A Better Approach to Ship Valuations

Part 1: A Quest for Better Valuations

The shipping markets are notoriously difficult for investors due to the violently cyclical nature of the business coupled with lots of obscure terms and practices.  One of the biggest challenges for investors is to determine a ‘fair value’ for these various enterprises in a sector where “book value” is often meaningless.  A much more accurate approach is net-asset-value (“NAV”), but this requires real-time ship valuations from an industry that is very private.  For decades, the only source of these valuations was from private broker reports, but these tended to be overly bullish and slow to respond to changing market conditions.

This changed in 2009-2011 as Richard Rivlin, a previous shipbroker launched a groundbreaking platform to provide real-time values.  His platform was aptly named VesselsValue and they began offering data subscriptions in May 2011.  I’ve worked closely with VesselsValue since mid-2013, and their data has been a cornerstone in the majority of our biggest investment successes.  Their data has also helped support several successful short ideas.

This report on vessel valuations is relevant to anyone who owns shares in key shipping companies, especially those with higher spot market exposure.  These include, but are not limited to: Ardmore Shipping, Capital Product Partners, Costamare, Danaos Corporation, DHT Holdings, Eagle Bulk, Euronav, Frontline, Global Ship Lease, Golden Ocean, International Seaways, Navios Maritime Acqusition, Navios Maritime Holdings, Navios Maritime Partners, Scorpio Tankers, Seaspan, Ship Finance, and Tsakos Energy Navigation.

Book Value vs. Net Asset Value: Key Example & Short Idea

One of the biggest pitfalls for retail investors in shipping stocks is the tendency for book values (i.e. accounting values) to be wildly inaccurate.  This is because shipping is a violently cyclical industry and ships can lose (or gain) large percentages of value in a matter of months or even weeks.  Meanwhile book values are based on the original purchase price, depreciated down on a flat-line basis to a calculated residual (scrap) valuation.

To give just one example of how data from VesselsValue.com could help save investors from this type of pitfall, let’s examine the massive disparity between Diana Shipping’s  book value and actual fleet value.  The following snippet comes from the Q3-16 report and shows a live fleet valuation of $1.42B plus advances of $51M for new ships (plus another $35M owed prior to delivery that isn’t included on the balance sheet).  Retail investors might make the incorrect assumption that the fleet is actually worth $1.47B, scroll down to see “Total stockholders’ equity” of $1.08B, and make the incorrect conclusion that DSX is ‘dirt cheap’ due to their “book value” of $13/sh and resulting P/B of just 0.3.

However, the reality is far different.  According to the latest data from VesselsValue.com, the fleet is actually only worth $675M.

The current valuation of $675M represents a writedown of nearly $800M (54%!) from DSX claimed valuations.  With this adjustment, DSX’s true NAV is far smaller, well below the current share price, and that’s before we start investigating the rest of their ‘assets’ like the related-party debt to struggling Diana Containerships.

Although we are short DSX and will likely have more public coverage out post-earnings, the point of this example was not to build a case against DSX in particular, but rather to highlight the extreme disparities that can develop in this industry.

Part 2: The Interview & Discussion

I was pleased to discuss the VesselsValue structure with two of their key officers during a recent chat.  What follows is a rough transcript from the core points of our discussion.

J Mintzmyer: What market needs originally led to the creation of VesselsValue.com?

Georgina Gavin (Chief Commercial Officer): Our founder, Richard Rivlin, was a private shipbroker for 25 years prior to the major crash in values during 2008.  During this period of crisis, he observed firsthand how major broking houses were not prepared to provide accurate values during periods of high volatility.  There was an immense need for real-time market valuations, reflecting a valuation for all market conditions, especially during periods of extreme volatility.  Rivlin realized that shipping valuations needed to be brought to the 21 st century with real-time automated valuations, objective, unbiased numbers based on raw sales & purchase data along with current market conditions.

Note: During the financial crisis, the shipping sectors went into panic mode and banks soon realized their loans were underwater.  Brokers were widely afraid to issue valuation estimates for fear of angering clients and banks also wanted to keep values higher.  Rivlin’s system provided some of the most up-to-date valuation during this time, earning VV some major pre-launch credibility, but it also angered a lot of industry participants who preferred the more opaque old-fashioned approaches.

Mintzmyer: Describe how your system works in a few sentences?

