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On 17 January, Value Investor’s Edge Live hosted Adrian Economakis, COO of VesselsValue, to discuss the shipping markets and particular asset pricing cycles. Adrian reviewed some of the features of their research platform, which include trade analytics and a full database of all vessels and transactions. He also discussed some of the key observations from a review of asset cycle pricing across sectors. Tankers were on a run and not particularly cheap at the time, whereas there is some intriguing deep value opportunities in some ancillary shipping sectors such as Panamax Containerships and Offshore Support Vessels.
- 1:00 minute mark – Background of VesselsValue? What research features are available?
- 5:45 – How accurate have are the valuations compared to deals?
- 9:15 – Which asset classes are the most depressed? Deep value plays?
- 20:30 – Views on tanker asset values versus historical levels?
- 25:00 – Discussion on demand indications in the market.
- 30:00 – Vessel tracking models- storage impact?
- 31:30 – What are the COSCO ships doing? Laid up? Storage?
- 34:00 – IMO 2020 market impacts thus far? Scrubber installations?
- 39:30 – Specific scrubber metrics and valuations for IMO 2020?
- 44:10 – Any other risks or weird activity to watch out for?
- 46:00 – Commentary on the latest VLCC resale levels ($105-$107M)?
I have been working with VesselsValue since 2013 and their data platform is a crucial backbone of our historical market-beating equity research here at Seeking Alpha and with Value Investor’s Edge. I’ve included some of their recent market-research slides to accompany our discussion, adding further color to the metrics they offer us as investors and researchers.
Although this was a scrappy start-up when we started working together in 2013, VesselsValue is now a worldwide operation with 7 offices and is widely respected as a top-tier data provider in our industry.
Tanker Market Updates & Relative Values
Our primary recent research focus has been on the crude tanker sector as rates were running super hot into late-2019. This improvement in rates led to a related increase in underlying vessel valuations, which improved the net asset valuation (“NAV”) for each company we follow. LR2s posted the largest gain during 2019, increasing by 16% on average, which disproportionately benefited Scorpio Tankers (STNG). The rest of the fleet increased by 3-9%.
I utilize their platform to provide us with real-time NAV updates to keep the valuation data in our Seeking Alpha updates ahead of other brokers and analysts who primarily focus on trailing valuations. Specifically to the current tanker markets, we can see where ships are valued in relation to historic levels. In early-2020, we could see that ships were sitting slightly ahead of their long-term median values, suggesting we were moving into a later-stage of the asset pricing curve. See below for an example using a 2007-built VLCC:
This is just one part of the puzzle since asset valuations will obviously improve when rates are higher (especially when longer-term time charter rates are higher), but it is very important to gauging our level of security. The best time to buy shipping stocks is when we can both get a steep discount to NAV (P/NAV well underneath 1.0x) and we are also simultaneously picking up assets well below their median levels (i.e. scoring a discount on top of a discount). This was the case in late-2018, when we were able to build selective portfolios of ‘double discount’ shippers and score strong returns (+72% on average). As we entered 2020, tankers were mostly above their historical mean with the exception of LR1 product tankers. Suezmax tankers were the highest valued, placing more potential valuation-risk to firms such as Nordic American Tankers (NAT), which had heavy allocation there.
Furthermore, VesselsValue also offers a look at estimated supply and demand changes in the markets as shown below. Their analysis is based on real-time vessel tracking and shows that VLCC supply increased significantly during 2019, but demand failed to keep pace. This data is heavily skewed due to markedly increased storage for IMO 2020, and similar indications have been heavily misinterpreted by some other news sources, but it is still worth keeping a very close eye on! When available, the Q1 and Q2-2020 data will be extremely informative to see what precise impact the Coronovirus effects have on our tanker tankers.
We keep a very close eye on these levels at Value Investor’s Edge and when cargo mile growth shows sustained increases (see Q2-15 to mid-2017 above), rates usually follow unless newbuild deliveries are huge.
The great news for tanker investors? Once we get past the temporary Coronavirus disruptions, cargo mile demand is set to soar in 2020-2021 as US exports continue to increase and China is set to make massive crude oil purchases over the coming year (USG-China is twice the distance as the Middle East). Furthermore, after a large gain in supply during 2019, the tanker orderbook is very thin for 2020-2021 meanwhile a near record proportion of older tonnage means that any period of sustained weakness is likely to be met with significant demolition.
