and NAV around 1.

So this will head to at least the .32 to .35 cent range in the short term.

But....with the chart pointed straight down the R/S upcoming odds are this will over correct (and then bounce back to that range).

If it goes low enough it will become worthy of a short term trade...playing for the bounce back up.

The bigger long term question is it really a good idea to be investing in a company spending money buying ships at what most would agree is the top of the shipping cycle (when used ship prices are at their peak)?

Kind of the opposite way you want to do it.....if the goal is make money anyway.

But I get it....no one will give/loan you money at the bottom of the cycle so if you're small and want to expand you take the money at the top and run.

Kind of why the shipping industry has been cyclical since forever....companies like this expand and grow at the top of cycle and then go BK at the bottom (and then it starts all over again).

[Lucky?]

@Lucky?

It's in that 32 to 35 cent range now (after R/S 3.20 to 3.50)....and it's over correcting.

I'll take a shot at this at 3 dollars if the volume drops down and then double down if it hits 2.50.

I'm OK owning it 10% to 30% under NAV....odds are they won't R/S it into oblivion while it's trading under NAV.

If it breaks two I'll take my loss and move on...means something else is up (they are planning to raise cash and then R/S it into oblivion).

[Henrik Alex]

@Lucky?

That's the big question. Will they continue their aggressive expansion or stop here? They have picked up vessels left and right and according to my calculations, they need more cash to take delivery.

[Lucky?]

@Henrik Alex

Well, considering the CEO gets paid for growing the fleet rather than the share price, and the fact they will need the money to finance those recent purchases, I'd say odds are they do another raise.

That said I'm still giving it a shot below NAV. The reason is the brokerage house doing the secondary should pump the stock up before they unload those shares.

But even if they don't do that already trading under NAV you have a certain degree of protection against a major move down.

[project.megaflex]

watch CTRM fly to 1.00 in the next 10 days towards June 28. The increase in size of fleet will make them a strong competitor in the sea. looking towards 2.00 followed by a RS 10:1 to maintain stock price at 20 in august. 😊

[project.megaflex]

Good time to buy CTRM below 0.45. Looking at the oversold status everyone can expect a price squeeze coupled with NASDAQ Compliance of minimum 1.00 we expect CTRM to recover 0.20 every week towards June 28.

Time to invest in CTRM 👍

[Henrik Alex]

@project.megaflex

Nonsense. Drybulk futures have been down meaningfully over the past couple of days and the company is still trading above NAV.

[Anthony Leigh]

@project.megaflex better get out before it drops below 0.1, the outstanding number is beyond imagination

[Henrik Alex]

@leighanthony

The stock won't drop "below $0.1" given the much higher asset value and expectations of positive cash flows for this year. Moreover, the company is likely going to conduct a reverse stock split next month.

[Tokyo Picker]

Another excellent article, Henrik. IF CTRM can get another accretive dilution done obviously they should and will do so. It is good for the company, however painful it may be for shareholders.

[headnugg]

Ugh, this company keeps doing stuff that make no sense.

[Henrik Alex]

@headnugg

Actually it makes a lot of sense to sell equity above net asset value and buy new vessels at net asset value, particularly given the current state of the charter market.