Baltic Trading Limited: A Quick Double If Shipping Rates Cooperate

Go down

Solved Baltic Trading Limited: A Quick Double If Shipping Rates Cooperate

Post by jesowepllo5 on January 3rd 2014, 7:49 am

  Current Price: $6.58Price Target (YE14): $12.50Baltic Trading Limited (NYSE: BALT) is a drybulk shipper with a fleet of fifteen ships. As has been well documented, the shipping industry has been in a state of disarray since 2009 as the market has worked off an excess supply of ships and weak demand for the transport of dry bulk goods.Dry bulk cargo typically consists of iron ore, wheat, and coal. Exports out of Australia and Brazil, usually on their way to China or India, are the most common voyage that drybulkers jordan China has had an insatiable appetite for iron ore over the past two years, and low coal prices have allowed China and India to continue to fuel their growing economies on the cheap. Consequently, the various Baltic Dry Indices have risen substantially since the BDI itself put in its all-time low at 647 in February, 2012.Baltic Trading, here on referred to as 'BALT' or 'the company,' almost exclusively makes voyages that are priced on spot market-related time charters, meaning the company is never locked into any long-term (greater than six-month) shipping contracts. This strategy has been particularly helpful in recent years, as the company has been able to wait patiently for a turnaround in market conditions without panic issuances of equity or the threat of a chapter 11 restructuring, as has been the case with so many drybulkers.BALT owns fifteen vessels consisting of four size classes:5 Handysize4 Capesize (BALT received the Baltic Tiger on November 26th - the third of its four total capesizes. The fourth, the Baltic Lion, was expected to be received before year-end, though it now looks like it will be received in early Q1, '14)4 Supramax2 Ultramax (recently purchased for an aggregate price of $56 million; both vessels are expected to be delivered during H2 2014. The contract also stipulates that BALT has the option of purchasing up to two more ultramax vessels for the $28 million each until Jan. 10, 2014)With the acquisition of 2 handysize, 2 capesize, and 2 ultramax in 2013 alone, management has begun to deliver on its promise to take advantage of its strong financial flexibility once conditions improve.BALT takes 13 (assuming delivery of the Lion by the end of Q4) exceptionally young vessels into 2014, all with spot market-related time charters, providing exceptional leverage to those who believe day rates will continue to rise.Over the remainder of this article, I will provide a range of top and bottom line estimates in conjunction with what I believe are conservative valuation methods, in order to derive a price target for BALT. I will be working bottom-up, and will thus discuss my outlook for the shipping industry toward the end of this piece.Revenue and Net Income BreakdownsThe following was taken from the company's 3Q presentation:(click to enlarge)These figures were based on the company operating 11.7 ships in Q4, so we need to do some approximations as to what break-even levels will be going into Q1 '14.Interest ExpenseFortunately, the company's projected quarterly interest expense includes projected expenses as a result of the term loan that it is using to finance the two new capesizes. I will address the company's balance sheet and debt obligations in detail later on in this article, though the $1.335 million that BALT provides is consistent with my calculations, so we can leave that as is.Direct Vessel OperatingIf we divide $5.4 million by the 11.7 vessels the company uses in its calculation, we get $461,538 in estimated DVO costs per vessel. Since the new ship is going to be a capesize, and for the sake of conservatism, I'll tack on $600,000 in new DVO costs, which results in DVO of $6 million.G&A, Management FeesThe addition of '1.3' ships shouldn't add much to this line, but we'll round to $2 million.Depreciation accounts for 'ships to be acquired,' so we can leave that as is at $4.213 million.Total Projected Net Income Breakeven for Q1, '14 = $13.548 millionAs of 12/24/13, day rates for the various ship classes were as follows:Handysize: $11,645 x 5 = $58,225Capesize: $38,999 x 4= $155,996Supramax: $15,195 x 