When we check back in a year, expect we’ll see drops in cargo mile demand for Q1 and likely Q2-2020 followed by huge spikes in the back half of the year and very flow “average vessels growth” levels (2H-2020 similar to 2015-2016). VesselsValue tracks all of these metrics and they’ve provided a forecast for tanker asset values. Note this was completed before the Coronavirus ‘black swan,’ so we might see temporary drops these coming months before a hearty resurgence expected in mid/late-2020.
Other Ancillary Sectors?
This report is already quite lengthy with just a review of the tanker markets, but along with our podcast audio discussion, which sectors look the best right now in terms of asset prices? Specifically, VV tags the Panamax containerships sector as “very cheap” trading nearly 60% below median levels.
Part of this is very logical since the older Panamax class was rendered ‘partially obsolete’ by the expansion of the Panama Canal, completed in 2016. Rates and valuations plummeted thereafter; however, since new orders also ceased to occur and demolition quickly overshot the loss in demand, rates have been improving significantly. Which companies are best positioned in this sector? Navios Containerships (NMCI) is a clear one, virtually a pureplay in the depressed space, but investors should be aware of a lower-grade management team. Another well positioned containership firm is Global Ship Lease (GSL), which I have covered extensively on Seeking Alpha.
On the ‘expensive’ side of the house, the highest sector is LPG. This makes sense as earnings exploded last year and we’ve enjoyed heavy profits at some key holdings including Dorian LPG (LPG), which was a clear star of our 2019 Model Portfolios and is also a top component again in 2020.
Obviously investors should not simply buy cheap assets and dump expensive ones (as that’s a recipe to always be into ‘bad sectors’) but it is important to realize where we are in the cycles when building out a portfolio. Right now, an LPG firm trading at 1.0x P/NAV might not be as ‘cheap’ as a containership firm trading at 1.0x P/NAV. If rates did pull back heavy, there wouldn’t be as much of a margin of safety since assets are already priced for stronger-than-average markets. There’s a lot of other analysis required, including looking at sector supply/demand, balance sheet capacity, management acumen, and overall corporate governance, but this data aids a clear part of the process.
Conclusions & Favorite Names
I hope the audio review and slide metrics are useful to investors who are following the shipping sector. This background information and live metric updating is a very important part of our continuing coverage and updates on Seeking Alpha and Value Investor’s Edge and I look forward to sharing more about our market viewpoints and underlying research process in future updates.
This has been an incredibly challenging market in early-2020 as we got slammed with an unexpected ‘black swan’ impact due to the Coronavirus, which also coincided with seasonality in rates. Investors and traders were riding high on profits and were quick to hit the ‘sell’ buttons. Which names do I like best today? As it relates to this particular coverage update, my favorite tanker names are Diamond S Shipping (DSSI) and Euronav (EURN), both of which I believe are very attractive medium-term buys from this level.
My favorite containership plays are Global Ship Lease (GSL) and Navios Maritime Containers (NMCI). I am also still bullish on Dorian LPG (LPG) but investors should be aware of where assets sit in the cycle when also considering that they still trade at a large discount to current NAV. I am currently long all five of these names.
Record Valuation Opportunity
We provide exclusive deep value research, which is a challenging space, but also deeply rewarding when disconnects are exploited. We had such an opportunity in 2019, with +72% average model returns.br/ppimg src=”https://static.seekingalpha.com/uploads/2020/2/5/839737-1580887392462091.png”/ppRecent market carnage has reopened these opportunities while cycle fundamentals remain solid for our top picks. We’ve had a rough start in 2020 (-18%), but we’re volatility veterans. I expect investors will once again thrive with emselective/em picks./ppstronga href=”https://seekingalpha.com/author/j-mintzmyer/research”Value Investor’s Edge/a/strongmembers receive first look at coverage and model updates. We offer live trackers and proprietary analytics. Check out our latest research and earnings coverage with astronga href=”https://seekingalpha.com/author/j-mintzmyer/research”two-week trial membership/a/strong!br/p
Disclosure: I am/we are long DSSI, EURN, GSL, LPG, NMCI, STNG. 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.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.