The product tankers are bleeding and have been since the end of 2015 due to oversupply from the good years when too much capacity was ordered. Some are even reporting negative cash flows. So what is changing now?
- The supply/demand balance is improving, especially when accounting for increased scrapping of older vessels ahead of 2020 regulations and demand growth of 4%. (2017 was a big scrapping year and 2018 will top that as 66% of 2017 numbers was reached already in April).
- Global Clean Petroleum Products inventories are coming down to below average levels. This may the most important chart short term indicating the wait for the turnaround could be a short one:
- As are crude oil inventories (the green line has fallen below the 5-year average in 2018)
- Prices have been significantly below 5-year averages for almost three years
- The price of vessels are stabilizing (new builds increasing slightly)
- Shipyard capacity is stretched. Scorpio Tankers 10K: “Shipyard capacity has rapidly and dramatically declined”. I have not been able to find numbers on that though.
- New financing methods in the shipping sector will lead to increased discipline.
We all know what tends to happen in cyclical industries when these dynamics are at play, right?
Concordia Maritime, Torm, Ardmore Shipping and Scorpio Tankers, to name a few in the product tanker space, are all struggling, naturally. Torm and Scorpio both took in new capital in recent months. But despite being the cheapest of the bunch on a Price-to-Book level, Concordia Maritime (Swedish) is in a very comfortable position when it comes to the cash position, meaning they can weather the storm for longer than their competitors before needing addittional capital. On top of that they are achieving market beating pricing rates quarter after quarter.
On a peer-to-peer basis the stock has underperformed peers in the last three months despite a similar environment, and despite the Swedish currency performing terribly. (STNG = Scorpio Tankers. ASC = Ardmore Shipping. TRMD = Torm)
The price is currently 10,40 SEK and the market cap 450 MSEK. It currently trades at 0,4 to NAV, which is lower than peers… A major impairment was taken six months ago when the pricing environment was at the bottom. I believe there is potential for a multiplying effect here: 1) The discount to NAV narrows, and 2) Vessel pricing rise = higher book value = potentially creating a nice multiplying effect on the share price.
Added to this the Swedish currency has been absolutely demolished the last three months. It is down 8-12% against the USD, EUR, NOK and DKK, to name a few related currencies. This means an added cheapness (the price of the stock + some of their costs are in SEK).
Patience and the importance of cultivating a tolerance for pain
The question, as is often the case with these deep value cyclical situations where future demand is certain is not if the market comes back, but when…
This is why patience is the mother of all edges in cyclical industries. A curious Chinese proverb states that patience is only possible from a place of strength, which from an investor’s point of view can be interpreted as not depending on near-term gains and refraining from using leverage in cyclical stocks. There is a tremendous advantage to be had in never being forced to sell.
The second magic ingredient is cultivating a tolerance for pain. This is essential because the troughs are often outdrawn and longer than expected and the upturn often short and violent, so while the net result may be overperformance in the end deep value investors experience more defeats on a daily basis than momentum investors, which is why it is harder. This is also why the opportunity exists: One gets paid for being a masochist 😉
And just to be clear: In my opinion this is not a “buy and hold forever” type of stock. Instead it is a “get in when the market is depressed and get out when normalization has occured”. If you are a splendid market timer you may even want to wait till euphoria has been reached. Personally, I am usually off to other hunting grounds before that happens.
Concordia Maritime is controlled by a major shareholder, Stena Sphere, which holds 52%. Some have pointed to corporate governance issues with a majority shareholder being in control while at the same time providing customers to Concordia Maritime for a fee. I personally am undecided whether this is a good or a bad thing for Concordia Maritime’s shareholders. Better debt terms are possible when you have a financially strong player backing you. On the other hand there is the possibility of overcharging for their services. But if that were the case, EBITDA-margins would be worse than competitors and that isn’t the case. Either way, this is more of an issue if you hold for the long haul, rather than taking an opportunistic approach to cyclicality, which is the game that I would recommend playing in this particular case.
Disclaimer: I do not accept responsibility for losses that are a result of buy/sell recommendations I make. I encourage you to do your own reserarch before making an investment decision.
9 thoughts on “Get Paid for Being a Masochist: Concordia Maritime (Oil Tankers)”
Love your writing style. interesting case also.
Thank you, Jan!
Dont you think Concordia still has a high debt load? 1,393.6 sek mill in long term debt and only 1,205.3 mill in equity. Cash balance of 193.2 mill.
thats a D/E around 1.0 Shouldnt it be much lower for a cyclical company than this?
