GNK - Pangaea Logistics Solutions: Strong Execution But Valuation Remains A Concern

2023-08-11 06:33:06 ET

Summary

• Pangaea Logistics Solutions is a unique dry bulk shipper with a diversified strategy and stronghold in the ice class niche.
• On Wednesday, the company reported mixed second quarter results, with strong time charter equivalent rates not translating into significant cash generation.
• With the third quarter representing the peak of the arctic trade season, the company's projected average daily TCE rate of $16,700 is outperforming quarter-to-date market averages by almost 100%.
• Pangaea remains committed to paying a fixed quarterly cash dividend of $0.10 per common share.
• With Pangaea valued very close to estimated NAV while the majority of peers are currently changing hands at substantial discounts, I am reiterating my "Hold" rating on the shares.

Note:

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

Pangaea Logistics Solutions, Ltd. or "Pangaea" is a Bermuda-based dry bulk shipping company with somewhat unique characteristics.

Unlike most industry players, Pangaea doesn't exclusively focus on voyage or time charters but also on so-called "Contracts of Affreightment" ("COAs").

COAs are agreements providing for the transportation between specified points for a specific quantity of cargo over a specific time period but without designating specific vessels or voyage schedules, thereby allowing flexibility in scheduling. COAs can either have a fixed rate or a market-related rate. The company’s COAs typically extend for a period of one to five years.

Moreover, the company is a leader in the ice class niche. Ice class trading includes service in ice-restricted areas during both the winter (Baltic Sea and Gulf of St. Lawrence) and summer (Arctic Ocean). Trading during the ice seasons has provided superior profit margins, rewarding Pangaea for its investment in specialized vessels and the expertise it has developed working in harsh environments.

Pangaea is employing an asset-light strategy, with a substantial part of the fleet chartered-in on short-term contracts to allow for quick adoption to changes in the market environment.

That said, the company has increased its owned fleet in recent quarters by adding a number of secondhand vessels as well as taking delivery of four 50%-owned newbuild Post-Panamax ice class carriers:

Please note that Pangaea consolidates two joint ventures owning the company's Panamax and Post-Panamax ice class carriers, with Pangaea's respective stake incorporated in the table above. Consequently, only the vessel values attributable to the company are included in my estimates.

After backing out $77.3 million in debt attributable to Pangea's joint venture partners, net asset value ("NAV") per share calculates to approximately $6.25:

Moreover, judging by the company's outperformance in time charter equivalent ("TCE") rates relative to the industry benchmark, additional value could be attributed to the company's COAs:

That said, the somewhat defensive nature of the company's long-term COAs usually results in Pangaea outperforming the market by a wide margin in times of weakness while the company tends to slightly underperform spot market-focused competitors during rallies in charter rates.

On Wednesday, Pangaea reported mixed second quarter results. While the company's average daily time charter equivalent ("TCE") rate of $15,558 exceeded the benchmark average Baltic Panamax and Supramax indices by almost 50%, higher working capital levels resulted in very limited cash flow from operations.

After accounting for the recent purchase of the Supramax carrier Bulk Prudence and a number of port and terminal operations in the U.S. as well as quarterly dividend payments, reported cash was down by a whopping $45 million quarter-over-quarter to $84.3 million.

That said, Pangaea still has ample liquidity to continue distributions and make further opportunistic acquisitions.

With the third quarter representing the peak of the arctic trade season, the company's projected average daily TCE rate of $16,700 is outperforming quarter-to-date market averages by almost 100%.

In combination with some working capital improvements, cash flows should increase quite meaningfully in Q3.

Pangaea remains committed to paying a fixed quarterly cash dividend of $0.10 per common share:

Even when taking into account Thursday's selloff, shares have outperformed industry peers year-to-date. From a net asset value perspective, the company looks close to fully valued, at least when not assigning meaningful value to the company COAs and port operations.

In addition, considering the current interest environment, the company's fixed quarterly cash dividend of $0.10 per share doesn't look that impressive anymore, but investors are likely attracted by the fixed, reliable payout relative to the variable dividend policies employed by most peers.

Bottom Line

There's a lot to like about Pangaea Logistics Solutions' strategy of serving higher-yielding market niches in a flexible manner without being entirely dependent on certain key commodities like iron ore or coal.

Particularly in times of market weakness, the company tends to outperform dry bulk shipping peers by a wide margin.

Moreover, Pangaea's fixed quarterly cash dividend of $0.10 per share appears to be safe for the time being.

With the company still valued very close to estimated NAV while the majority of peers are currently changing hands at discounts between 20% and 50%, I am reiterating my " Hold " rating on the shares and would advise investors to consider cheaper competitors like Safe Bulkers ( SB ) or Genco Shipping & Trading ( GNK ).

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