When you’re paying seven figures for a ship, you want to inspect it before sealing the deal. You want to make sure you can actually get the old crew off and your own crew on. COVID threw a monkey wrench into all that. Not surprisingly, shipping sale-and-purchase (S&P) activity slowed to a crawl for several months last year.
That lull is long gone.
S&P activity is now booming across multiple sectors, which should be a plus for shipping stocks. Higher secondhand ship demand should equate to higher asset values, which should theoretically equate to higher share prices.
According to Clarksons Platou Securities analyst Frode Mørkedal, “It has been over a decade since buying activity has been elevated and aligned across the three conventional shipping sectors of tankers, dry bulk and containers.”
Allied Shipbroking of Greece counted 185 ship sales in February and 176 in January. Those are the highest monthly tallies in at least a half-decade.
Box ship sales highest in years
According to a new report by Alphaliner, S&P activity in container shipping has “surged to the highest levels in four years, with prices in some segments now double those seen a year ago.”
Buying interest is so intense that the average age of ships bought in the first two months of 2021 “has risen to nearly 15 years as operators look to lay their hands on scarce tonnage to meet demand.”
Alphaliner noted that ships with combined capacity of 140,000 twenty-foot equivalent units (TEUs) changed hands in January alone. One example of a sale reported by Alphaliner in February: TS Lines bought the 2013-built, 4,957-TEU Songa Toscana for $42.3 million. That’s 84% more than seller Songa Container paid for it in 2018.
Mørkedal believes that box-ship asset values have room to run. “There remains further upside, given [that] secondhand prices remain below levels seen in 2010, while earnings power [charter rates] is higher.”
Dry bulk sales ‘frenzy’
Brokerage Eastgate Shipping said Wednesday that there is now a “frenzy” of dry bulk S&P transactions. It pointed to the surge in rates for Handysizes (bulkers of up to 35,000 deadweight tons or DWT), Supramaxes (45,000-60,000 DWT) and Panamaxes (65,000-90,000 DWT).
“This surge in rates naturally attracts buying interest, which subsequently continues to push asset values higher,” said Eastgate. “This, in turn, attracts more owners to consider becoming sellers, keeping the stream of available candidates, especially in the Panamax and Supramax segments.”
Mørkedal noted that the majority of listed dry bulk companies have been “discussing plans to remain acquisitive or become more acquisitive in the coming months.”
Deals are piling up. On Wednesday, Star Bulk (NASDAQ: SBLK) announced two more ship acquisitions. They were its 11th and 12th ship purchases in the past three months. Golden Ocean (NASDAQ: GOGL) is buying 18 bulkers in a related-party deal. Eagle Bulk (NASDAQ: EGLE) has purchased seven vessels since December.
Even tankers trading hands
“Interestingly, tanker sale-and-purchase activity has been plentiful, despite the extremely low earnings, which indicates that buyers are increasingly optimistic on the outlook given what has been witnessed in other shipping segments,” said Mørkedal.
As of Sunday, Allied Shipbroking counted 85 tankers totaling 11.5 million DWT trading hands for $1.7 billion since the beginning of this year — in the vicinity of dry bulk sales in terms of DWT.
Since then, TORM Shipping (NASDAQ: TRMD) announced the purchase of eight medium-range product tankers from TEAM Tankers for $82.5 million in cash and 5.97 million TORM shares.
During the Annual Capital Link International Shipping Forum on Wednesday, Euronav (NYSE: EURN) CEO Hugo De Stoop implied that his company could soon switch from buying shares to buying ships.
“We bought back $180 million of shares last year and earmarked another $50 million for buybacks this year at the time we announced Q4 results [Feb. 4] but our share price was 20% lower than it is today,” explained De Stoop. “We have closed the gap on NAV [net asset value, the market-adjusted value of the fleet and other assets, minus debt and other liabilities]. It is very close. So, we are at a point where it may not be required to do share buybacks. If our share price is at or around NAV, we will always prefer to buy assets. Certainly when we are in low territory for values.”
In general, the closer public shipping companies’ shares trade to NAV, the more likely management will stop buying back their own shares and start buying secondhand vessels. That change in behavior would increase S&P demand even further.
Relationship between rates and asset values
During most of the decade since the financial crisis, shipping stocks traded at a substantial discount to NAV. In other words, the shares weren’t worth as much as the ships were in the physical secondhand market. Importantly, asset values at that time were usually higher than implied by charter rates — a good reason why shares traded at a discount to NAV.
During a Capital Link webinar on shipping stocks in February, Clarksons Platou Securities analyst Omar Nokta recalled, “For the past decade, asset values were largely better than the earnings underlying those ships. You didn’t really earn your cost of capital. And if the charterers weren’t willing to pay the freight rates to justify the asset values, Wall Street wasn’t going to give that valuation either.”
This year, at least in the container and dry bulk sectors, asset values appear lower than what is implied by underlying charter rates, the reverse of the earlier dynamic.
Unlike in earlier years, charter rates are outpacing secondhand market values. If rates are sustainable — always a big “if” in shipping — they should theoretically pull NAV upward. And all else being equal, if NAV rises, so should shipping stock prices.
Jefferies analyst Randy Giveans said during the February Capital Link webinar, “In the past, NAVs were elevated [compared to rates]. In the last few months, that has not been the case, and in our view, NAVs are rising. We think NAVs are starting to increase.”
More room for values to run?
During the Capital Link event on Wednesday, Giveans further explained, “There have been many companies buying secondhand tonnage in the last few weeks.
“As steel prices go up, and inflation goes up and people remain reluctant to order newbuildings, the gap between 5-year-old vessels and newbuilds will tighten. Increased S&P activity will increase valuations. And sometimes that goes back and forth and asset values snowball in a relatively short period of time.”
According to Nokta, “If you look at the dry bulk stocks, they’ve had a great run. The group currently trades at around NAV. Obviously NAV is a moving target, but the [stock] market tends to gravitate towards where NAV is going.”
Where NAV is going, he argued, is up, because “asset values are still below where they were before the pandemic, even though dry bulk and container earnings are above where they were.” Click for more FreightWaves/American Shipper articles by Greg Miller
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