In comparison Jinhui shipping (drybulk) has a D/E of 0.2
Certainly not risk free and I’d prefer the loan to be reduced during the coming upcycle (as it has since the 2011-2015 period where net debt was above 2,000 MSEK). Concordia’s D/E is on the high side though not an outlier for the sector Ardmore Shipping is slightly higher, while Torm is lower at 0.65. Haven’t looked at Scorpio Tankers who had a capital infusion post the recent Q-report.
Concordia has some extra liquidity reserves in the form of short-term bond investments, so their Cash & Equivalents stand at 435 MSEK which ought to be enough to withstand a prolonged bear market, in my opinion.
Yes I would also like cyclical companies to reduce debt when things are going great. I had a bad experience with Prosafe where they had heavt debt when oil was above 100$. Instead of paying down debt they where paying a big dividend. So when oil collapsed their debt crushed them and they had to raise capital trough dilution of shares which wiped out the returns of the existing shareholders. I also hold Vale which also had a high debt load, but their new CEO is focusing on reducing debt in the time forward as they new start to earn good money again. I think he is doing the right thing.
Yes I overlooked the short term deposit. I did not know how liquid that money was/is.
Being able to withstand the downturn with low debt and high cash I think is of vital importance. Concordia still loose money I see. So since they cannot cover the interest on the long term debt at the moment they have to use their cash or other means of cover their debt. Who knows when the cycle turns. Timing is difficult. I just hope they will not come in a situation where they have to raise capital from the shareholders and dilute.
Could it be more wise to invest in a company that has already raised new capital and diluted? In that way the worst is already over and the company has good financials for the upturn?
Just wonder. What is the difference between NAV and book value?
And, do you have any opinion on Jinhui Shipping that is listed on Oslo stock exhange?
Thanks. I am still learning.
Aren’t we all 😉 Those commodity players continually teach investors lessons on how not to run a company in that they choose to believe the good times will go on indefinitely…
High debt levels in the oil space may not be a bad bet right now if you can find a rational player that chooses to focus on bringing down that debt rather than expand. Could be worth multiples more very quidkly.
I chose Concordia in the product tanker space specifically for their ability to survive in a prolonged downturn. In my opinion they won’t have a problem surviving another 3-4 years unless they choose to invest and get the timing wrong. All of the players I have mentioned believe the market turns in the second half of 2018 and I think the graphs in my post support that notion but of course it could take longer than what everyone believes – in fact it usually does 😀
Book value does not always reflect “real” book value as vessels etc. may not have been written down to reflect real present value. NAV = “real” book value. Good will is also cleansed from the NAV number.
I don’t have much of a view on Jinhui except that I remember a few years back when I looked at it that management (who are also major shareholders) had a tendency to rake in more than their fair share of the profits in good times. I suspect that is why this company is always looking so attractive on valuation metrics. But I don’t have much insight into it. Also, one could make the same argument for Concordia where CEO pay is also quite high, although the case is not as extreme. The dry bulk segment looks very interesting and I may soon look more in depth at the sector and Jinhui specifically.
Thanks. So the NAV is calculated by estimating the value on each ship? Like looking at recent sale price for similar ships in the industry? You are right about Jinhui shippings management, they are paying themselfs too much in good times. The valuation however is attractive and i think the management has the correct strategy. Reducing debt and being able to go trough the downturn. I would say I have quite extensive knowlegde of Jinhui after following them since 2007, so feel free to ask. I am sure I can learn a few things from you. Still not sure Jinhui is a big value trap and red flags everywhere or if its a great buy. Still trying to understand what the action of the management means. Recently lots of insider buying and big debt reduction.
Yup, for Concordia there was a huge gap between real value of the ships (NAV) and the one that was stated in their books. The writedown in Q3 narrowed that gap so that NAV and book value now is pretty much equal. Once the market turns that writeturn can potentially be reverse adding a lot of upside.
Thanks for your comments on Jinhui. I have been interested in the dry bulk sector for some time and will take a deeper dive at some time in the future. How can I reach you if I have questions that are specific to Jinhui?
I understand. Same situation was in Jinhui. Very cheap on P/B, then came a big writedown on ship values so the book value was overstated. However now as the ships are finished written down (I hope) the worst seems over. Jinhui has almost doubled since it bottom of 4.44 nok per share in 2016. Still i believe there is further upside. Problem with Jinhui is can we trust the management? If the drybulk have a strong recovery they will earn plenty, but will the management distrubute the cash in a shareholder friendly way? That I am not sure of.
You can f.eks reach me here: https://warrenbuffettspreadsheet.wordpress.com/contact/