Description

Summary

GLBS trades at 60% of liquidation value of $5.80/share vs. peers at 100-120% of liquidation value. After 6 painful years, the dryshipping industry is seeing demand growth exceed supply growth in 2014 and 2015 for the first time since 2007 which I forecast will drive a tightening market and higher dayrates. I think GLBS is one of the best values in the dryshipping sector given its young fleet, bottom quartile daycosts, and attractive valuation. Base case, I estimate GLBS’ fair value is $7 in one year with a downside value is $2.40. 

Industry Fundamentals

A combination of (a) lax credit underwriting, (b) new and unsophisticated participants entering the market, and (b) the 10-year bull market for commodities that drove dayrates to record highs caused the dryshipping order book to reach 75% of the fleet in 2008 just as the world was headed into a global recession. The ensuing 6 years were painful for the industry as supply growth outpaced demand growth each year and dayrates declined to near cash breakeven (very negative IRRs) in 2012. During this period, demand continued to grow to record highs after the financial crisis and new orders continued to decline such that the order book is down over 75% from the peak and about 1/3^rd of those orders will likely be canceled or scrapped. Demand for the Dryshipping should move to record highs again in 2014 and 2015 driven by Fortescue, Rio Tinto, Vale, and BHP completing low-cost, multi-billion dollar iron ore mines in Australia and Brazil. The demand growth is driven by supply push – low-cost iron ore miners ($40 cash cost) have land-locked iron ore which they need to ship into global markets ($120 spot price) which should displace high cost Chinese iron ore mines ($100-$120 cash cost). The ore coming out of Chinese mines is not loaded onto a vessel so the rotation to Brazilian and Australian mines drives growth in the drybulk trade. 

The supply/demand dynamics are setting the stage for a multi-year upcycle for dayrates and increased profitability to incentivize newbuilds to meet growing demand. 2014 is the first year in seven years that demand growth will outpace supply growth. Demand should grow 6-7% vs. fleet growth of 3-4% and again, in 2015, demand should grow 6-7% vs supply growth of 4-5%. A newly ordered vessel takes 2-3 years to deliver, so the next available delivery is 2016. In addition, the factors that drove the significant over-building of vessels have corrected themselves – given losses in the sector, unsophisticated players have liquidated or filed for bankruptcy, and banks have restricted lending for dryshipping given the large losses incurred. I think the 6-year period of pain has changed industry dynamic for the next 5+ years and sets the stage for rational newbuilds and normalized industry profitability. 

Four primary sizes of dryships:

• Capesize vessels typically have capacity over 150,000 deadweight tons (DWT) and are most often used for the iron ore trade. Because the vessels focus on the iron ore trade which is seasonal, the dayrate volatility tends to be highest. The Capesize name comes because the vessels are too big to pass through the Panama or Suez canals so need to travel around the Cape of Good Hope or Cape Horn.
• Panamax vessels typically have capacity of 65,000-80,000 DWT and are used for all types of drybulk goods. Panamax rates tend to be more stable through the various trade seasons because they are used for more types of trade. Panamaxes are the largest vessels that can navigate through the Panama Canal.
• Supramax vessels typically have capacity of 50,000-60,000 DWT and are used for all types of drybulk goods. Again, dayrates are more stable for the same reasons as the Panamaxes.
• Handymax vessels typically have 35,000-50,000 DWT of capacity and are used for grains, cement, and other bulk goods.

Dryships trade: 34% coal, 27% iron ore, 26% bauxite & alumina, and 13% other bulk materials

What are normalized rates?

Demand is driven more by production growth rather than end demand. The miners have historically paid 40-80% of the commodity value in shipping cost. I expect iron ore to be in the $100/ton range for the next few years which equates to about $60,000/day for a normalized capsize rate. The Panamax rates tend to follow the Capesize at about half, or $30,000, and the Supramax rates are a little below the Panamax rates or $25,000. In my upside case, I assume that dayrates for Panamaxes return to $25,000 which is what they earned in 2010-2011. If rates normalized to historical levels, there could be more upside than my $20 upside valuation because I assume only $25,000 for a Panamax in my upside case. 

