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Paragon Shipping: A Diamond in the Dry Bulk Carnage
Posted by: alexs85 (IP Logged)
Date: March 21, 2012 10:33AM
Dry bulk stocks have struggled since the start of the credit crisis. There have been some ups but mostly it’s been all downs since 2008. However, all of this pessimism has sent some shipping stocks to irrational valuation levels and a number of them are trading below liquidation value.
The liquidation value is pretty easy to estimate for dry bulk stocks because ship transactions occur very often and there are a number of brokers that publish the transactions and the estimated value of the ships. The leading metric for determining the condition of the dry bulk shipping industry is the Baltic Dry Index. It measures the market rates to contract the ships out. Needless to say, it’s not doing very well. It currently sits at 879 and is down more than 90% from 2008 highs over nearly 12,000.
There are a number of issues plaguing the industry including the over capacity of ships as well as the slow economic recovery from the economic recession. Dry bulk players ordered ships when the BDI was at 10,000 plus and now the ships are coming online. Every dry bulk company has slides demonstrating the impact of the ships.
The value in the dry bulk stocks now comes in two ways: the ships and the charters attached to the ships. Companies can rent out their ships in two ways: spot or contract rates. A spot rate is just based on the BDI and the time charter is based on the agreed-upon rate a company will pay to lease out the ships per day. Some companies have a strategy of chartering out ships for longer term periods, and those companies are in a lot better shape now as the rates they receive for their vessels are a lot higher than market rates.
The stock I am focusing on in this article in Paragon Shipping (PRGN). It has experienced a tough number of years and it is also one of the most undervalued, if not the most undervalued dry bulk stock, from my research. PRGN is a small player and currently owns 10 vessels with four vessels that are expected to be delivered in 2012. The vessel breakdown is 8 Panamaxes (approximately 70k DWT) and 2 Supramaxes (approximately 55k DWT). I used data from ship broker RS Platou but there are a number of brokers that publish ship values. Below is my spreadsheet with the values of each of Paragon’s vessels in millions.
I ignore the value from Paragon’s charters because they add very little value as all of them are close to market rates. However, Paragon has a number of other assets. It owns an equity stake in Box Ships (TEU) and has loaned the company $15 million. Paragon also has over $40 million in cash, according to my estimate. I discount the equity and debt in TEU by 10%. I also discount Paragon’s advances in its vessels by 20% due to the fall in vessel values. On the liability side, I take all of the liabilities plus the $20 million that would be due to Allseas for the termination of the management agreement if the company is liquidated. With a $114 million liquidation value of the company and 58.7 million shares outstanding, that leads to a liquidation value of $1.94 a share for upside of over 100% over today’s share price.
The risk of course is that ship values and the Baltic Dry Index continue to fall even further without any sort of pickup in the stock price. However, I think the margin of safety built in here is significant as the upside in the stock based on the market values of the vessels is over 100%. Ben Graham suggested that investors buy NCAV stocks at two-thirds of the estimated value and PRGN meets that test by a wide margin.
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