SB - Seanergy Maritime: Reiterating Buy On Rally In Capesize Charter Rates

2023-10-09 14:15:26 ET

Summary

• Seanergy Maritime Holdings is likely to be a prime beneficiary of the recent rally in Capesize charter rates due to its exclusive focus on the industry's largest class.
• With the BCI at 52-week highs, Seanergy Maritime's fourth quarter profitability and cash flow generation should improve quite meaningfully from the mediocre levels witnessed for most of 2023.
• Assuming an average daily TCE rate of $20,000 for the second half of the year, H2 EBITDA would double from the seasonally weaker first half.
• Even with shares at six-month highs, the company is still trading at a 43% discount to net asset value.
• There is the potential for further accumulation by Mr. Konstantakopoulos or other Greek shipowners looking to get exposure to the Capesize segment at discounted valuations.
• I am reiterating my "Buy" rating on Seanergy Maritime Holdings based on my expectation for the company's Q4 results likely being substantially better than the current analyst consensus and the possible stock accumulation.

Note:

I have previously covered Seanergy Maritime Holdings ( SHIP ), so investors should view this as an update to my earlier articles on the company.

Greece-based dry bulk shipper Seanergy Maritime Holdings ("Seanergy" or "Seanergy Maritime") is likely to be a prime beneficiary of the recent rally in Capesize charter rates due its exclusive focus on the industry's largest vessel class.

The company’s operating fleet currently consists of 16 Capesize vessels with an average age of approximately 12.5 years and an aggregate cargo carrying capacity of approximately 2,846,965 dwt with all vessels being employed on index-linked time charters.

In addition, the company will soon take delivery of a 12-year old Newcastlemax carrier which will be bareboat chartered-in for twelve months with an option to purchase the vessel for $20.2 million. Upon delivery, the vessel will commence an index-linked time charter agreement based on a significant premium over the Baltic Capesize Index ("BCI") .

With the BCI at 52-week highs despite perceived demand headwinds from the Chinese Golden Week holiday, Seanergy Maritime's fourth quarter profitability and cash flow generation should improve quite meaningfully from the mediocre levels witnessed for most of 2023.

However, earlier this year, the company decided to hedge some of its index-linked exposure by converting four vessels to fixed charter rates for the remainder of the year at an average daily time charter equivalent ("TCE") of approximately $20,500 thus limiting the potential upside for Q4 somewhat.

Moreover, current forward freight agreement ("FFA") rates indicate expectations of the BCI giving back at least some of the recent gains in the near future:

Some of the recent strength in the BCI has been attributed to Chinese coal imports from Australia reaching multi-year highs with Capesizes being the preferred vessel class for the Australia coal trade as well as strong levels of iron ore shipments from Brazil.

According to Arrow Shipbroking Group , the recent rally might have more legs:

We believe that the rally could extend for a more weeks as we appear to be in a demand sweet-spot with West African volumes recovering whilst Brazil is yet to see the seasonal rains begin. Furthermore, the market looks to have gained additional impetus from FFA flow and positive sentiment. But once the seasonality plays out and the balance is restored, we expect the freight market to cool, although rates are unlikely to retreat to the summer lows within Q4.

But it doesn't require TCE rates of $25,000+ for Seanergy Maritime to deliver solid results:

Assuming an average daily TCE rate of $20,000 for the second half of the year, H2 EBITDA would increase to approximately $40 million, more than double the number achieved in the seasonally weaker first half of the year.

A near-term delivery of the above-discussed Newcastlemax vessel would improve the company's Q4 outlook even further.

Despite somewhat limited financial resources, the company utilized $1.6 million to repurchase 362,161 shares in the second quarter and expects to redeem $3.2 million in remaining convertible notes until year end.

Just recently, Costamare Inc.'s ( CMRE ) Chairman and CEO Konstantinos V. Konstantakopoulos accumulated a 5.1% stake in Seanergy Maritime but so far has abstained from publicly stating his intentions regarding the company.

With second hand vessel values not yet reflecting the recent rally in charter rates and shares trading at six-month highs, the company's discount to estimated net asset value ("NAV") has narrowed to approximately 43%, very similar to peer Safe Bulkers ( SB ):

While Safe Bulkers is paying a far more generous dividend, its exposure to the Capesize segment remains limited to a little over 30% of its fleet based on carrying capacity.

Bottom Line

While the recent rally in Capesize charter rates is to some extent reflected in the company's share price, I am reiterating my " Buy " rating on Seanergy Maritime Holdings based on my expectation for the company's Q4 results likely being substantially better than the current analyst consensus and the potential for further accumulation by Mr. Konstantakopoulos or other Greek shipowners looking to get exposure to the Capesize segment at discounted valuations.

Should Capesize charter rates continue to increase, the share price is likely to follow suit.

Risk Factors

Please note that the Capesize segment remains highly dependent on Chinese iron ore imports so any meaningful reduction in iron ore shipments to China would negatively impact charter rates.

In addition, dry bulk shipping is subject to seasonality with Q1 usually being the weakest quarter of the year.

Lastly, a highly cyclical industry like shipping requires investors to keep a close eye on charter rate developments in order to avoid potentially outsized losses.

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