The Players

The entire US-listed dryshipping sector has about $8B in market cap. The companies are DRYS, SALT, NMM, DSX, NM, SB, SBLK, BALT, VLCCF, PRGN, GNK, EGLE, ESEA, GLBS, FREE, NEWL, and SHIP. Most companies are trading 1.0-1.2x P/NAV because of the improved outlook for dryshipping and expectation that vessel values will continue to climb off of multi-year lows. Many companies have questionable management teams, employing an external management structure in which a CEO-owned management company receives excessive fees for ordering newbuilds and chartering and operating vessels. This, in turn, makes the industry cost structure unnecessarily high – average daycost for Panamaxes is $5,000-$6,000 vs. best operators under $4,500. That means a single vessel at an inefficient operator is underearning by $360,000/year. This gives efficient, internally-managed companies a competitive edge because they can have $1,000 lower cash breakeven levels, meaning they can survive depressed dayrate environments and earn more during the upcycles. Safe Bulkers (Ticker: SB) is probably the best operator with daycosts under $4,500, causing the stock to trade at 1.7x P/NAV vs. the sector at 1.0-1.2x P/NAV. GBLS is a small, underappreciated operator which has bottom quartile daycosts of $4,482, a new fleet, and trades at 0.60x P/NAV.

Company Background

Globus Maritime (Ticker: GLBS) owns one Kamsaramax (slightly larger than a Panamax), two Panamaxes, and four Supramaxes with an average vessel age of 7.1 years (6.0 years ex-Tiara Globe which is held for sale), making GLBS’ fleet one of the youngest fleets in the industry. New vessels have lower operating costs, better fuel efficiency, lower drydocking costs, and higher utilization rates. In addition, GLBS does not have an external management structure, so costs are lower and shareholder interests are better aligned. Consequently GLBS’ average daycost per vessel is $4,482, one of the lowest in the industry. 

70% of GLBS’ vessels are operating in the spot market in 2014 and 100% in 2015 which allows the company to benefit in the near-term from higher dayrates. The company has no shipyard orders, so annual capex is only around $1MM for drydocking costs and vessel upgrades. In 3Q 2012, GLBS impaired the carrying value of their vessels by $80.2MM, so the assets are now marked slightly below fair value and depreciation expenses will be lower than 2012 levels going forward. Dryshipping companies pay no taxes because their operations are in international waters so EBITDA minus capex and interest equals FCF. 

The company was founded in 2006 by Georgios Karageorgiou and funded by $40MM of equity from Georgios Feidakis (found each other through Credit Suisse – no relationship prior to 2006) and IPOed in the UK raising another $47MM of capital at $35/share from outside investors in 2008. The company had little-to-no trading volume in the UK, so board decided to relist on the NASDAQ and raised another $22MM of capital at $8 in 3Q 2011 after dayrates had significantly declined to help with debt repayment. The company has reduced debt from $111MM to $90MM over two years. Management would like to grow the fleet over time but stated that they will not issue equity below 1x NAV because it is dilutive to shareholders. 

In 2012, when vessel values hit multiyear lows, GLBS breached soft covenants related to debt/assets and amended their covenants to suspend dividends and focus all cash on principal repayments. In 2013, after repaying over $15MM in debt and with rising vessel values, GLBS is comfortably within the covenants and can start paying common dividends in March 2014. The company’s liquidity and leverage positions are comfortable with $7MM in cash, $90MM in debt, and $15MM in FCF. The company has $12MM of principal payments in 2014 and $14MM in 2015 which I expect them to meet with operating FCF. GLBS is repaying debt at 2x depreciation, so quickly building equity value.

Valuation

GLBS’ valuation is sensitive to Panamax and Supramax dayrates which drive both FCF and vessel values. NAV is liquidation value – the market for vessels is relatively liquid, so the assets could actually be sold and cash returned to shareholders within a relatively short period.

