Castor Maritime - Market Value Diverges From Fundamentals
Long/Short Equity, Special Situations, Contrarian, Banks
Seeking Alpha Analyst Since 2008
The opinions expressed herein are the opinions of Teton Record Services Limited Company. Publication of these opinions is not a recommendation for investment, nor is it a solicitation of any kind of business or transaction.
The employee authoring this opinion has thirty years in investment banking, specializing in tax arbitrage and asset finance, and has a Masters degree in politics and economics from Oxford University.
Teton Record Services Limited Company is a corporation established with limited liability under the laws of the State of Wyoming.
Summary
- CTRM's over-valuation is becoming extreme and approaching 5x book value. Book value per share is approximately $0.25.
- The company has a history of rising above book value and then falling back sharply.
- CTRM is also showing unsustainable levels in metrics such as price to revenue and price to earnings.
Castor Maritime (CTRM) continues to have an amazing run. There is a fascinating interplay between the (primarily) institutions who bought into the huge share issuances of January (and earlier) and who are now looking to realize their massive profits, and the largely retail denizens of chatrooms like Stocktwits and Reddit who are mainly just trying to chase the price up.
The institutions involved are very familiar with CTRM - they were involved in investing in the company before the recent publicity (which is why they were involved in the January and earlier issuances). They know the underlying value of the company and probably (like most experienced investors) expect that over time the company's market value will tend to be close to the underlying value. The Stocktwits and Redditers are at a disadvantage here. A perusal of those sites will quickly show that many of them are unfamiliar with most standard valuation metrics, they have no idea what the company's underlying value is, often even what the market capitalization is and they misunderstand some very basic market features - such as SEC filings and the NASDAQ $1 rule. This article is an attempt to redress that imbalance with relation to valuation metrics.
First a Note on Calculations
This article will use a fully diluted share count of 710 million. As more fully described in my recent article "Castor Maritime: Squeeze Will Sink Under A Wave Of Sale Issuance", the share count went from 131 million on 12/31/20 to a diluted 709 million now (including outstanding warrants). Investors who want precise details should read CTRM's recent F-3 Filing (dated 1/26 but filed 1/27) ("The F-3") and/or my article (which is, in essence a summary and explanation of The F-3.
Price dependent calculations herein will be based on a CTRM share price of $1.22, which is the share price as I submit this article at approximately 2 pm EST on February 18. This gives a market capitalization of $865 million.
Other data will be taken from CTRM's report on its financial condition on 9/30/20, which I will refer to as the "9/30 Financials".
Outstanding Warrants:
I have used the diluted share count of 709 million, rather than the 509 million issued shares reported in the F-3.
This is because the F-3 tells us that the 199 million outstanding warrants are exercisable at any time and are well in-the-money (some being exercisable at $0.19 and some at $0.35). The advantages of exercising the warrants are (i) that the warrants are not liquid or listed, while the shares issued upon exercise are both, and (II) should a warrant holder not wish to sell the shares resulting from exercise, he can lend them to the shorts at annualized rates of over 20% (source: Fintel):
I therefore believe that all warrants outstanding as of 1/25 either have been or shortly will be exercised and Fintel agrees that about 100 million already have been:
Price to Book
This is the most reliable and easy to calculate calculation.
Assumptions:
- All "in-the money" warrants are exercised.
- The privately placed warrants issued on undisclosed terms on 7/12/20 had the same price and exercise terms as the warrants issued publicly on 6/23/30.
- If cash has been used to purchase assets (including vessels) or pay down debt, there has been no net effect on book.
Calculation:
| $ millions | |
| Book value from 9/30 Financials | 53.05 |
| June 2020 Warrant Exercise | 20.69 |
| July 2020 Warrant Exercise | 20.21 |
| Jan 5, 2021 Stock Issuance | 16.40 |
| Jan 5, 2021 Warrant Exercise | 18.00 |
| Jan 5, 2021 Stock Issuance | 24.00 |
| Jan 5, 2021 Warrant Exercise | 26.00 |
| Current Book Value | 178.35 |
| Book Value Per Share | $0.2512 |
(Source: The F-3, 9/30 Financials, author's calculations)
This gives a price to book of 4.8567.
Comparisons:
Here is a comparison to a couple of peers:
| Price to Book | ||
| Castor Maritime | CTRM | 4.86 |
| Star Bulk Carriers Corp | SBLK | 0.84 |
| Eagle Bulk Shipping | EGLE | 0.90 |
And, just for fun, to a couple of widely-helds:
| Price to Book | ||
| Castor Maritime | CTRM | 4.86 |
| General Motors | GM | 1.66 |
| Berkshire Hathaway | BRK.B | 1.41 |
Price to Revenue
We're going to have to make some pretty heroic assumptions here. CTRM is fundamentally (in my opinion) a pretty well-run company, so let's err in their favor where possible.
Assumptions:
- Vessels under contract will be successfully transferred so that the 4/2021 CTRM Fleet will consist of 2 tankers and 10 bunkers. The vessels not owned as of 12/31 are described in several CTRM press releases here.
