Sumoy

Investment ideas and financial education

Star Bulk Carriers – navigating at the edge

This NASDAQ-listed dry bulk shipping company is sailing through one of the worst markets ever. Huge oversupply depresses rates, and only the hope for higher scrapping rates and a low price for iron ore (which would make China to switch from low-grade domestic product to high-quality imported ore) is keeping investors interested in one of the most cyclical sectors.

Since my first post on dry bulk shipping, PRGN has dropped around 50% in market cap, and despite having a decently young small-sized fleet, faces the financing of newbuilts. This is why I am turning my attention to SBLK: it is very leveraged, but has no capital expenditures in the horizon.

These days, the smaller the vessel, the better: orderbook for small ships like handysizes is not staggering as it is for capesizes. Unfortunately, SBLK’s fleet includes 10 capesizes and 9 supramaxes. But, with most of its capesizes covered in 2013 (75% of days) to big firms, it is fine to assume these charters are “safe”. Their exposure to the spot market comes from the supras, that are expected to fare much better than capes.

I expect 2013 EBITDA to be slighly below USD40M, which makes net debt (3q12 figure) to EBITDA ratio 197/(<40) >5. This might pose some problems to the debt covenants of the company, but I presume SBLK will be able to renegotiate, given the success PRGN had a couple of days ago in rearranging the terms of its debt. The USD32m principal repayment SBLK will need to do in 2013 (no more repayments in 2012) will probably from the sale, for instance, of a couple of vessels.

At USD6/share, the company trades exactly in line with its Gross Asset Value: I assume 9 y-old supras are worth USD15M each, and 10 y-old capes USD17.5each. These values are approaching to scrap levels, but certainly there is value attached to the charter out rates of the capes above USD20k/day (and they have 4 of these, please look at page 6 of their 3q12 presentation http://starbulk.irwebpage.com/files/SBLK_2012-3Q_Results_Presentation.pdf).

9×15+10*17.5=USD230M, which equals the sum of net debt (USD197M) and market cap (USD32M). As it happens with PRGN, SBLK’s mcap may suffer from high volatility – besides possibly going long whenever asset prices recover, it is certainly a nice straddle options play.

 

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One comment on “Star Bulk Carriers – navigating at the edge

  1. jjsumoy
    04/05/2013

    The recent equity issue announcement is no surprise, at it is clearly stated in the 20-F annual form. This was a requirement by the lenders (chiefly Commerzbank and HSH Nordbank) to renegotiate the debt covenants. The backstopped equity offering at USD5.35/share will keep the company ashore for the rest of 2014. The balance sheet will look much healthier. Still, if I was a shareholder I would be selling the rights to attend the capital increase, as I would not like to treble my exposure to this player.

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This entry was posted on 14/12/2012 by and tagged .
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