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Seanergy Maritime Holdings expects better days for dry bulk shipping in the near future

Monday, 22 November 2010 | 18:42

With oversupply issues seen as overblown and solid cargo demand from China expected to continue in the coming months, Christina Anagnostara, Chief Financial Officer of Seanergy Maritime Holdings Corp., expects Cape and Panamax rates to find

additional support in the coming months. At the moment, Seanergy has secured charter coverage of 98% for 2010, 78% for 2011, 38% for 2012 and 19% for 2013 which is among the highest in the industry. "This provides cash flow stability, protection against the volatile freight rate environment and upside potential as five of our vessels in total are under profit sharing arrangements that allow us to participate in market upswings" said Anagnostara in an interview with Hellenic Shipping News Worldwide.
As for the oversupply issues, she mentioned that in the first nine months of 2010, deliveries were 40% of the projected 93 million deadweight tons. This is a perfect example of the uncertainty in the orderbook. Including scrapping estimates the global dry bulk fleet is expected to grow by 5.1%, 18.7%, 8.9% from 2010 to 2012. "We firmly believe that order book slippage will continue to lessen the sector's supply worries, especially when combined with the fact that a sizeable share of the world fleet is growing older than 20 years and will soon need replacing" she said.

Which were the main highlights from your company's third quarter and nine month results?

The third quarter of 2010 was very importantΒ  in our development as we successfully concluded the acquisition of the remaining minority interest in Maritime Capital Shipping Limited. In addition, on October 25, 2010 we announced the completion of the acquisition of the remaining 50% interest in Bulk Energy Transport Holdings and as a result Seanergy now owns 100% of MCS and BET and their fleets. These transactions increased the size of our wholly owned fleet to 20 vessels, significantly improved our revenue and profit generation capacity and simplified our balance sheet. These accretive acquisitions were paid for mainly in stock, as only $10 million out of the total purchase price of $62 million was in cash, thereby enabling Seanergy to preserve its liquidity and strengthen its capital structure.
For the third quarter of 2010, we recorded Net Revenue of $29.0 million compared to $22.4 million in the same quarter in 2009. Our average number of vessels during the third quarter was 20 as compared to 8.7 vessels in the same period of 2009 and the time charter equivalent (TCE) rate earned by our vessels was $16,153. Our EBITDA was $15.7 million. Adjusted EBITDA, which excludes losses on interest rate swap agreements, was $17.2 million and Net Income was $2.9 million or $0.03 per basic and diluted share.
For the first nine months of 2010, Net Revenue was $69.9 million as compared to $70.7 million in the same period in 2009. TCE rate earned by our vessels was $17,039. The Company operated a fleet of 15.4 vessels on average during the first nine months of 2010 as compared to an average of 6.9 vessels during the same period of 2009. EBITDA was $36.5 million. Adjusted EBITDA, which excludes loss on interest rate swaps, was $40.9 million and Net Income was $2.8 million or $0.03 per basic and diluted share.

How would you say the company fared when taking into account the state of the dry bulk freight market conditions?

During 2010 the dry bulk market has been extremely volatile. Our strategy in order to protect against the volatile freight market is to secure high employment coverage with first class charterers. Consistent with this strategy, during the third quarter we secured new medium term time charters for four of our vessels. We believe that these new time charters are with highly reputable charterers at attractive charter hire rates with upside potential as three of these time charters have profit sharing arrangements. Our charter coverage 98% for 2010, 78% for 2011, 38% for 2012 and 19% for 2013 is among the highest in the industry, which provides cash flow stability, protection against the volatile freight rate environment and upside potential as five of our vessels in total are under profit sharing arrangements that allow us to participate in market upswings.

What about your stock's valuation?

We believe that Seanergy underperform the market since its stock trades at about 25% discount compared to its peer group in terms of median EV/EBITDA 2011 based on Bloomberg quotes as of November, 16 2010. For that reason coupled with the fact that our focus on further fleet expansion continues as we work towards our goal to be a major publicly traded dry bulk company, we consider today's level of our stock very attractive as an entry point.

Oversupply issues have plagued the market this year. Are you more optimistic about 2011 or not?

Although the risk of oversupply is still a factor in the dry bulk market, the rate of actual deliveries remains unclear. Firstly, there are still important liquidity and financing concerns as we are still in the process of exiting the credit crisis. Banks are only keen to lend selectively to ship owners that have a proven track record in the industry. As asset values have taken a steep dive compared to a number of years ago, many ship owners are required to infuse more equity capital into their businesses. Secondly, industry participants remain skeptical concerning the ability of Greenfield shipyards with limited track record and expertise, to deliver vessels ordered in previous years, while at the same time handling the new orders that are placed. Thirdly, many newbuilding deliveries scheduled in 2011 were contracted at sharp premiums to today's prices. With freight rates as volatile as they are and at significantly lower levels than the average of a few years ago, we don't believe owners will elect to acquire all of the vessels ordered.
In the first nine months of 2010, deliveries were 40% of the projected 93 million deadweight tons. This is a perfect example of the uncertainty in the orderbook. Including scrapping estimates the global dry bulk fleet is expected to grow by 5.1%, 18.7%, 8.9% from 2010 to 2012. We firmly believe that order book slippage will continue to lessen the sector's supply worries, especially when combined with the fact that a sizeable share of the world fleet is growing older than 20 years and will soon need replacing. Furthermore, as the size of the world fleet increases, congestion in ports will increase and so will congestion in shipyards for scheduled dry dockings. This should help in the absorption of excess tonnage.

