NMM - Navios Maritime Partners: Will Activist Letter Improved Alignment And Strong Markets Drive Returns?

2023-12-05 11:00:00 ET

Summary

• Navios Maritime Partners has traded at abysmal valuation ranges over most of the past 2-3 years, despite strong operational results.
• The poor valuation is driven by a combination of questionable governance structures, lackluster dividends, and a confusing capital allocation strategy.
• A recent activist letter published by Ned Sherwood (who now owns a 5.4% stake), highlights frustration with current management and underlines the value case.
• We estimate NMM has a $99/unit net-asset-value ("NAV"), yet NMM currently trades in the mid-$20s, a gargantuan discount.
• Is NMM worth another look now that CEO Angeliki Frangou's ownership stake is set to triple, dry bulk rates are surging, and activists are paying attention?

Navios Maritime Partners Overview

Navios Maritime Partners ( NMM ) is a diversified shipowner with exposure to three primary shipping segments: dry bulk, containerships, and crude/product tankers. The massive pro forma fleet (including newbuilds) is composed of 80 dry bulk vessels, 50 tankers, and 47 containerships, comprising one of the largest publicly traded fleets in the world with 177 total vessels. Despite this formidable (and wildly profitable) armada, at current pricing in the mid-$20s, NMM trades at a relatively anemic market capitalization of just $800M, a mere fraction of its estimated net asset value ("NAV"), which likely stands somewhere between our recent estimate of $99.22/unit and Jefferies' analyst Omar Nokta's previous estimate of $117.60/unit.

This means that one of the world's largest and most profitable shipping fleets currently trades at a discount of somewhere between 74-78%! Put another way, if NMM units traded at the actual fleet valuation minus associated debt, there could be an upside of over 4x for current units. Unfortunately, there are some clear reasons NMM trades at this wild discount. Most of which are clearly outlined in a recent letter , published by activist investor Ned Sherwood on 28 November 2023. I am also a long-term investor in NMM units and share many of the same sentiments.

This report reviews the recent activist letter, assesses the current situation at NMM, and underscores three reasons why I believe NMM might be worth another look at this time:

1. Improvement of alignment as CEO Angeliki Frangou's ownership stake is set to increase by around 3x in the coming weeks.
2. Surging dry bulk spot market rates, which account for the lion's share of NMM's current market exposure.
3. Increased interest by activist investors and a general trend of improving corporate governance across the shipping industry.

Ultimately, I believe NMM is probably worth about $40-$50/unit at this time, as I still assign a notable 50-60% discount to the recent assessment of a $99/unit NAV due to substantial corporate governance concerns. Although this target range still includes massive discounts to NAV, this still represents a 50-90% upside from recent trading levels.

The Activist Letter

The recent letter from Ned Sherwood calls out Navios management for a number of valid reasons, most of which will be reviewed below along with my own commentary.

Abysmal Returns and Strange Capital Allocation

Sherwood properly excoriates Navios for the abysmal level of shareholder returns over the past two years, which includes a dividend payout ratio of just 1.2% ($0.80 over two years vs. $32.49 in EPS). Despite trading at a massive discount to NAV, Navios has also refused to repurchase units, even while plowing billions into a massive fleet renewal program.

This is a very confusing capital allocation decision. Why would a typical management team prefer to invest in new ships at 100% of net asset value as opposed to repurchasing shares for as cheap as 20% of net asset value?

Conflict: Related Party Shipmanagement

The capital allocation at Navios is bewildering, but it is easily explained by gargantuan conflicts of interest. The insider CEO, Angeliki Frangou, makes most of her profits not from NMM units nor from NMM salary, but rather from her privately-held ship management company which also controls all of the ship management contracts at NMM. Therefore, it might appear that Ms. Frangou is more likely to improve her fortunes by growing the fleet rather than by boosting NMM's shareholder returns or by increasing NMM's trading price.

Conflict: Recent NM Privatization

Perhaps even more importantly, Ms. Frangou has recently completed the takeover of Navios Maritime Holdings ( NM ), a small firm which only has two substantial assets: an opaque South American logistics firm and 3.183M units in NMM. NM was recently acquired by Ms. Frangou for $2.28/sh, which was a slight improvement from the initial offer of $1.84/sh. As of 30 June (included in a September filing ), NM had 22.83M shares outstanding. If NMM traded around its NAV of $99/unit versus the recent trading range in the low-$20s, then NM's valuation could have ballooned from the $2s into the $10s!

It could therefore be argued that keeping NMM trading at a pittance of 'true value' could be critical to a longer-term goal of privatizing NM. While Ms. Frangou's ongoing takeover of NM appears to be destined for success, there is a silver lining in these otherwise dark clouds: once NM is gone, Ms. Frangou's direct ownership in NMM is set to balloon from roughly 5.1% (1.55M units reported in early-2023 ) to roughly 15.6% (1.55M plus NM's 3.18M units). Once Ms. Frangou owns all of NM and her stake has more than tripled, there is increased incentive to drive NMM closer to its 'proper' valuation range of somewhere between $99 and $117 (VIE and Jefferies' estimates of NAV).

