With dry bulk shipping rates finally ascending from multi-year lows, it may be time for investors to consider allocating a portion of their risk-based assets toward companies positioned to emerge as intermediate and long-term winners in the sector. With that in mind, Seanergy Maritime Holdings (SHIP) is a compelling stock that should be on the short list of consideration for investors looking to take advantage of undervalued companies in the dry bulk industry.
Seanergy is not a new name to the sector. However, the company has transformed itself significantly since 2015, having built an impressive fleet primed to reap the rewards of the rising trend in dry bulk day rates. SHIP already owns a fleet of eleven vessels, comprised of nine Capesize vessels, which are the largest of the dry bulk carriers, and two Supramax vessels. Combined, SHIP's vessels can haul more than 1.7 million DWT of dry bulk, and the fleet has an average age of 8 years.
What drives the Seanergy story? First of all, looking ahead over the next five years, sector fundamentals are positive. Then, several factors are aligned to support the thesis that Seanergy is a strong value play and growth story in the dry bulk Capesize sector, well positioned to capture significant upside potential. A modern, high-quality fleet acquired at low prices, a strong management team with a committed company sponsor, a competitive cost structure, a respectable balance sheet and solid corporate governance with no related party transactions are among Seanergy's competitive advantages. And we believe that shares of SHIP at current levels are not factoring in the recent developments at the company or the positive sector outlook.
Seanergy Investors, Stay Focused On Growth
Looking at the fundamentals for SHIP, it's apparent that the market may have left one of its most emerging dry bulk gems at the harbor. Trading at just 68 cents a share, well off of its 52-week high of $8.65, investors may have written this story off far too early, ignoring the newest chapters being written by company management.
Now, before you slam me with comments about a delisting notice received from NASDAQ, consider the fact that SHIP has a minimum of 180 days to regain listing compliance, along with additional tools at their disposal to satisfy the issue. So, before investors start screaming "reverse split," the reality is that SHIP has built an impressive asset base, positioned not only to take advantage of a rise in service demand but has also improved its balance sheet considerably to allow the company to benefit materially from increased day rates and lower operating costs. Thus, with time on their side, investors should keep their eye on the opportunity and focus less on the dark clouds that have not even approached the horizon. In the last 52 weeks, SHIP's shares have traded between a high of $8.65 and a low of $0.60, so given the company's quality and prospects, the shares could rebound well above the $1 mark.
Positive Sector Fundamentals
After a couple of years in the doldrums, the dry bulk sector has come lately into renewed attention as the result of continued robust demand and diminishing fleet growth. This has restored the balance between supply and demand which is what drives freight rates. Trade growth is expected to be around 2% in 2017 and 4% in 2018, against projected fleet growth of 2% in 2017 and 1.5% in 2018.
Supramax vessels are smaller (60,000dwt), transport a variety of cargoes and can access smaller ports as well. Capesize vessels are the largest ships (about 170,000 dwt) and are used to transport mainly iron ore and coal, which together account for over 50% of the dry bulk trade. China has been the locomotive of the dry bulk trade with India playing now a bigger role, as its economy grows.
Historically, a recovery in the dry bulk sector has a bigger effect on the Capesize sector. Two more factors add to the attractiveness of the sector, which is the core focus of SHIP. Demand for major commodities is expected to continue strong between the years of 2017-2020 and the fact that ships need to transport over longer distances (a lot of high-quality iron ore goes to Brazil to China) translates into higher demand for ships. And there may be fewer Capesize vessels around, as the Capesize orderbook is virtually zero now and is expected to start to decline towards the end of 2017. This can be a bonanza for freight rates and asset values, which are now starting to recover from historically low levels.
So, How Will Seanergy Cruise Higher?
A big portion of the ultimate return in shipping has to do with the timing of the asset acquisitions and the price paid for it. Seanergy has been literally and completely rebuilt since 2015 and has invested $275 million since then, with $41.5 coming from the company's sponsor. SHIP has managed to acquire the majority of its fleet close to historic low prices, thus having a huge advantage over other companies that have legacy issues with more expensive acquisitions. To give you an idea, the 20-year average value for a 5-year old Capesize vessel is $48 million, and the 5-year average (with the market in a trough) was $34.4. Seanergy's acquisition cost was $29.2 million for a similar vessel. The average fleet age for SHIP's vessels is eight years with an expectancy to comfortably generate transport services for at least two decades. So, there is plenty of economic life ahead.
Another factor is Seanergy's competitive cost structure. SHIP operates as one of the lowest cost providers in the industry, with its daily operating costs about 30% below the industry average. Moore Stephens, an industry specialist firm, reports that the average daily operating cost is around $7,200 when SHIP's cost is around $5,000. This cost advantage goes directly to the bottom line.
While low budget operators can snag a contract at random times, SHIP has built strong relationships with industry leading charterers, including RioTinto, Cargill, Daewoo, and BHP Billiton. In addition to these world shipping charters, SHIP has secured trade relationships with LDC, Oldendorff, Vale, and Fortescue to add diversity, flexibility, and competitiveness to transport contracts. As world economy gains traction, which economists expect to happen during the remainder of the year, these existing SHIP customers will be the first to benefit from the growth, and the value generated may create a secondary boon for shippers, like Seanergy, who have long-term relationships with global suppliers.
Cost Efficient, Scalable, Growth Oriented Operating Model
SHIP offices in both Athens and Hong Kong and employs a shore-based staff at each port. Seanergy has delegated the outside technical and commercial fleet management to unaffiliated third parties, which enables the company to grow without the need for additional investment in these areas. The company has hired Fidelity Marine, an unrelated third party, to undertake an exclusive role for the commercial management of the fleet on a commission basis. Fidelity Marine acts as the sole broker to Seanergy and brings with them over 28 years of industry experience and longstanding relationships with worldwide charterers.