Toby Mumford (Lead Analyst): We use an algorithm which tracks a large sales database along with all features of the vessels including year-group, cargo capacity, engine types, upgrades, etc.  Our system uses the latest inputs to revalue the world fleet every night.  Our algorithm will also adjust to the state of the market based on time-charter and spot markets to adjust values in the absence of a meaningful volume of sales & purchase transactions.

Mintzmyer: How accurate are your vessel predictions values on average?

Mumford: Our accuracy has been fairly strong over the past few years, with an average standard deviation of 6.1%.  85% of all recorded sales have been concluded within 10% of our estimates, the majority of which have been far closer.  We balance between reliability and reactivity and do our best to sort out the ‘noise’ like forced sales and impaired tonnage. The higher volume markets tend to be more accurate due to more data inputs and more clear historical trends.

Note: Based on personally tracking and investing with this data for nearly 4 years, I can attest to the quality and overall accuracy of the reports.  The caveat would be that the accuracy is clearly better when there are more transactions.  The data also tends to be more conservative as distressed sales often exaggerate the weakness of the actual market.

Mintzmyer: How can VesselsValue.com help investors make better decisions?

Gavin: Our platform allows everyone to get a grasp of real ship valuations in one place while also allowing private investors and analysts to work confidentially (i.e. without tipping their hand by calling a broker to request specific information).  We’ve already done all the background research and can provide historical trends and analysis, saving investors hundreds of hours of time.  Our data can be exported into private models to allow key confidential decision-making with information available instantly by the touch of a button. Success in shipping is all about buying and selling vessels at the right time, and our platform aims to bring more information to the market participants who utilize our software.

Note: This is undeniably the best part.  This software allows us to compare across companies, sectors, and year-groups within seconds.  The data is unbiased and is fully confidential.

Mintzmyer: I’ve noticed a few new updated features on the website, can you expand on these?

Mumford: We’ve recently launched a new discounted cash flow model which shares a historical average projection with investors.  This allows users to compare current valuations with long-term performance metrics to get a better idea of when true disconnects are developing.  Our long-term vessel valuation curves, recently expanded to include the 1990s, allow for greater historical perspective.  We’re also working on more fleet positioning and global demand data, which we will be releasing soon.

Note: A few days ago, VV.Com launched their “Trade” initiative, which contains significant data on vessel positioning, demand trends, and other key market data.

Mintzmyer: With these new features including the long-term vessel valuation curves, what are some interesting observations you’ve seen lately?

Mumford: In early 2016, we hit the lowest point since 1992 for dry bulk valuations, investors who bought tonnage at this time have already realized tremendous asset returns as some of these secondhand vessels are now trading at far higher levels.  In the tanker space, valuations have recently weakened and are coming closer to the lows last seen in 2002-2003.

Note: At Value Investor’s Edge, with the help of influential data from VesselsValue.com, we were able to identify several of these dry bulk market disconnects, one of which included a massive buy of Scorpio Bulkers back at $2.98, along with the senior notes (SLTB) at $9.10. SALT has returned 150% in under a year and the notes are up by a similar amount while also offering a major income opportunity (21% yield to original cost).

We continue to use this type of data to support our bullish thesis, including in a recent purchase of Gener8 Maritime around $4/sh.

Mintzmyer: Do you have any examples of where your data has been used as a part of a major shipping deal, either private or public?

Mumford: Our valuations are frequently used by major private equity and bank funds during the due diligence phase prior to conducting deals or to aid with vessel disposition decision-making.  One higher profile public example includes when our data was referenced in the Genco Shipping court restructuring case.

Note: Not only was VV data referenced in the court case, but it was also extremely useful to us during the uncertainty at GNK last fall.  We were able to enter and exit the stock at opportune times based (in-part) with historic valuations as a guidepost.

Gavin: We have a very diverse basket of clients who value our unbiased data.  This includes shipping banks, private equity, hedge funds, and private investors.  There can be a tremendous disconnect between varying private broker valuations and our clients valued data-driven figures, especially as a starting point for further discussions and negotiations.

Conclusion

Navigating through the shipping sectors can be very difficult, especially if investors do not have access to the latest data.  At Value Investor’s Edge, we always strive to utilize the best data available in the industry and our partnership with VesselsValue.com helps us achieve far better research, which typically drives strong investment results.

Although this can be a higher-priced platform compared to other more vanilla data sources, it is easily worth the cost for any serious investors, especially those who are running a fund or looking to diversify a major portfolio.  If nothing else, I encourage investors to always view book values with heavy skepticism when forming valuation opinions.