4= $60,780Total revenue / day = $275,001Total revenue / quarter (previous x 90; assuming 99.9% utilization rate) = $24,750,090DrydockingAs of 12/26/13, BALT had four vessels scheduled for drydocking in Q1 '14, one for Q2, and one for Q3.The five vessels scheduled for drydocking in H1 consist of three supramax and two handymax vessels. The company projects that each vessel will have 20 offhire days during the maintenance periods.The loss of a combined 60 offhire days for the supramax vessels results in lost revenues of $912,000, while the loss of 40 offhire days from the drydocked handymax vessels results in the loss of $465,800 in revenues, for a total H1 loss of $1,377,500 (these figures assume current day rates).BALT management is also guiding for about $4.6 million in drydocking costs during H1; these consist of general maintenance costs and fuel efficiency upgrades.H1 2014 Revenue and Net Income ProjectionsH1/H2/FY14 Base Case (Current Rates)Given that the two (possibly four) ultramax vessels will not be received until H2 '14, I'd first like to project BALT's H1 revenues and net income based on the thirteen vessels they should have going into next year.Given the current rates I outlined above and deductions due to drydockings, we have the following equation:$49,500,180 (projected revenue for H1, or estimated quarterly revenue X 2)-$1,377,500 (lost daily contracts based on current rates and company guidance for drydocking duration)-$4,600,000 (total projected H1 drydocking costs)-$27,096,000 (projected H1 breakeven net income; costs)= $16,426,680 in H1 Net Income, or EPS of $.38Now, assuming the two supramaxes are received by H2:Supramax rates (typically close to those of panamaxes) of $18,000 (4/6 month contract rate for panamaxes) x 2 = $36,000 in revenue / day, or $6,480,000 in incremental revenue for H2. We also need to add another $1 million to H1 breakeven costs, for a projected H2 breakeven NI of $28,096,000. Additionally, we must account for the drydocking of the Baltic Jaguar (supramax vessel). This event reduces projected revenues by $303,900, and adds another $1 million to miscellaneous costs.Let's also assume BALT has ownership of the two new ultramaxes for 75% of H2 (I will keep the new cost structure constant, however, as the difference is minimal); 75% of $6.48 million = $4,860,000 in additional revenues.This new revenue, plus initial fleet revenue projection (which assumes 99.9% utilization and no additional drydockings) less new projected costs (lower drydocking expenses and higher NI breakeven) and lost revenues due to drydockings --> $4,860,000+ $49,500,180 - $28,096,000 (new breakeven) - $1 million (drydocking expense) - $303,900 = H2 net income of $24,960,280.Giving us FY14 projected net income of: $41,386,960, or FY14 EPS of almost $ jordansH1/H2/FY14 Modestly Lower Rate ScenarioThis is consistent with the market's forward view. Looking at the 1-year rate contracts as of 12/24/13 rates are moving for $26,000/day on capemax deliveries, and $13,000/day on panamax deliveries.It should be noted the 4/6 month contracts for both of these vessel sizes are actually higher than current spot rates, going for $39,750 and $18,000 respectively, reflecting sentiment that market participants expect day rates to improve throughout H1 '14.For this scenario, I'll assume the following rates (basically based on available 1-year forward contract rates):Handysize: $7,700Capemax: $26,000Supramax: $10,000Resulting in:$38,500 (handy) + $104,000 (CAPE) + $40,000 (supra) = $182,500 in daily revenues, or $32,850,000 per quarter.This figure, less aforementioned deductions of $32,773,500 (which are about $300,000 lower from the adjustment for the lower loss of revenues from offhire days), results in a net H1 profit of $76,500, which is essentially breakeven.For H2, we'll assume ultramax rates of $13,500, generating H2 revenues of $4.86 million, or $3,645,000 assuming 75% of H2 ownership days.Thus, H2 revenues --> $3.645 million + $32.85 million - $28.096 million - $1 million - $200,000 (new loss from offhire days) = $7,194,000.FY14 'lower rate scenario' projected net income = $7,270,500, or an EPS of about $.17.Valuation ScenariosIn the 'current rate' scenario, BALT does about $1 per share in earnings. The company has a stated dividend policy that is as