Anchors Away: My Three Favorite Shipping Ideas

Deep value is found at the corner of “yucky” and “no way in hell” and over the last twenty years, shipping stocks have exhibited those two characteristics a hundred times over.

Alex did a great job summarizing the macro view of the shipping market in his latest article, which you can read here. To brush up, there are three main drivers of this deep value situation: 1) maximum pessimism in the industry, 2) regulatory requirements from IMO 2020 acting as near-term catalysts and 3) the need for countries to import cleaner fuel (mainly India and China).

With these factors in mind, I’ll offer three companies that are well positioned to capture the uptrend in the industry. Two of the companies mentioned have short-term catalysts that should help bolster share price acceleration while the industry heats up to capital inflows. The final idea is a micro-cap shipbuilder from Philadelphia which could provide handsome returns to those willing to stomach the illiquidity.

Diana Shipping, Inc. (DSX)

Diana Shipping, Inc. (DSX) is a sub $300M shipping logistics company that transports dry bulk cargoes and commodities (such as coal, iron ore, and grain). The company operates 46 dry bulk vessels for a combined carrying capacity of over 5M dwt (dead-weight tons) with an average age per vessel of 9 years.

The thesis for DSX is simple (and like that of almost all shipping companies): increasing charter rates resulting in higher revenue growth, most of which will drop straight to the bottom line. These higher revenues helped drive the rebound back to profitability last year. Along with the turnaround, management believes their shares are undervalued and initiated a Self-Tender offer to purchase 4M shares at $3.66 (current share prices are $2.65) while simplifying their capital structure by purchasing all Class-B shares. Finally, margin of safety can be found in its 40% discount to tangible book value.

Nowhere are the turning industry trends more apparent than in DSX’s income statement. The company reported net losses in 2017 upwards of $500M. Just 365 days removed from that time, the company boasted $16M in EBIT. DSX appears to be making all the right decisions. With this newfound cash, the company is aggressively reducing leverage (net debt trimmed from $560M in 2017 to $404 in 2018), selling off their oldest ships, and repurchasing shares at discounted prices.

Future growth will come from increased charter rates due to IMO 2020 as well as increased demand for the types of items DSX ships. For example, grain imports are projected to grow 4%, thermal & coaking coal to increase by 2 & 3% respectively and total bulk trade expected to grow near 3% (all according to Clarkson’s Research). The company is projecting revenues for 2019 – 2020 to hit between $224M – $255M respectively. If we use historical EBITDA margins of 50%, we arrive at 2020 EBITDA of $127M, which translates to 5x EV/EBITDA. Even at $4+/share the company would be trading less than 7x EBITDA. In other words, it’s cheap.

Risks for DSX mainly involve the commodity products it ships. Although the shipping industry could heat up and charter rates increase, if demand for any of the above-mentioned commodities drops, DSX ships will remain in their docks.

Although not my favorite of the three mentioned, I like what I’m seeing from management and their efforts to reinvest back into the business through the tender offer. Usually, when companies say they’re going to tender, it’s because they truly believe their shares are priced ridiculously low.

If DSX continues to grow top-line charter revenues, pay down its debt and reinvest its capital to shareholders, we could end up seeing that $3.66/share management talked about. Also, the company is paying a robust 12% dividend, which makes waiting for share appreciation easier.

Capital Product Partners, Inc. (CPLP)

Capital Product Partners (CPLP) is another micro-cap shipper that transports cargoes, crude oil, gasoline, diesel, jet fuel and containerized goods. Its 25 vessels include the suezmax crude oil tankers, medium range (MR) product tankers, neo-panamax container carriers and bulk carriers. What’s interesting about CPLP is its decision to spin-off its tanker fleet, which will then be merged with DSS Holdings’ business. This transaction is expected to close by 03/27/2019.

We’ll touch on the spin-off company in a little bit, but for CPLP’s purposes, what does their new business look like? The “new” CPLP will consist of 10 containerships and 1 drybulk vessel (average age of vessels is 6.5 years).

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Disclaimer: All statements are solely opinions and are for educational purposes only.

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