ESEA - Euroseas Ltd. (ESEA) - Forward Visibility High and Improving
Tight supply and higher container rates are positives for upcoming charters. Based on Contex indices, rates have continued to move up in 3Q2021 and term charters remain common. Our current EBITDA estimates assume that the Corfu/Evridiki/Astoria/Aegean Express feeders will soon secure longer term work at charter rates in the north of $25.0k/day ranges and the Oakland will remain chartered at close to the current TCE rate.Fine tuning 2021 EBITDA estimate to $47.4 million based on TCE rates of $17.4k/day. The Diamantis P charter expanded forward cover to 96% at TCE rates of $16.7k/day. Forward cover was already high but the recent Spetses and Diamantis P charters had a positive impact and moved the average rate up by $1.0k/day. Since the container market has been stronger than expected and charters have become longer, only 2% of 3Q2021 available days and 14% of 4Q2021 available days are open.Visibility into next year is the highest in more than a decade. Fine tuning 2022 EBITDA estimate to $70.6 million based on TCE rates of $23.6k/day. The Diamantis P charter expanded forward cover to 69% at TCE rates of $20.6k/day from 62% at TCE rates of $19.8k/day. Forward cover should move higher with upcoming charters on the three feeders and one intermediate. While the forward cover is not as high as 2021, the average rate is ~25% higher and contracted EBITDA approximates $42.4 million.Capital structure improving due to strong cash flow. Net debt dropped to $51.9 million and all of the preferred stock was converted. Refinancing for upcoming maturity of $12 million is in place. With improved visibility and strong cash flow, net debt is expected to drop to $31.9 million in 4Q2021 and might be below zero in 4Q2022 even after two new builds. Absent an acquisition, a regular dividend and/or special dividend might be paid by yearend 2021.Maintain Outperform rating and price target of $30.00/share. Our container market outlook stays favorable and numerous longer term charters at higher rates create forward cash flow visibility. Even though the stock was up 325% in 1H2021 and is recovering from the 18% drop in July, the stock is still down ~7% in 3Q2021. We believe that the current valuation remains attractive and the favorable risk/reward profile warrants a positive rating. Moreover, improving operating results and declining financial leverage should allow shareholder friendly moves, like paying a regular and/or special dividend. Read More >>