Almost nothing has gone right for investors in the shipping sector. With international freight rates continuing to trend low, operators are finding it difficult to cover their expenses.As a result, losses are mounting.
The Baltic Dry Index – a widely cited indicator of vessel demand and rates in shipping industry – has averaged 769 since the starting of the year. This is the lowest since at least 1985 and is indicative of just how severe the current slump in the industry is.
Charter rates have plunged more than 90 percent from their highs in 2008 as a glut in the number of vessels caused downward pressure. As if it was not good enough for the sector, the global economy witnessed a slowdown not seen in decades in the subsequent years. As a result, prices of shipping companies have come down to levels equivalent of stock market fire sale. Here is a closer look:
While the scenario is certainly negative, there is some ray of hope. In what appears to be an early indication of shipping freight rates firming up, ship owners are saying no to unprofitable cargoes.
Earlier, ship owners would undertake additional business at lower rates to avoid idling the ships but rates seem to have fallen to levels where ship owners are no longer taking baits. This step will likely lead to some traction coming back to charter rates and benefiting shipping companies such as Diana Shipping Inc. (NYSE:DSX) (FRA:DSZ) which saw profits in the fourth quarter plummeting to $5 million from $20 million in the same period a year ago.
Time charter revenue fell nearly 14 percent to $49.4 million from $57.4 million a year earlier. Analysts at Deutsche Bank AG (NYSE:DB) (ETR:DBK) and Dahlman Rose have buy rating on the stock with price targets of $11 and $10 respectively. Compared to current price of $8.7. These are decent improvements but the market is lacking conviction at the moment if these levels are achievable.
Unlike its unprofitable peers, Matson Inc makes profits and pays dividend. Although the dividend yield of $2.3 percent is not very attractive, it is still nothing to scoff at. Its current market price of $25.9 sits comfortably above the book value of $6.6 per share. This marked difference in valuations with other players is based on the fact that Matson is protected by law. This advantage may be termed unfair by some but is not likely to go away in a hurry. In fact, the company has maintained steady revenue growth since 2009. The company has growing from $1.2 billion to $1.56 billion. Additions to the bottom-line were less consistent but the company managed to grow its share in the protected market.
Navios Maritime Partners L.P. (NYSE:NMM) is another player in a relatively good shape. Although a price to book value ratio of 1.4 is not very good, it is still better than other players in the industry. Another distinct advantage this stock offers is an exceptionally high dividend yield of 12.5 percent. The stock has moved in the range of $ 11.53 – $16.83 over the last 12 months and is currently available at $14, at a price earnings multiple of 8.8. RBC has an ‘Outperform’ rating on the stock with a price target of $16, indicating a potential upside of 14 percent from its current price. Like many other players in the industry, valuations are extremely attractive and downright akin to a fire sale but acquisitions are ruled out for now and thus, any recovery in prices will be gradual only.
It could be a bit too early to assess if charter rates are bound for a steady recovery as yet. Given the unprecedented capacity glut in the market, it may take longer than expected before dry bulk shipping companies become profitable. Valuations are certainly mouthwatering and there is virtually no downside to investment in the sector now. For investors looking for a profitable play in the sector, Matson may be an excellent option.