follows:'Our net income less cash expenditures for capital items related to our fleet, such as drydocking or special surveys, other than vessel acquisitions and related expenses, plus non-cash compensation.'In this scenario, we can expect BALT to pay out about $36 million (net income less drydocking expenses) in dividends, or about $.84 per share. At current prices (12/26/13), investors would have a yield on cost of about 13%.At 8X YE14 EPS: $8 (12.7% dividend) -- 21.5% IRR10x: $10 (8.4% dividend) -- 52% IRR15x: $15 (5.6% dividend) -- 128% IRRTaking a look at current industry valuations:Diana Shipping - 6.34x sales; N/A P/ENavios Maritime - 2.28x sales; 10.19xStar Bulk Carriers - 3.16x sales; 32.15x (forward)Safe Bulkers - 4.65x sales; 12.12x (forward)Dryships - 1.41x sales; 18.17x (forward)Industry averages: P/S - 3.57, P/E - 18.16At my price target of $12.50 in the 'current rate' scenario, BALT would have a market capitalization of $537,500,000, giving it a P/S of 5.06 and a P/E of 12.5x. While we'd be valuing BALT at a premium based on current peer group P/S ratios, the presence of the dividend and minimal debt load relative to peers suggests a 12.5x multiple on earnings is quite reasonable. Further, BALT will be growing its revenues at a significantly more rapid rate given its direct exposure to the spot charter market.In the 'lower rate scenario,' in which BALT earns $.17, the company would be paying a 2.6% dividend at current prices. Could the stock trade lower than it currently does ($6.58) in such a scenario? Perhaps, but even assuming depressed rates into 2015, the benefit of operating the two new ultramaxes for an entire year and the absence of six drydockings will add substantial incremental revenue, thus limiting downside.Balance SheetHere are BALT's debt obligations:Nordea Bank 2010 Credit Facility - $2.25 million due in '15, $100 million due in 2016.DVB Bank SE 2013 Credit Facility #1 - $375,000 due over remainder of 2013, $1.5 million/yr due during '14-'17, and $15.625 million due by '19, total of $22 million.DVB Bank SE Credit Facility #2 (used to finance a portion of the Tiger and Lion capesize vessels) - $687,500 will be due/quarter starting March '14, and a balloon payment of $27.5 million will be due with last payment in 2020. These payments assume that BALT draws on the entire term loan of $44 million.To recap:The interest expense calculations done earlier in this article under the net income breakdowns account for the 2014 payments required for these three facilitiesTotal long-term debt is about $166 millionInvestors need to watch closely as $100 million will need to be repaid in 2016 to be in compliance of the 2010 credit air jordansThe company, by my calculations, will have roughly $70 million in cash at the end of Q4 '14. $51.5 million will be due upon acquisition of the Baltic Lion; $22.6 million will be available under the remainder of the DVB facility #2, so it appears likely that the company will finance the balance with those proceeds. Another $56 million will also be due in H2 2014 for the two ultramax vessels; if BALT has a blow-out H1, then it may be possible for management to exercise its option to acquire all four ultramaxes.BALT takes a cash balance of about $41.1 million into Q1 (assuming delivery of the Baltic Lion, and that management draws on the remainder of facility #2), with future liabilities of $56 million for the remaining vessels.Miscellaneous Company and Valuation NotesBALT has an average fleet age of 3.7 years, compared to an industry average of 10 years.BALT is one of the few publicly traded shippers that has 100% exposure to the spot market, providing leverage at a time where industry dynamics point to rising spot charter rates.The company's fleet consists mostly of Korean and Japanese ships; widely considered to be the highest quality vessels.Management has proven itself to be competent, waiting patiently for excess supply to finally start coming in and acquiring highest-quality vessels at attractive prices, quite impressive at a time where many shippers are teetering on the edge of bankruptcy.BALT will be doing at least $113 million in annual, current-rate, 99.9% utilization rate revenues by 2015 (assumes no drydockings and a projected fifteen vessel fleet). This results in net income of about $55 