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A shipping company trades at half of NAV. What a bargain! Or is it...
Let's say a shipping company has a fleet of 50 vessels worth $20 million apiece. The assets are worth $1 billion. Suppose it is $500 million in debt. Thus it has $500 million of net asset value (NAV).
Let's say a shipping company has a fleet of 50 vessels worth $20 million apiece. The assets are worth $1 billion. Suppose it is $500 million in debt. Thus it has $500 million of net asset value (NAV).
(Here, for simplicity, we assume that net working capital is roughly zero.)
Say there are 25 million shares outstanding. NAV per share is 500/25 = $20/share. But the stock trades at $10. Why? Does this mean shareholders get two ships for the price of one?
Say there are 25 million shares outstanding. NAV per share is 500/25 = $20/share. But the stock trades at $10. Why? Does this mean shareholders get two ships for the price of one?
A shipping company has a variety of expense categories. Broadly, they are:
1. voyage expenses
2. vessel operating expenses
3. charter hire
4. general and administrative expenses
5. depreciation (non-cash,)
6. interest on loans
That's pretty much it.
1. voyage expenses
2. vessel operating expenses
3. charter hire
4. general and administrative expenses
5. depreciation (non-cash,)
6. interest on loans
That's pretty much it.
Sometimes there are capital gains or losses, derivative hedging costs, restructuring charges, amortisation of acquired charters, etc. But the core expense categories are above.
Shipping companies are usually domiciled in offshore tax havens, so pay no income tax. Sometimes just "tonnage tax" or other nominal fees or duty in various jurisdictions.
But generally, they are not subject to corporation tax. Even when they are profitable. Which happens from time to time.
Note that depreciation is "non-cash" because the cash has been previously sunk, as a lump sum, in a vessel acquisition, and is charged off ratably as the vessel is operated, generates revenue, and continuously deteriorates physically.
Almost all shipping companies, like most real asset businesses, have debt. So interest expense is incurred.
Charter hire is the cost to "charter-in" vessels which are not owned by the company, to be relet in operations. Not all companies do this, and some do it occasionally.
Charter hire is the cost to "charter-in" vessels which are not owned by the company, to be relet in operations. Not all companies do this, and some do it occasionally.
Voyage expenses are voyage-specific costs which include brokerage commissions, bunker fuel, cargo handling fees, and port and canal charges.
Vessel operating expenses are the direct operating expenses of the ships. Most of this is labour, i.e., seafarer's wages. It also includes insurance, repair and maintenance costs, telecommunications systems, stores, spares, and lubricants.
Now we come to the category of interest: general and administrative expenses. These are the head office expenses: the cost of running the fleet as a whole. They include office rent, travel expenses, legal, accounting & professional fees, and personnel costs.
A big portion of personnel is management pay. Executive salaries, bonuses, deferred share and stock option grants.
A private shipowner can run a shipping company for less than $1,000 per vessel per day. Many public companies charge $2,000 per vessel day.
A private shipowner can run a shipping company for less than $1,000 per vessel per day. Many public companies charge $2,000 per vessel day.
They may tell you it is because of the cost of running a public company: securities lawyers, accountants, listing fees, etc. But the reality is that a public company can be run for $1k/ship day.
But the public shipping companies will often charge the publicco $2k/ship day.
But the public shipping companies will often charge the publicco $2k/ship day.
What's the difference?
The extra $1k/day over 50 vessels for one year amounts to
1,000 x 50 x 365 = $18,250,000 per year.
Let's say a private shipowner has a 10% cost of equity. So the company should earn 10% of $500 million, or $50 million, in an average year.
The extra $1k/day over 50 vessels for one year amounts to
1,000 x 50 x 365 = $18,250,000 per year.
Let's say a private shipowner has a 10% cost of equity. So the company should earn 10% of $500 million, or $50 million, in an average year.
But because of the higher expense rate, the company only earns 50 - 18 = $32 million. Hence the market cap is fairly priced at 32 / 10% = $320 million, which, over 25 million shares, is $12.80. This is a 36% discount to the $20 NAV per share.
In fact, a 0.64 P/NAV is not atypical for a shipping stock. The point is, you don't own 100% of the fleet. In a sense, you only own 64% of it (32 ships), because the earnings from the remaining 36% (18 ships) goes towards paying bloated management salaries.
But the fact is, the stock may be worth even less than that. Management may charge chartering commissions, bill vessel sale & purchase commissions, overcharge for operating expenses through their private management companies,
arrange ship financing on non-market terms from friendly bankers, charter in or out on non-market terms, and sell the publicco ships at disadvantageous prices, as their private entities pocket the difference.
In some cases they make subordinated loans to the publicco at exorbitant interest rates. Or issue convertible debentures to themselves and short the stock. (Death spiral.)
There are so many ways to bilk shareholders. Details vary, and in most cases, you will never know. But think of your ship manager as a barnacle on the hull of your ship, slowing it down, burning up fuel, and eating away at the steel.
That barnacle has a comfy lifestyle at your expense, so long as it can stay attached to the hull of the ship. And the more ships you have, the more of its family you will support.
In the last cycle, earnings were so good that a lot of money came into the shipping sector, and a lot of shipping families cashed in on the Wall Street equity bonanza.
Governance varies from 0-10. Most of the 0's and 1's who swindled investors worst have been sued into oblivion and have taken their fleets private. Others are still around but have very small market caps. Avoid these.
There are still some 2's and 3's out there sucking off the teat of the capital markets (your money). Avoid these. The best ones are maybe a 7 or 8 on governance.
If you're invested in shipping, and you don't understand these things, then be advised you're swimming with sharks. My advice is, take your money and run.
Just buy blue chip stocks and don't come back. This industry is run by pirates, and not for the shareholder's benefit.
Just buy blue chip stocks and don't come back. This industry is run by pirates, and not for the shareholder's benefit.
This is not to say now is the time to exit shipping. Each segment and company is different. Now is low season for many segments. The point is to evaluate whether you want your money tied up in this industry with these people for the long term.