Still, this year we saw many newbuilding orders which are difficult to justify given the already huge orderbook. Are valuations really that low? What's your opinion on the matter?

Stronger freight rate environments have led to firmer asset values, but despite this, asset values still remain at historically low levels. As far as our opinion on fleet expansion is concerned, we are inclined towards prudent fleet expansion that is likely to offer good value for our company's shareholders in the long term. Although nothing is to be ruled out, such opportunities in the current market environment are more likely to arise when acquiring whole fleets (such as BET and MCS) or in resale deals.

How do you think the Baltic Dry Index will average next year, compared to 2010?

Demand for iron ore, coal and grains will be the main factor impacting the BDI over the next year, while geographically all eyes are on demand in the Far East region. Chinese imports of iron ore are strengthening in the fourth quarter, according to the China Iron and Steel Association (CISA), as this is a time of inventory build-up and major ore producers such as Vale and Rio Tinto have lowered prices. This is likely to provide support to Cape and Panamax rates over the coming months. However, it should be noted that the continued adherence to quarterly pricing of iron ore imports, as reiterated by Baosteel Chairman Xu Lejiang this week, is likely to keep freight rate volatility high, compared to the old annual pricing system.
According to data from the China Coal Transport and Distribution Association coal inventories are low as power stations have started stockpiling coal for a colder than average winter season. The same is the case in India, where coal-based power generation has increased markedly, while stockpiles are running low. Furthermore, as the coal mining industry consolidates, China shut 1,355 small coal mines with production capacity of 125.19 million tonnes in the first nine months of this year, according to earlier data released by the National Energy Administration, which is going to add to short term domestic supply concerns in 2011. This combination of high demand for coal along with severe limitations in sourcing coal domestically is going to provide a significant boost in the seaborne coal trade. Smaller vessel freight rates are also likely to find support from the intra-coastal coal trade in China, where transportation of coal by trucks has proved very ineffective.
In the grain trade, the harvest season is bound to increase trade activity and provide a boost to rates on sub-Panamax vessels. Furthermore, the curtailing of Russian grain exports until at least the second quarter of 2011 is likely to force importers to opt for alternative sources, such as the U.S. which will boost ton-mile demand.
Apart from China, it shouldn't be neglected that demand for major and minor bulk cargoes can potentially be driven by economic activity in other regions such as India and Brazil. To sum up, freight rates in 2011 are expected to find support on a number of factors and are likely to remain at the same levels with those of 2010, while the volatility we experienced this year will be present as well.

Which ship sector appears to offer the most attractive prospects today?

Since there have been fewer deliveries of smaller vessels so far, as well as a considerably smaller newbuilding order backlog, sub-Panamax vessels are more attractive for ship owners. Furthermore, a much larger proportion of the world fleet is over 25 years of age and will need to be withdrawn or replaced, as compared to larger vessel types. This should work to alleviate future supply concerns to an important extent. Seanergy is very well positioned to take advantage of such market dynamics given that Handysize vessels constitute a significant portion of our fleet.

Will we see more investments from Seanergy in the near future and if so, which ship segment would you say you are looking into the most?

Clearly for Seanergy we continue to investigate and inspect vessel and fleet acquisition opportunities and we are optimistic that opportunities to expand the fleet are still out there.Β  However, our aim is to safeguard the long-term interest of shareholders and, as such, we must determine both the current and long-term viability of a vessel on a case-by-case basis. As we have mentioned, Handysize is an attractive segment but we are looking at other segments as well if the economics are right. For us any vessel in any segment that its IRR is higher than the cost of capital, is acceptable provided that the purchase price to EBITDA is less or equal than 6.5 times and the project is accretive in terms of EPS.

What about cargo demand in the future? Is a booming China enough on its own to sustain the global fleet growth?

Economic growth and stability in emerging markets is very important to dry bulk demand and China's growth over the next years is expected to remain strong enough to support freight rates. That said we believe that China's focus on controlling lending and preventing the development of asset price bubbles is going to be favorable for the dry bulk industry in the long term, as the last thing we need today is China to experience the same problems as most developed countries.
We believe that dry bulk fundamentals remain stable as we expect demand for core commodities, namely iron ore and coal, to remain strong in China and other emerging markets. Industry sources project that over the next 10 years, China's GDP will continue growing at 7% per year on average as urbanization is going to be the main driver of demand for domestic consumption, raw materials and steel. But, even in the case where China is unable to maintain its rate of growth over the coming years, we believe that the demand curve is still strong because of India and Brazil. Soon Africa is also expected to enter the playbook. India's GDP over the next two years is expected to grow at an annual rate of 9%. As the focus of global economic activity shifts towards emerging markets, we will see a number of different regions playing an important role in the production and trade of raw materials and finished products. I do not believe that China is going to be the sole engine of growth in the long run. In the near term, rates in the fourth quarter will improve as a result of lower iron ore contracts and the build up of iron ore and coal inventory in China. Harvest season in the northern hemisphere is the catalyst on the smaller vessel segments.

Nikos Roussanoglou, Hellenic Shipping News Worldwide

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