Conflict: Protectionist Governance Structure

Sherwood also calls out Navios for its anti-takeover provisions, which are included as part of its corporate charter in the Marshall Islands. Specifically, NMM restricts unitholders from voting beyond a total level of 5%. Even if one unitholder theoretically amassed a sizeable 15% stake, their total votes would only count for 5%. Another major holder, Pilgrim Global, reported a 10.1% stake back in mid-May. Although Pilgrim has not issued any activist demands (and has filed a 'regular' 13-G form), in theory, their votes would only count for 5% if Pilgrim decided to try to take action along with Sherwood.

NMM is organized as a limited partnership ("LP") whereas soon-to-be privatized NM was the original general partner ("GP"). Ms. Frangou will soon have control of over 15% of LP units plus the powerful GP. It would take a 50.1% vote of LP units to make any meaningful changes, which is practically impossible given the 5.0% voting cap. Add in the massive conflict of interest due to the related-party-controlled private ship management group, and it becomes obvious why NMM trades at such a larger discount to NAV.

Potential Actions?

Sherwood's letter includes four possible suggestions to "unlock massive unitholder value:

In my opinion, there is nearly zero chance NMM will voluntarily remove its anti-takeover provisions (#1) nor will they sell off the fleet to other owners (#3). However, merging the privately held ship management business (#2) seems plausible and eventually shifting to heavy share repurchases (#4) seems to be a massive win-win idea.

Action: Merge Ship Management Business?

Ms. Frangou's privately held ship management company used to be part of a publicly traded entity (Navios Maritime Holdings, NM), until a liquidity and insolvency crisis in mid-2019 resulted in the sale of this business to Ms. Frangou for just $20M. If NMM would reacquire the management business and ideally eliminate the GP ownership in favor of a conventional corporate structure, such a transaction would reduce the conflicts of interest while also making NMM far more appealing to outside investors.

If Ms. Frangou would receive NMM units in exchange for the management business, this could grow her stake closer to 20-25%, which would both increase alignment. NMM could convert to a regular corporate structure and given Frangou's ownership of 20-25%, this would also reduce the need for draconian anti-takeover provisions, thus also solving Sherwood's action item #1.

Action: Shift to Repurchases?

NMM trades at an enormous discount to NAV, so share repurchases could go a long way to close this gap. NMM has already approved a $100M share repurchase program, so they now just need to take action. If Navios repurchased 4M units at $25.00, this would boost the current NAV from $99/unit to $110/unit overnight while also increasing EPS by over 15%.

Management has previously mentioned a target of raising a $2M/vessel cash threshold and has suggested they also have a longer-term ultra-conservative LTV ratio of just 20-25%. It would seem to be more efficient to accept either slightly higher leverage or to sell additional older vessels in favor of heavier repurchases. Any time a company can buy $1.00 of assets for just 20-30 cents, the choice should be clear! Once Ms. Frangou owns a larger stake in NMM, we might see more accretive actions.

Dry Bulk Market Heating Up

Although investors can celebrate better management alignment and an activist letter might be some encouragement, the best medicine is via improved market rates! Increased congestion related to the Panama Canal, strong import demand from China, and other seasonal factors have led to dry bulk markets recently going ballistic. The Capesize market in particular has surged from just $15kpd a few weeks ago to levels in the $50kpd range as of 1 December.

NMM earnings are set to climb into Q4-23 and will likely also be strong at the start of 2024. As of the most recent SEC filing (pg. 5-6), posted on 22 November 2023, NMM has 11 Capesize vessels on direct index/spot exposure and another 15 Capesize vessels will shift to index/spot exposure in December.

If dry bulk rates hold up for a few months, NMM's free cash flow could surge over the coming months, driving up EPS and easily building enough liquidity to support a $100-$200M repurchase program during 2024. Depending on market conditions NMM trades somewhere between a forward P/E of 1.5-2.5x for FY24.

Conclusion: Risky, But Worth Another Look

NMM has significant warts; however, the discount is massive and insider alignment is slowly improving. While I certainly support the recent activist letter, the letter alone is unlikely to drive significant changes. However, it is clear that activist investors are paying attention. The combination of improved alignment, more activist attention, and rapidly improving dry bulk markets could lead to a stronger market assessment of NMM units into 2024.

I believe NMM is worth another look and it is a top position in my current speculative portfolio. Our official 'fair value estimate' for NMM is $40/unit, but if management takes more accretive actions in 2024, then units could feasibly trade much closer to our current NAV estimate of $99/unit.

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