The technical management gets overseen by V. Ships, a Cyprus company established in 1991 that provides professional management to over 1000 sailing vessels. V. Cyprus enjoys established recognition from the U.S. Coast Guard and other governmental agencies and holds service certification for a variety of ship type. SHIP pays a fee of $8000 per vessel, per month.
Seanergy: The Difference Is In The Management
Forecasts suggest that the upcoming weeks and months may generate additional pricing momentum for dry bulk shippers. But, investors are cautioned not to search out the lowest priced stock in their belief that all carriers will benefit equally. Despite the price, investors must look closely at company fundamentals, its off-balance-sheet agreements, and related-party transactions that exist in the industry.
In sharp contrast to some of its peers in the sector, SHIP has absolutely no off-balance sheet or related-party transactions on the books. The company has also established extensive internal controls and oversight managed by a BOD that has three of its five members sitting as independent directors. The transparency of the third-party ship management is accompanied by the company's clarity when it comes to its finances.
Management has proved its competence – the company has been completely rebuilt since 2015 and at acquisition prices below historical levels and below most of its peers. In 2015, SHIP went from zero to eight vessels; in 2016 they added another two, and an additional vessel was acquired in 2017 which is expected to be delivered in the near future.
To build the fleet, SHIP completed a $25.5 million raise through two direct equity and one marketed public offering during the second half of 2016. Also, SHIP raised an additional $37.9 million during the fourth quarter of 2016, taking delivery of two Korean built Capesize vessels at historically low costs. These capital raises strengthened the company balance sheet and its ability to secure new financing facilities to fuel growth throughout 2017.
Other than utilizing its NASDAQ listing to raise capital when the markets offer fair terms, the company has established beneficial financing arrangements with Alpha Bank, UniCredit, Nordbank, and Nataxis, just to name a few. Through these partnerships, SHIP has secured seven bilateral loan agreements, bringing total debt to $214 million. Importantly, SHIP has negotiated significant covenants with lenders that provide for minimum payments throughout 2017, as well as maintaining the ability to declare a dividend to holders of common stock. Along with these strong relationships and lender confidence, SHIP also enjoys full waivers on loan facilities until the second quarter of 2018. These arrangements provide Seanergy with firepower and flexibility to pursue additional acquisitions.
The most recent filings show outstanding shares sitting at approximately 37 million, with 19.6 million in the public float. At current stock prices, SHIP has a market cap of roughly $25 million and a total capitalization of approximately $245 million.
Besides competent management and Board of Directors, Seanergy has a committed sponsor who owns about 70% of the company.
Looking ahead, management has a very clear and well-defined strategy – it is looking for additional opportunities in the Capesize sector which are its core focus. And management is positioning its fleet to take advantage of a market recovery. For example, in April, the company announced the charter contract of M/V Lordship for up to twenty-two months, which is expected to generate upwards of $10 million in net revenues for the company. The contract terms also allow for additional market upside and the flexibility to enter into a fixed-price agreement for up to twelve months at any time during the contract. The flexibility of the arrangement signifies the early signs of the rebounding rates, where the shipper is grabbing more leverage as demand increases.
Where Seanergy Will Dock
While investors would be hard pressed to commit to a given price target for a stock, most believe that SHIP is considerably undervalued at current levels. Perhaps being priced in with weaker competitors, SHIP may surprise investors and become the breakout star in the remainder of 2017.
Shares of SHIP at current levels are not factoring in the recent developments at the company or the positive sector outlook. With management tasked on getting the share price to well above the one dollar level, investors should expect an aggressive, but balanced, acquisition and chartering campaign to generate meaningful revenue increases during the next several months.
With its ownership in just the nine Capesize vessels, assuming no additional acquisitions during the remainder of 2017, SHIP can generate more than a 21% return on investment for each ship. Considering day rates of between $15,000 - $25,000 per day, SHIP could deliver an annual FCF of more than $4.2 million per ship based on developing day rate projections.
Why Seanergy may find its stock either ignored or misunderstood by investors remains the question of the day. But, what should be recognized is the inherent value already in place at the company regarding its asset base and potential to deliver significant FCF in the coming quarters. Investors should not ignore the business fundamentals and continued strength on display at SHIP. Additionally, investors would be wise to take the current NASDAQ notice as a short-term blip on the screen, with a dedicated management team having tools available to remedy the concern.
At current levels, SHIP should clearly be benefiting from the recent rebound in industry stock prices, but, for the time being, SHIP remains an undervalued opportunity. As with the new market dynamics, by the time retail investors decide it's time to make the investment into SHIP, the stock will have appreciated significantly higher than current levels, jumping in reaction to pre or after market news that dilutes the buying opportunity at these levels. For that reason, and for the compelling fundamentals of the company, a ticket to cruise on SHIP is attractive at these levels.
Disclosure: This article was written by Kenny Soulstring, and it reflects my own opinions and unique articulation. This article is not intended to offer investing advice, guarantee 100% accurate predictions or to be interpreted as providing a personal recommendation. What I can guarantee, though, is accurate research, thoughtful analysis and an enthusiasm about any stock that I cover.
While I seek to uncover emerging companies that I feel have true value and potential, it's important that investors assign an appropriate time horizon to each of their investments, understanding that emerging companies need time to mature.
I wrote this article myself and it includes my own research and expresses my own opinions. I am not receiving compensation for it (other than from CNA Finance). I have no business relationship with any company whose stock is mentioned in this article.
Additional Disclosure: I have no position in any stock mentioned, but may initiate a long position in SHIP within the next 72 hours.
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