Think shipping stocks, and the first things that come to mind are Wall Street and Oslo. Think Milan, and the first thing that comes to mind is fashion.
And yet, a very well-known Italian shipping company sponsored by a very high-profile family has been publicly traded on the Milan Stock Exchange for over a decade: product-tanker owner D’Amico International Shipping (Borsa Italiana: DIS).
The company’s chief financial officer, Carlos Di Mottola, sat down for an interview with FreightWaves at the Capital Link ship finance forum in Manhattan on Oct. 15. The following is an edited version of that conversation:
FreightWaves: You listed through an initial public offering (IPO) on the Milan Stock Exchange in 2007. You’re now the only ship owner left on that exchange after the delistings of Montanari and Premuda. Most ship owners list in the U.S. or Norway, where they have greater access to equity and debt investors for growth capital, and more analyst coverage. Do you feel you have enough capital-market access in Milan?
Di Mottola: “Yes, we did a rights offering and a private placement this year, and we used the same format in 2017. We also did a rights offering in 2012.”
But why did D’Amico decide to go public in Milan in the first place?
“When the group decided to list this part of its activities, it was a way for it to monetize at a good point in the cycle without reducing its presence in the sector. The group also sold some vessels, but it sold many fewer vessels than it would have if it hadn’t IPO’d.
“Since going public, the listed entity has also proven useful for sharing the burden of raising capital between the controlling shareholder [the family entity, D’Amico International S.A.] and the rest of the investor base. [In the weak period following the financial crisis] we might have had to sell more vessels at very unfavorable times, but because we had other investors participating in rights offerings, we were able to hold on to more vessels, allowing us to sell them at much more attractive prices later.”
Your previous CEO was quoted several times over the past decade as saying that a move to a U.S. or Oslo listing was possible. Are you still considering a move to an exchange that has more of a shipping focus and more trading liquidity?
“There are different views among the shareholders. We have discussed this several times. But as of now, there is not a strong conviction on the benefits of listing on another exchange.”
Here in New York, I’ve seen a lot of pressure over the years on management of public shipping companies to do things to placate shareholders that they would not have done if they were private.
“What you say is true. I totally agree. In the U.S., for example, it is important for a listed company to have a certain size. There is a pressure to become larger. For us, we want to manage our company to properly provide good returns to the investors, but we don’t need to have a 200-vessel fleet.”
Your controlling shareholder – D’Amico International S.A. – still owns 66%, with outside investors owning 34%. You still have a relatively small public float 12 years after your IPO. How much of your float do you think is institutional versus retail?
“It’s more institutional. Switzerland, London and, of course, Milan are the key hubs where our investors are today. Retail was an important component when we IPO’d, but over time, retail got a bit burned and fed up with the dynamics of the share price – and rightly so.
“This is not a sector that’s really suited to retail investors. It’s too volatile and too specialized, and you really need to understand it in order to withstand the cycle. You can time the cycle wrong and if you keep reinvesting and participating in the rights offerings, you have a chance of recovering eventually. But if you don’t and you just get fed up, you usually get fed up at the wrong time – and you lose all your money.”
Explaining the discount to NAV
The common lament of management in the U.S. market is that shipping shares trade at a discount to net asset value (NAV), the market-adjusted value of the vessels and other assets, minus debt and other liabilities. There has been very little equity offering activity here in 2019 because you don’t sell shares at a discount to NAV unless you really have to. Do you face the same valuation problem?
“Yes, we are trading below NAV, although actually, our share price went up over the last 11 days – I would actually say we outperformed our peers over the last week. We’re still at around a 35% discount to NAV, but we used to be trading at more than a 50% discount to NAV.”
There are a lot of theories on why shipping shares trade at a discount. Why do you believe your company’s stock is trading at a discount?
“We have around 50% time-charter [TC] coverage for the fourth quarter. We usually target between 40-60% TC coverage. So the answer, I think, is that if you want to play the product-tanker sector and you really believe in the fundamentals and you really believe this is the right time, and that spot rates are going to go up, then our strategy – which is more prudent, with more TC coverage than some other companies – is probably not as appealing because it reduces the potential upside [versus higher spot exposure].
“Also, compared to companies like Scorpio Tankers [NYSE: STNG], we don’t have the larger product tankers. We have LR1s [Long Range 1 tankers; 55,000-79,999 deadweight tons (DWT) of capacity] but only six of them out of a fleet of around 50, and we don’t have LR2s [80,000-119,999 DWT]. When markets are going really well, typically, larger vessels do better. They give you a bigger bet – a bigger upside. The MRs [Medium Range tankers; MR1s: 25,000-39,999 DWT; MR2s: 40,000-54,999 DWT] that we have will do well, too, but the potential upside from the LR2s is bigger.”
Aligning interests with the controlling shareholder
This goes exactly to the pressures faced by U.S.-listed companies. If you were on a quarterly conference call with analysts in New York, and you described a strategy of focusing on MRs, which are better in downturns but offer less upside in upturns, and you described a chartering strategy in which you intentionally halve your operating leverage – and then you admitted that your NAV discount was related to this strategy – you would get pushback. You don’t face that same pressure in Milan, but still, why have you chosen a strategy that’s so conservative relative to several other listed product-tanker owners?