million, or $1.25 per share.Potential upside is outstanding. If rates continue to rise, $1.50 - $2 in EPS by 2015-2016 is plausible, resulting in a triple bagger ($1.75 x 10) and huge dividends for shareholders.Industry NotesFinally, we arrive at the current supply/demand for the shipping industry:China is expected to grow coal imports by 8% in 2014.Australia is forecasting a 23.3% rise in exports in '14 (see link above).While China does produce some of its own iron ore, it is of a lower grade than that of Australia and Brazil, necessitating a continued elevated level of imports; additionally, low global iron ore prices make domestic iron ore uncompetitive (Navios Maritime Q3 report).Indian coal and steel imports are expected to be up 17% in 2013, and 2014 is also projected to bring strong import growth.Vessel deliveries were down 43% year-on-year through September; and net capesize fleet growth of 4% was the lowest since 2003 (BALT Q3 presentation).There has been a high degree of 'slippage' in newbuilding vessel deliveries as shippers have had to cut back as a result of financial difficulties.14% of the fleet is twenty years or older.Fleet growth should be quite limited going forward - shipyard newbuild orderbooks are nearly filled for 2015.3.4% of the fleet is expected to be demolished this year - well above historical averages.All of this is consistent with commentary from management at BALT, Navios, Dryships etc. that upticks in trade activity are resulting in charter-rate increases that are more sensitive than they have been in recent years.This is a complex story but my belief is that the industry has cut supply out of necessity and strong dynamics on the demand side of the equation should put upward pressure on rates throughout 2014.ConclusionsAn investment in any shipper right now is highly speculative, though BALT offers exceptional leverage and return potential if rates at least remain close to where they stand today.If rates do indeed cooperate, and I believe they will, BALT should be trading between $10-$15 by year-end 2014, providing at least a 5.6% dividend in the process. In this scenario, investors are looking at one-year equity returns of ~90%.In the event that rates continue to rise, BALT is a $15-20 stock with large dividend potential.If rates decline by about one-third across the board, BALT will still be modestly profitable, though investors will likely see, at best, only modest returns over the course of 2014 in that scenario, though I'd be a bit concerned about the larger debt payments coming due in 2016 and beyond if rates are subdued throughout 2014 and market dynamics deteriorate.Intermediate-term downside appears relatively limited; even in the event that capesize rates drop to, say, $20,000/day, BALT would be about breakeven. However, I would again be concerned about management's ability to pay off the majority of the long-term debt. We'll likely see a slew of equity issuances if rates drop throughout 2014.All in all, I'm willing to risk $2-3 of downside in 2014 for about $6 in one-year upside, and conceivably much more if rates rise. At $3.50 per share (market cap of $150 million), BALT would be trading at 45% of book value, which consists almost exclusively of its exceptionally young fleet. Many of these ships were acquired at a time of even lower rates than those offered today, suggesting that the stated value of some of these vessels is lower than what the company could receive for them (assuming the company isn't a motivated seller). While I'd like to see a more definable downside here, the return potential on the upside does indeed to be several multiples higher than the conceivable downside in 2014. Longer-term, I'm thinking of BALT as a high probability lotto ticket.Given its financial flexibility, diversified, highest quality fleet, uniquely high leverage to rising spot charter rates, and competent management, BALT appears to be the best vehicle to play a rebound in the shipping industry.Disclosure: I am long BALT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)Additional disclosure: A family account I manage is also long BALT<br> <br>
New Member

Posts : 1
Reputation : 1
Language : en

View user profile

Back to top Go down

Back to top

Permissions in this forum:
You cannot reply to topics in this forum