Dry Bulk Shippers: Good to Go

by: Darspal Mann

Bears have hammered the dry bulk sector for last 6+ months, mainly for being:

- At its all time cyclical peak
- Soon to suffer from overcapacity on new ship builds
- Global economy entering into recession
- Bulk freight index decline showing lack of pricing power
- Overlevered

and other varied reasons. But it seems like they might have overdone it (even if in near term).

I believe it might be, yet another time, when it's time to look at this sector wearing your "bullish" glasses. Especially since

- Long-term global trade trends are still positive and this sector grows with the growth of global trade, no matter which way it's moving.

- Demand/ supply dynamics for new capacity look pretty in sync at least for another 2-3 years and even after that most of the data can be learned either way. BTW next year there are 111 more bulk ships coming online against order book of 1000+

- Bulk freight index (index of freight prices for different vessels) after coming down by more than 30-40% seem to be stabilized now. Some consider first quarter to be soft since commodity price negotiations are being held and some countries try to play games with commodity suppliers by holding up boats at the ports without letting them unload. But now that overhang should be going away

- Coal: As suggested by most coal producers, China is in net importer status of Coal, it should bode well for shippers as China imports coal from Australia. Indeed India is starting to look for thermal coal from overseas too (as validated by Tata groups deal with Indonesia's BUMI resources).

- Grains: It's not just that wheat and rice is going up in prices but the amount of travel, these agri commodities are doing is also going up. Seasonally too we should see grain from southern hemisphere to start rising going into second quarter.

- Dividend announcements coming: most Shippers pay a big part of earnings as dividend and since prices are still strong, we should expect earnings to be strong and in turn the dividends to be strong. Most of these dividends should be announced in next few days. BE READY

Above all Valuation: Most estimates are calling for revenue decline since analysts are baking in major decline in Baltic freights, you be the judge of how stocks are react if the freights don't decline or indeed if they go up. Based on these declining Baltic freights, stocks on average are trading 4-9X EV/ EBITDA and offering dividend yields of 7-13%.

My favorite names are DRYS, DSX, ESEA and SBLK. More on these names soon. Good luck!