“The reason is that we don’t have unlimited resources. Our controlling shareholder has invested a lot of capital in the company, and we don’t have a crystal ball. We have a base case and that base case is very positive, but things can go wrong. There are risks. There’s a risk of a recession, of a hard Brexit and so on. I mean, we saw what happened with the bombing in Saudi Arabia. That was completely unexpected. Fortunately, production came back very quickly, but if it hadn’t, who knows what the impact would have been.
“Of course, the fundamentals are now really, really strong so the chances of it going wrong are definitely less. But what if we were wrong and the company had to raise more capital? Would the [controlling family] group be able to follow and invest as it did in the past transactions? Possibly not. And if not, then the [family] group would be diluted.”
In the U.S., listed shipping companies that call the market wrong and need to raise a lot of money just go ahead and do a highly dilutive follow-on equity offering.
“That’s because they don’t care as much about the share price, because for them the important thing is the management fees. For the D’Amico family, the important thing is its investment in the [listed] company. The family doesn’t want to get diluted at a very unattractive [share price] level.”
You just mentioned related-party fees. This is a serious concern among U.S. shipping investors. A lot of the public shipping companies have potential conflicts of interests with the sponsoring private entity. What sort of business relationship does your listed entity have with the controlling shareholder?
“The related party mainly does the technical management. The commercial and operational management is done in-house. The group outside the perimeter of the listed entity also assists with insurance and legal matters. In general, I would say that our related-party transactions are much less than for other listed companies.”
Have eco ships fulfilled their promise?
You’ve just completed a major newbuilding program, spending $755 million for 22 vessels since 2012. You’ve put a lot of emphasis on fuel-efficient “eco” ships. The eco-ship concept arose back when the price of fuel was very high, and some have questioned the concept’s worth after pricing came down. Did the design pay off for you, and will it pay off even more going forward given the IMO 2020 rule, which requires the use of more expensive 0.5% sulfur fuel starting Jan. 1?
“It’s true that when we started ordering these ships the oil prices were higher, but yes, they’ve paid off big time. [Due to IMO 2020] the premium that charterers are prepared to pay to time charter eco vessels has increased significantly over the last year. For MR2s, it went from a $1,500-per-day premium for a one-year TC to around $2,500 per day.
“Also, vessel values of younger eco ships held up much better throughout the downturn than older [non-eco] 10- to 15-year old tankers, and eco-ship values have increased significantly over the last two years in anticipation of a recovery, whereas the value of older ships has only increased in the past six months. Having the eco vessels in our fleet allowed us to keep up our NAV more than we would have otherwise.”
You have all of the newbuildings delivered and your fleet fully renewed just as IMO 2020 and other positive drivers are expected to support the recovery. Are all the pieces of the puzzle now in place for your company?
“We’ve already picked up some of the market improvement because at the beginning of this year, we were very exposed in the fourth quarter. We were below 30% covered [by time charters]. As the market picked up, we covered ships at the higher rates.
“For 2020, we have 37% coverage, so we have decent exposure to the spot market. Not that much in the last quarter of this year and the first quarter of next year, but after that, the exposure increases. If the market keeps going up throughout 2020, we’re well positioned to benefit. And we don’t expect this to be a brief recovery, like we saw in 2015. We think this one has legs.”
The pitch to U.S. investors
You’re here at a Capital Link event in New York, doing one-on-one meetings with potential investors. With market signals so strong, why should they buy your Milan-listed stock when there are other companies listed in New York and Oslo that have higher exposure to a rapidly rising market given lower TC coverage and larger vessels – in other words, companies like Scorpio Tankers? What’s your investor pitch?
“It’s a good question. I would say that D’Amico is renowned in the shipping industry for being a serious operator with very high-quality technical management. This provides us access to contracts with oil majors. We have very strong relationships with Total and Exxon. They take our vessels on three- to five-year TCs. They’re not doing that with just anyone. That’s a big differentiator, especially of course in weaker markets, which provides us with more resilience.
“I would also say that there is a very strong alignment with the interests of the D’Amico family and the company. The family really cares for the success of the company because it has invested so much of its wealth in this company.
“It wants the share price to go up because they [family members] want cash to come back to them eventually because they invested so much cash in the company. Someday, they may want to sell some of their shares and their participation may go down [from 66%]. The family would also want to receive dividends [when the market is strong enough to support dividends], which is aligned with the objectives of third-party investors.”
In other words, you’re offering decent returns plus the ability to sleep better at night because your fleet, your oil-major relations and your conservative TC approach allow you to better weather downturns? More of a long-term business than a short-term lottery ticket? And unlike some other public tanker companies, you’re more interested in share-price appreciation than related-party fee income?
“Exactly. A bit less upside but good enough. More resilient on the downside. More of a balanced approach.” More FreightWaves/American Shipper articles by Greg Miller