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Aircraft owners have had a rough time during the pandemic, but shipowners have been moving forward — and for investors following the sector, there appears to be more upside.
Key indicators of shipping activity, such as the Baltic Exchange’s dry bulk index, surged amid the pandemic recovery, reaching levels not seen since the early 2000s. The index has now retreated, but remains at elevated levels.
Fleet of publicly listed shipping companies, from funds to similar Clarkson, a shipbroker, has seen their shares soar. The listed funds segment of the London market is particularly popular, as income-focused investors have backed two asset-backed funds that own ships: Tufton Oceanic Assets, which listed in 2018, and Taylor Maritime Investments, which listed last year. I have stakes in both.
The stock prices of these closed-end investment companies have all experienced rapid appreciation. That has pushed their once generous 7% dividend yield down to slightly less risky 4.9% and 5.9%, respectively. The cynic might think that with the shipping market stabilizing, these funds are the best behind it – maybe even cool down if we see an energy-induced recession – but I think they may still reward patient investors .
It is important to understand the characteristics of both types of funds. Both started out as income-focused vehicles, but benefited from a substantial increase in net asset value as the vessel appreciated. That means both parties have been busy raising additional funds in recent months.
They’ve been tempted to buy the right second-hand vessel – the average age of Taylor Maritime’s fleet is 11 years – and then trade the vessel as purchase prices soar. Tufton recently spun off container ship Vicuna for $18 million, achieving a net internal rate of return of 46% over several years.
Both avoid the pitfalls of previously listed asset-backed income vehicles, such as aircraft leasing funds, which use complex financial engineering, including large amounts of debt and a layer of equity. Both have large fleets – 19 for the Tufton I last visited and 30 for Taylor Maritime – and they are not as advanced as the aircraft leasing fund’s massive, gleaming A380.
The funds also avoid reliance on one large lessor and have fairly short leases, ranging from a few months to a few years.
But there are important differences between them. Tufton has a more diverse vessel portfolio, including an early focus on container ships, and a smaller category of chemical tankers and bulk carriers called Handysizes. Taylor Maritime focuses primarily on Handysize bulk carriers and has also invested considerable capital in a separate entity called Grindrod Shipping, an international shipping company listed in the United States and South Africa with a fleet of 25 ships mainly composed of A modern fleet of Japanese-made geared boats. dry bulk carrier.
Again, some readers may acknowledge these subtleties but raise a more fundamental question. Aren’t we past the best of times and now entering a more difficult period? There is no doubt that the pace of activity has slowed. But Edward Bartry, chief executive of Taylor Marine, noted that there was plenty of upside in the figures for his Handysize bulker division.This indicates port congestion Still at a high level, there aren’t enough boats to move around. His prediction is that the current strong market will continue at least until “2023 and beyond.”
Of course, this optimistic forecast doesn’t cover another risk: a sudden surge in new ships being ordered and chartered. Buttery’s response is that the bulk carrier segment has not fallen prey to the overcapacity typical of the containership industry.
When looking at newbuilding orders, he observed that “handysize orders remain the tightest of all the dry bulk industries. It’s worth noting that even if shipowners want to, they will only be able to keep up to 2024 due to lack of capacity in shipyards. Can order a few.”
Another risk is the duration of the lease term. Taylor’s contract appears to be shorter, mainly because the market is currently paying the highest interest rates. The Tufton charter appears to be slightly longer, with an average expected charter duration of 1.9 years. Taylor could be more vulnerable if demand suddenly freezes.
Another risk is that older bulk carriers and tankers operated by Tufton and Taylor Maritime suddenly become uneconomical due to stricter environmental regulations. Both funds are investing heavily in upgrading their ships – for example, to use biofuels – but there is no obvious answer to the swift need to decarbonise the fleet.
Most progress is likely to revolve around gradually replacing fossil fuels with alternative low- or carbon-free fuels such as methanol and ammonia. Meanwhile, owners of newer, more fuel-efficient ships are likely to be the beneficiaries – both funds scored well on this metric.
I remain optimistic. Both funds are churning out cash due to high returns on deployed assets. Tufton currently has a fleet operating rate of 14%. There may be more upside in the value of these ships. The fund team at investment bank Jefferies has been running a slide rule on the two fleets and believes that both may be worth much more than stated.
According to Clarksons, they estimate the average second-hand price of a 10-year-old Handysize has increased from $17 million at the end of 2021 to $18.5 million today, which could mean a net asset value (NAV) increase of $3500 Ten thousand U.S. dollars. ) for Taylor. That puts an estimated NAV of $1.73 per share, which means the stock is trading at an 18% discount.
As for Tufton, analysts temporarily added a $20 million NAV boost to its more mixed fleet, implying a NAV of $1.44 per share, which in turn represents a 5.8% discount. Jefferies also noted that large Japanese shipyards are pushing up the price of new ships significantly to cover the extra energy and steel costs, thereby propping up the prices of existing ships.
The rather mundane segments of the shipping market targeted by both funds have underperformed over the past few decades. The current boom followed a decade-long slump in bulk carrier rates. If the economy suddenly slows, all talk of strong asset backing could become a fantasy.
But overall, I think there is still real potential for value enhancement. And don’t forget those well-covered dividend payments, which should satisfy income-hungry investors.
David Stevenson is an active private investor and has interests in the aforementioned securities. e-mail: [email protected]. Twitter: @advinvestor
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