By J Mintzmyer
Summary
- Star Bulk Carriers is a dry bulk pureplay with the largest publicly-traded fleet, now with 90 vessels.
- Last Friday, they announced an acquisition of 16 vessels, funded by the assumption of debt and 10.5M new shares.
- We’ve crunched the numbers on this deal and are very supportive. This is a Value Investor’s Edge long position, fair value estimate: $15/sh, 24% upside.
- SBLK has heavy exposure to the larger Capesize segment, which was strong in late-2017 but faced some recent weakness due to slower Brazilian iron exports.
- Capesize rates are now surging, and we’re very bullish on forward prospects.
- This idea was discussed in more depth with members of my private investing community, Value Investor’s Edge.
Company And Market Overview
Star Bulk Carriers is a dry bulk shipping pureplay, with 81 directly-owned vessels and 9 long-term leased vessels. They have a diversified fleet mix, but their primary exposure is towards the larger Capesize and Panamax segments, which are utilized mostly for iron ore and coal transport. The chart below shows their vessel mixture.
Source: Value Investor’s Edge, Analytics Platform
Although their fleet profile is mixed, when sorted by their cargo capacity (deadweight tonnage, or “DWT”), we can see that SBLK is heavily dependent upon Capesize performance.
Source: Value Investor’s Edge, Analytics Platform
Capesize rates were quite strong in late-2017, hitting daily rates of around $30k, with Q4 averages in the mid-$20s. These were the strongest segment results since 2014. Rates dipped back into the seasonal low period in February-March, and due to extensive flooding and other disruption in Brazil, rates remained weak until early April. Rates bottomed about two weeks ago and have since exploded upward, more than doubling in 10 days.
Source: VesselsValue, annotations added by J Mintzmyer
If Capesize rates keep expanding, I believe SBLK is placed in an excellent position to capitalize on these profits. This is one of my largest personal positions and a core holding at Value Investor’s Edge. We’ve been long off and on for the past two years, with our latest position basis at $10.15, with a fair value target price of $15.00.
Beyond the normal bullish update, we’re providing this update piece due to Star Bulk’s decision last week to acquire 16 vessels from private equity holdings. We’ve crunched the numbers and have determined this deal is clearly accretive to shareholders prior to including any potential scale benefits.
Following the transaction, which included the issuance of 10.5M new shares, SBLK has approximately 74.5M shares outstanding for a market capitalization of close to $900M.
Acquisition Details
SBLK announced the vessel acquisition last Friday (20 April), with the particulars included below – 16 vessels built between 2010 and 2017. As compensation for these vessels, SBLK will assume $310M of related debt and has issued 10.5M worth of new shares. Based on closing price of $11.69 on 19 April, SBLK effectively paid $433M for this fleet.
Source: Star Bulk Carriers Press Release
Is $433M a good deal? We consulted VesselsValue, the premier source for immediate vessel and fleet pricing information, to determine what the fleet was worth. According to their live data as of 20 April, these ships were worth $441M. Notably, VesselsValue tends to be more conservative than broker valuations, and so I expect this to be one of the lowest valuation numbers for these ships.
Put another way, if the ships were worth $441M, and SBLK assumed $310M of debt, this means they acquired $131M worth of vessels for 10.5M new shares, or an effective sales price of close to $12.50/sh. A beneficial deal for current shareholders, prior to addressing the benefits of scale.
Valuation And Impacts
Following the acquisition, we value SBLK with a current net asset value (“NAV”) estimate of about $12.60/sh, but this is based on current fleet valuations, which I believe have significant upside if strong rate trends continue. Due to SBLK’s leverage, if underlying fleet valuations improve by just 10%, their NAV will expand to $15.40/sh.
We also reviewed operating leverage and the impact to SBLK’s fleet profile. Following this acquisition, which included a 14% equity dilution, SBLK grew their fleet from 74 to 90 ships (22% growth), and they grew their cargo capacity from 8.2M to 10.14M DWT (24% growth). Perhaps most importantly, the average fleet age dropped from 8 years to 7 years.
In total, SBLK grew their cargo capacity by 24%, while lowering average fleet ages by a year, with dilution of only 14%. The stock appreciated 3.25% last Friday, but I suspect there are still significant gains on the table. I am looking forward to Q1-18 earnings, likely posted in mid-May. If Capesize rates keep rising, even $15/sh might seem like a weak target.
Conclusion And Valuation
Star Bulk now has the largest publicly-traded dry bulk fleet, and it is positioned towards the Capesize segment which is seeing the strongest rate improvements. Their recent fleet acquisition is clearly accretive and positions SBLK as a potential consolidator and industry leader. They are the private equity vehicle of choice, and SBLK is a major holding on Value Investor’s Edge. I believe $15/sh, 24% upside, is a fair valuation target, derived primarily from a slight premium to underlying vessel valuations.
Did you subscribe for our daily newsletter?
It’s Free! Click here to Subscribe!
Source: Seeking Alpha