- Shipping rates will stay at current high levels (data source, Fearnleys) throughout the year.
Calculation:
| Size | Number | Type | Months in Service | Daily Rate | Revenue | |
| Panamax | 6 | Bulker | 12 | $15,000 | $32,850,000 | |
| Capesize | 1 | Bulker | 9 | $19,500 | $5,338,125 | |
| Kamsarmax | 3 | Bulker | 9 | $16,500 | $13,550,625 | |
| Aframax | 2 | Tanker | 9 | $15,000 | $8,212,500 | |
| Total | $59,951,250 | |||||
| $164,250.00 | per available day |
So that gives a price to revenue of 14.45.
Comparisons:
Here are the same comparisons (2020 revenue other than CTRM):
| Price to Revenue | |||
| Castor Maritime | CTRM | 14.45 | (expected 2021 revenue) |
| Star Bulk Carriers Corp | SBLK | 0.84 | |
| Eagle Bulk Shipping | EGLE | 1.81 | |
| Price to Revenue | |||
| Castor Maritime | CTRM | 14.45 | (expected 2021 revenue) |
| General Motors | GM | 0.62 | |
| Berkshire Hathaway | BRK.B | 2.34 |
Price to Earnings
Piling generous assumption upon generous assumption, we will look at earnings.
Assumptions:
- As compared to Q3 2019, all expenses rise in proportion to number and size of vessels and number of days.
Calculation:
Based on revenue numbers from above:
| Price to Earnings | |
| Revenue | $59,951,250 |
| Opex, depreciation, management | -$20,527,534 |
| Interest, SG&A | -$4,084,496 |
| Earnings | $35,339,220 |
So that gives a P/E of 24.5, very high for a small company in a highly cyclical industry.
Comparisons:
Here are the same comparisons (using 2021 projections for all shipping companies due to their losses in 2020):
| Price to Earnings | |||
| Castor Maritime | CTRM | 24.51 | (expected 2021 earnings) |
| Star Bulk Carriers Corp | SBLK | 5.53 | (expected 2021 earnings) |
| Eagle Bulk Shipping | EGLE | 31.66 | (expected 2021 earnings) |
| Price to Earnings | |||
| Castor Maritime | CTRM | 24.51 | (expected 2021 earnings) |
| General Motors | GM | 12.24 | |
| Berkshire Hathaway | BRK.B | 16.42 |
History of and reason over-valuation
This is not the first time that CTRM's valuation has been pushed to unsustainable levels. As described contemporaneously by SeekingAlpha contributor Henrik Alex in excellent articles here and here, CTRM briefly traded at more than 200% above book, before seeing a 97% stock crash over the subsequent 18 months.
Why is CTRM prone to such extreme swings in price to book ratio. According to Henrik's (very credible) opinion, in 2019 it was partially due to some investors' insufficient appreciation of the effect on the capital structure of the cumulative preferred stock on which dividends were not being paid.
In the current case, I think the cause is similar. Changes in the capital stock have not been fully appreciated by less sophisticated investors. There are two major sources of confusion - first the fact that a huge amount of stock has been issued since the last reporting date, and second, CTRM's habit of issuing large amounts of warrants in combination with its stock issuances. This practice is beneficial to the company in allowing it to issue stock more cheaply - investors will pay more for a stock if it comes with an embedded option to purchase another stock at the same price. However, it causes confusion since those warrants are not usually taken into account in the market capitalization (and consequent price to book) calculations done by the various financial web sites on which retail investors rely.
Take, for example, the StockTwits site mentioned at the outset of this article. As of today, 82,696 investors are following CTRM on this site. It reports that CTRM has a market capitalization of $441 million at a price of $1.21, implying shares outstanding of 364.46 million. We know that is wrong.
How do we know? Because CTRM told us so. On 1/26 they wrote:
Why is StockTwits so wrong? They have taken into account the 131 million shares out standing at 12/31 and the January share issuances of 231 million, but not the 146.3 million of warrants that were exercised prior to 1/25. The 82,696 watchers on StockTwits are being given incorrect data.
StockTwits is not alone in this error. MarketBeat may be the worst, showing a market capitalization of $2.9 million (and a P/E ratio of 10, despite the fact that the company is in loss).
And even CNBC seems wholly confused with a market cap of $158.77 million, having not updated its share count since 12/31.
Not all are so recreant. Yahoo Finance has the correct numbers, although not adjusted for outstanding warrants, as I have discussed above in my explanation of calculation methods.
With popular websites mainly unable to keep up with share issuance and therefore giving market cap ranges between $2.9 million and $615 million, it is no wonder that investors are confused.
Conclusion
This is a company with a book value of about $0.25 trading at about $1.21. Investors who do not think that this is the new Tesla should expect the market price to shrink toward the book value.
Fundamentally this is a well-run and growing company which has serendipitously found itself on the receiving end of an injection of extremely low cost capital at just the right time to invest in a growing market.
However, irrational speculation and/or investor confusion has driven the price to levels unsupported by any metric. I am selling at these levels.
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.
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