Diana Shipping - Use The Recent Selloff To Participate In The $4.50 Tender Offer

Summary

• Initiating coverage on Diana Shipping, a leading Greece-based dry bulk shipper with decent financials employing a rather conservative chartering approach.
• In contrast to peers, the company is focusing on medium- and long-term charters resulting in improved earnings visibility and better resilience during market downturns.
• On the flipside, this strategy leaves the company disadvantaged in today's strong dry bulk market, but earnings are expected to catch up over time as weak legacy charters expire.
• Investors should consider taking advantage of the recent selloff in shipping stocks and the company's current self-tender offer to initiate a position in the shares at an almost 50% discount to estimated net asset value.
• With dry bulk market conditions likely to remain strong, I would expect the company to start paying a sizeable dividend in early 2022 at the latest point. Get long Diana Shipping with a medium-term price target of $6.

Viktor Ketal/iStock via Getty Images

Diana Shipping (DSX) is a leading, Greece-based dry bulk shipping company currently commanding a fleet of 36 dry bulk carriers with an average age of 10.4 years.

The company is employing a rather conservative chartering strategy focused on medium- to long-term time charters which are usually spread out to avoid clustered maturities.

While this approach provides good earnings visibility and better resilience in market downturns, it obviously leaves the company disadvantaged in today's strong dry bulk market with large parts of the fleet still employed on legacy contracts well below current time charter- and at a fraction of current spot rates:

Source: Company Presentation

As a result, the company's Q2 average daily time charter equivalent ("TCE") of $13,477 lags peers focusing on the spot market or index-linked time charters like Star Bulk Carriers (SBLK), Golden Ocean Group (GOGL), Genco Shipping & Trading (GNK) and Eagle Bulk Shipping (EGLE) even when adjusting for somewhat different fleet compositions.

That said, Diana Shipping recently managed to secure eight new charter contracts more reflective of the current market environment:

Source: Company Presentation

In addition, a sizeable part of the fleet will be up for re-chartering until year-end thus providing additional earnings upside over the next couple of quarters.

The company's balance sheet is in great shape with ample liquidity and net debt of just $307 million vs. an estimated fleet value of over $900 million.

Moreover, Diana Shipping appears to be dirt cheap from a net asset value ("NAV") perspective, currently trading at an approximately 40% discount to estimated net asset value per share:

Source: Company Press Releases, Compass Maritime

In contrast to many of its peers, the company is actually recognizing the massive discount and recently initiated its second self-tender offer this year (emphasis added by author):

ATHENS, Greece, July 16, 2021 - Diana Shipping Inc. (NYSE: DSX) (the “Company”), a global shipping company specializing in the ownership of dry bulk vessels, today announced the commencement of a tender offer to purchase up to 3,333,333 shares, or about 3.6%, of its outstanding common stock using funds available from cash and cash equivalents on hand at a price of $4.50 per share. The tender offer will expire at the end of the day, 5:00 P.M., Eastern Time, on August 16, 2021, unless extended or withdrawn. The Board of Directors determined that it is in the Company’s best interest to repurchase shares at this time given Diana Shipping’s cash position and stock price.

Earlier this year, the company already bought back six million shares at a price of $2.50 per share.

Admittedly, 3.3 million shares isn't a huge number and with the stock currently trading well below the tender offer price, investors considering to participate in the offer will likely face proration like already experienced in the February tender offer in which the company ended up buying approximately 60% of all shares tendered.

Assuming 50% proration for shares tendered in the current offer, investors would still be able to decrease the average purchase price of their remaining investment by approximately 12.5% as shown in the example below:

Source: Author's own Estimates and Calculations

With dry bulk market conditions widely expected to remain favorable going into 2022 and Diana Shipping benefiting materially from the expiration of weak legacy charter contracts over the next couple of quarters, using the current self-tender offer to initiate a position in the shares at a 46% discount to estimated NAV looks enticing to say the very least.

Bottom Line

The recent broad-based selloff in shipping stocks in combination with the above discussed self-tender offer provides a decent opportunity to initiate a position in one of the stronger industry players.

With more and more legacy charters expiring, Diana Shipping's earnings will gradually catch up to peers over the next couple of quarters.

In addition, reading between the lines of the most recent conference call transcript, I would expect the company to start paying a sizeable quarterly dividend starting in Q1/2022 at the latest point.

Get long Diana Shipping and participate in the current self-tender offer to significantly lower your cost base for the remainder of your investment.

Assuming current conditions in the dry bulk markets take hold, I wouldn't be surprised to see the shares trading at $6 going into next year. Keep in mind that share repurchases and positive cash flows from operations should increase net asset value per share quite meaningfully over the next couple of quarters.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of DSX either through stock ownership, options, or other derivatives. 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.