EDRY - EuroDry Ltd.: Buy On Discounted Valuation Strong Balance Sheet And Ongoing Share Repurchases

2023-06-20 13:58:00 ET

Summary

• Despite an approximately 40% decrease in the Baltic Panamax Index since the time of my last update, EuroDry's shares have held up well.
• Outperformance relative to peers, among other things, likely due to the fact that the company has repurchased approximately 7% of outstanding shares in recent quarters.
• Last month, the company reported seasonally weak first quarter results but still managed to generate $2.8 million in free cash flow.
• EuroDry continues to trade at an approximately 73% discount to NAV which I consider too high for a company that has been treating common shareholders reasonably well in recent years.
• Even when considering the current charter rate environment and company-specific headwinds like the heavy 2024 drydocking schedule and potential cancellation of a lucrative time charter contract, I am keeping my "Buy" rating on the shares based on heavily discounted valuation, low net debt levels, sufficient liquidity and ongoing share repurchases.

Note:

I have covered EuroDry Ltd. ( EDRY ) previously, so investors should view this as an update to my earlier articles on the company.

It has been nine months since my last update on small, Greece-based dry bulk shipper EuroDry Ltd. ("EuroDry").

While the stock price is up just slightly since that time, the Baltic Panamax Index ("BPI") has declined by an eye-catching 40% mostly due to lower-than-expected global economic growth and the Chinese real estate sector struggling to regain its footing.

In fact, the company's shares have outperformed peers by a wide margin largely due to a number of factors:

1. EuroDry was already trading at a massive discount to net asset value ("NAV") at the time of my last article.
2. Over the past few quarters, the company has repurchased approximately 7% of outstanding shares.
3. Unlike most of its peers, EuroDry does not pay a dividend. As a result, shares have not experienced selling pressure from income-oriented investors.

Last month, EuroDry reported seasonally weak first quarter results with the company's average daily time charter equivalent rate of $10,674 down heavily on both a sequential and year-over-year basis and well below all-in break-even levels:

As a result, EuroDry recorded a net loss for the first quarter while Adjusted EBITDA deteriorated by more than 80% year-over-year to $2.36 million:

The company generated free cash flow of $2.8 million and ended the quarter with $20.4 million in unrestricted cash and cash equivalents.

Overall, the balance sheet remains in decent shape with net debt of approximately $43 million representing just 22.5% of estimated fleet value:

Valuation-wise, EuroDry continues to trade at an approximately 73% discount to NAV which I consider too high for a company that has managed to avoid outsized dilution for common shareholders ever since its spin-off from Euroseas Ltd. ( ESEA ) in mid-2018 and redeemed all of its expensive Series B Preferred Stock last year.

Apparently, investors are discounting the lack of dividend payments and high average age of EuroDry's Panamax fleet with three vessels being due for their 20-year special periodic survey ("SPS") next year.

In addition, the Ultramax vessel Good Heart and the Supramax carrier Molyvos Luck will be due for their 10-year SPS in 2024. In aggregate, 50% of the company's fleet will have to undergo expensive drydockings next year.

Given this issue and considering a surprisingly strong second hand vessel market, management might very well decide to dispose of one or more of the affected Panamax carriers in the not-too-distant future.

In contrast to the majority of its peers, EuroDry does not provide a mid-quarter outlook in form of a quarter-to-date daily TCE rate but on May 15, fixed rate coverage for the remainder of 2023 was 46.2%:

Based on the rates disclosed in the slide above, the company's second quarter results should improve from seasonally weak Q1 levels despite some impact from drydockings and the potential cancellation of the lucrative time charter for the Ultramax carrier Good Heart after recent detention by the U.S. Coast Guard ("USGC") has resulted in the vessel missing its lay/can period .

In fact, the deficiencies discovered by the USGC appear to have resulted in the requirement to drydock the vessel for repairs in the first half of May.

Looking further ahead, a potential recovery in dry bulk charter rates will require economic growth headwinds to abate and particularly the Chinese real estate sector to come back strongly which is anything but certain at this point.

Despite the uncertain industry outlook, I would like to see management becoming somewhat more aggressive in terms of share repurchases as the company still has approximately $7 million left under the program which will be up for board review in less than three months.

That said, the anemic trading volume in the company's shares doesn't exactly help things with this regard.

Bottom Line

Considering the weakness in dry bulk charter rates in recent quarters, EuroDry Ltd.'s stock has performed reasonably well since my last update on the company nine months ago.

Even when considering the current charter rate environment and company-specific headwinds like the heavy 2024 drydocking schedule and potential cancellation of a lucrative time charter contract, I am keeping my " Buy " rating on the shares based on heavily discounted valuation, low net debt levels, sufficient liquidity and ongoing share repurchases.

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