2024-01-01 23:15:05 ET
Summary
- Similar to peers, shares of small, Greece-based dry bulk shipper EuroDry have been in demand following a recovery in dry bulk charter rates over the past two months.
- Forward Freight Agreement rates for the historically weak first quarter are surprisingly strong.
- Q4 results will also benefit from the recent addition of three Ultramax vessels.
- Ongoing Panama Canal limitations in combination with a very low orderbook and projected further increase in ton-miles could set up dry bulk shipping stocks for additional gains next year.
- Consequently, I am reiterating my "Buy" rating based on discounted valuation, moderate debt levels, and ongoing stock buybacks while assigning a price target of $25.
Note:
I have covered EuroDry Ltd. ( EDRY ) previously, so investors should view this as an update to my earlier articles on the company.
Similar to peers, shares of small, Greece-based dry bulk shipper EuroDry Ltd. ("EuroDry") have been in demand following a recovery in dry bulk charter rates over the past two months.
Even after the recent pullback, the Baltic Panamax Index ("BPI") is still trading substantially above the lows witnessed earlier this year:
In addition, Forward Freight Agreement ("FFA") rates for the seasonally weak first quarter are surprisingly strong:
The recent move in Panamax charter rates has been attributed to a number of reasons:
- Panama Canal limitations with wait times for bulk carriers increasing to several weeks
- Strong Chinese imports of agricultural products
- Congestion at export ports in Brazil, Indonesia, and Australia
Given these tailwinds, it is fair to assume that the company's upcoming Q4 results will show substantial sequential improvement.
Last month, EuroDry reported third quarter results largely in line with muted expectations:
However, with only 50.7% of available days for the fourth quarter having been fixed as of the date of the Q3 earnings report, analysts are rightfully expecting the company to report a profitable Q4:
Moreover, Q4 results will benefit from the recent addition of three Ultramax bulk carriers:
We are pleased to announce the acquisition of three Eco Ultramax drybulk vessels, all built during 2014 and 2015. The vessels are sisterships of our own M/V Alexandros P which was built at the same shipyard in 2017. This acquisition further expands our modern fleet cluster at a time when we believe that the market fundamentals, especially the low orderbook, are very supportive of a healthy market over the next two to three years. While demand side -geopolitical and economic- uncertainties remain, we believe that the risks are tilted to the upside and the present level of the market presents a great opportunity to expand our fleet with high quality units of known design. We expect these vessels to make significant contributions to our EBITDA.
Please note that two of these vessels are minority-owned by investors represented by NRP Project Finance AS , a leading Norwegian manager and facilitator of direct investments within the maritime space and private maritime funds.
As a result, EuroDry's fleet has increased from ten to thirteen vessels with an average age of 12.5 years and estimated value of approximately $215 million:
During the questions-and-answers session of the Q3 conference call , management discussed plans to dispose of the company's aging Panamax fleet at an opportune time:
We will definitely be at some point replacing the older vessels with newer vessels. This transition has to happen, and at some point it will happen. When we think the time is right, we will do it. Hopefully within the next couple of years we will see a stronger market, which will make it more interesting for us to sell some of the older vessels.
However, with 60% of the Panamax fleet due for its 20-year special periodic survey next year, management would be well-served to consider near-term disposals of the respective vessels.
Even after the 25%+ move over the past two months, EuroDry's shares are still trading at a large discount to estimated net asset value ("NAV") despite limited corporate governance concerns and an active share buyback program:
Unfortunately, I do not expect the company's relative valuation to catch up with some of its larger peers anytime soon due to a number of issues:
- lack of scale
- very old Panamax fleet
- Greek family-controlled
- lack of dividend payments
- very low trading volume
However, with the Panama Canal limitations unlikely to be resolved anytime soon and some additional disruptions from the situation in the Red Sea in combination with a very low orderbook and projected further increase in ton-miles could set up dry bulk shipping stocks for additional gains next year.
Keep in mind that the introduction of new environmental regulations could result in more slow steaming or even some scrapping activity thus reducing available vessel supply even further next year.
As usual, much will depend on China's demand for key commodities like iron ore, coal, bauxite, and agricultural products.
Bottom Line
Following a largely disappointing 2023 for dry bulk shipping, the final quarter of the year is expected to show significant improvement for EuroDry and the vast majority of its peers.
Moreover, based on current FFAs, the usually weak first quarter might actually be profitable for most industry players, including EuroDry.
With ongoing Panama Canal limitations providing support to charter rates going into 2024, dry bulk shipping stocks might see further gains.
While EuroDry's shares are not likely to close the valuation gap to larger peers anytime soon, the current discount to NAV appears excessive.
Assigning a still hefty 50% discount would yield a $25 price target for the shares.
Consequently, I am reiterating my " Buy " rating based on discounted valuation, moderate debt levels, and ongoing stock buybacks.
However, investors should be wary of the shares' limited liquidity.
Risk Factors
Despite the recent strength in charter rates, dry bulk shipping remains a seasonal and very volatile market with heavy dependence on China.
Slowing Chinese imports of iron ore, coal, and agricultural products would almost certainly put renewed pressure on charter rates.
In addition, there are some company-specific issues like the near-term requirement to replace the aging Panamax fleet and the shares' anemic trading volume which often results in substantial Bid/Ask spreads.
Given this issue, investors looking to take (or dispose of) a position in EuroDry should avoid placing market orders.
For further details see:
EuroDry: Buy On Promising 2024 Dry Bulk Setup And Discounted Valuation