The market value of GLBS’ seven vessels is $140MM less $90MM in debt plus $7MM in cash divided by 10.2MM shares equals a $5.60/share NAV. Base case, I estimate 2014 dayrates are in-line with 1-year forward freight agreement (FFA) rates which are $14,500 for Panamaxes and $12,500 for Supramaxes. This drives EPS of $0.75 in 2014 and $15MM in FCF. GLBS has $12MM of principal payments due in 2014 and I estimate the remaining $3MM will be used to pay a $0.30/share dividend in 2014 (can initiate dividend after March 2014). In 1-year, assuming flat asset values and including the debt repayment, I estimate NAV will increase to $6.80/share. My base case one-year fair value is $6.80/share NAV plus the $0.30/share dividend for total value of $7/share. Again, this fair value assumes GLBS simply earns 1-year FFA rates (no dayrate increases). The market should continue to tighten through 2014 and 2015, so I think this is a conservative assumption. 100% upside is interesting, but where GLBS becomes compelling is looking at the risk/reward for upside and downside scenarios.

The upside case is that dayrates return to 2010-2011 levels which is $25,000 for Panamaxes and $22,000 for Supramaxes. In this scenario, I estimate GLBS will earn $3/share in EPS and generate $37MM in FCF. Subtracting $12MM for debt repayment, the remainder should be used for a dividend of $2.40/share. I think the stock would trade at ~12% yield or $20/share. In that case, the asset prices would increase in value such that the NAV would increase to $16/share and the stock would trade ~1.25x P/NAV at $20/share. Vessels typically trade at a 15% unlevered IRR ($25k dayrate - $4.5k daycost)*360 / 15% = $49MM vs. today’s price of $25MM for a Pamamax. Running the higher ship values through the NAV gets ~$16/share NAV. Typically, stocks trade above NAV during up cycles because of the strong FCF and dividends.

Downside case is that rates return to their lows with Panamax rates at $10,000 and Supramax rates at $8,750. GLBS earns $0.11/share in EPS and generates $9MM of FCF which is all used for debt repayment. GLBS monetizes their Tiara Globe which is held for sale for $11MM, which along with FCF and current cash balances provides sufficient liquidity for over four years of interest and debt repayment, at which time the debt balance would be down to $36MM – a very manageable level given the asset value. Under this scenario, Panamax values would likely fall back to their lows of $18.5MM/vessel and NAV would fall to $2.80/share plus $1.20 in debt amortization in 2014 equals $4 NAV. The downside valuation assumes GLBS trades at 60% of NAV which is $2.40/share.

With a base case (no change in dayrates) of $7 fair value, upside case of $20 fair value, and downside case (dayrates back to lows) of $2.40, I think the risk/reward on GLBS is compelling. Given the tightening market over the next two years, I think the upside case is more likely than the downside case, making the case for GLBS even more interesting.

Catalyst

• GLBS reports 4Q results in April and, based on dayrates during the quarter, I expect GLBS to earn $0.16 in 4Q vs. the one street analyst at $0.10. In addition, I estimate base case 2014 EPS of $0.75 vs. the analyst at $0.50.
• The Baltic Dry Index (BDI) is a simple average of several shipping routes across different vessel sizes. The BDI has historically bottomed on Feb 2^nd on average because Chinese steel mills destock iron ore inventories ahead of Chinese New Year, weather-related delays in shipping out of Brazil and Australia, and the South American grain trade starts in early March. Retail investors/traders closely follow short-term movements in the BDI to trade the stocks, so it makes sense to be in the stock ahead of a rally in the BDI.
• GLBS cut its $0.085/share dividend in 2012 as a concession to lenders and to focus on principal repayment. I expect the company to restart quarterly dividend payments in 2Q or 3Q 2014 of $0.10/share. Given the small market cap, I expect this will attract retail interest in the stock again (stock fell from $5 to $3.80 when it was cut).
• GLBS is covered by one sell-side analyst who is neutral on the stock because he does not closely follow the dryshipping market (he covers NA transports), so is waiting for a couple quarters to see if dayrates have bottomed.