According to the world bank there should be a recovery in world trade in 2011
That's just about the time most of Hellenic's ships come off charter.
In the meantime strong cashflow from existing charters should significantly cut debt during 2009 and 2010.
In 2008 HCL made an underlying EPS of 66p a share! That's forecast to drop to 17.82p in 2009 and 7.99p in 2010 (looks far too low from my modelling of charter revenue). I can easily see them making 30p in 2011 if rates rebound.
Interesting article on SmalCapNews on a similar theme: Wave of optimism: is the tide turning for shipbrokers?
http://www.smallcapnews.co.uk/article/Wave_of_optimism_is_the_tide_turning_for_shipbrokers/7805.aspx
Some commentary in the article from the Hellenic CEO:
Fotini Karamanlis, the chief executive of shipbroker Hellenic Carriers, said last week said the dry bulk shipping market had improved significantly since the end of last year, when the severe financial crisis led freight rates below operating expenses. His comments came as the company delivered one of its fleet of vessels to a charter customer paying a gross rate of US$18,000 per day for a minimum of 13 months. According to Mr Karamanlis, both the increasing volumes of trade, mainly towards the Far East, and the gradual availability of credit had helped the market recover.
As the article notes, the collapse of the Baltic Dry Index was just remarkable - it was around 9310 in July 2008 and collapsed to around 630 by December. It's now back at 3,700 or so. See: http://www.investmenttools.com/futures/bdi_baltic_dry_index.htm#bdi
Crazy volatility driven by massive speculation, I think.
Fotini Karamanlis, the chief executive of shipbroker Hellenic Carriers, said.................
His comments came as........................
According to Mr Karamanlis....................
Fotini Karamanlis is female
As the article notes, the collapse of the Baltic Dry Index was just remarkable - it was around 9310 in July 2008 and collapsed to around 630 by December. It's now back at 3,700 or so. See:
Crazy volatility driven by massive speculation, I think.
I'm not sure it's necessary to invoke speculation to explain the volatility of the Baltic Dry Index (I'm also not actually sure how one would speculate on this index so as to affect it, though this is probably just ignorance on my part...). To my understanding a small oversupply of shipping relative to freight demand can have a very drastic effect on prevailing rates due to the fact that demand and supply in this market are both quite inelastic. There's an article on the subject of the BDI here which I found to be quite useful:
http://www.businessinsider.com/the-cost-of-global-shipping-is-a-lousy-economic-indicator-2009-5
as it includes (towards the end) an explanation of how this mechanism works.
Good article.
The shipping market has laways been cyclical on the supply side. When freight rates are high, ship owners commit to new build and bring parked up ships into service. This evenutally creates a glut of supply causing freight rates to fall. Ship owners then park up ships and accelerate scrappage of old vessels causing a shortage in the market. Of course these things don't happen overnight so the cycle occurs over years rather than months or weeks.
I think what is unusual about the current situation is the speed of the fall, which indicates demand side influence.
Because freight rates were depressed for a long period of time in the 90's and early 21st century, supply of ships was limited, so when demand picked up strongly in China, freight rates soared. High freight rates only lasted a couple of years so I don't think there was enough time to address supply side constraints (a lot of proposed new build build will have been cancelled, funding lost etc). Hopefully that means that supply constraints still exist and when world trade picks up we should see freight rates increase strongly (although not to the same levels).
Of the BDI is only a spot rate so longer term rates will not be as high in the peaks or low in the troughs or as volatile.
For anyone new to the company (like me :0)), there is a useful summary of HCL's fleet & charter contracts in their latest RNS, here: http://fool.uk-wire.com/cgi-bin/articles/200906240700103819U.html
I observe from the annual report that vessels have to be dry-docked every 2.5 years. DAK how long a vessel is typically out of service for when dry-docked? Judging by the available days vs ownership days in 2007 and 2008, I would guess that there was little dry docking activity those years (presumably because the vessels were recently acquired). I also observe that the industry norm useful life for vessels is given as 25 years and the remaining useful lives of the vessels in HCL's fleet is between 8 and 16 years. I would guess that as vessels age, dry docking times/costs increase.
SteMis, does your financial model take this into account?
Other than that issue, sounds interesting...
Best regards,
Mark
Hi Mark,
Thanks for the comments.
I thin there must have been some dry docking in 2008 because dry dock costs of £1,638,000 were capitalised (of which £302,00 related to acquisition of M/V Konstantinos D and $325,000 to the acquisition of M/V Hellenic Wind, which leaves $1,011,000 of actual spend).
My model assumes 95% availability under charter (so effectively 18 days unavailable for each vessel).
Hi SteMIS,
I think I'll do some further research on this. In 2008 (see p15 of AR), we had 1,979 ownership days and 1,953 available days. That seems like a very high availability and suggests to me that dry-dock time was below average that year and the previous one.
As a pure guess, I'd guess that a when a 15 year old vessel goes into dry-dock, it may need a month or so (which is not far off your 95% availability assumption). But we may have an accrued backlog of dry-docking activities. I presume that dry-docking would be scheduled for when time charters end, whereever possible.
Best,
Mark
PS - I'll need to check this out but it seems a little odd to capitalise past dry dock costs, rather that accrue a charge (like accrued dilapidations for a building) for future costs!
Talking of World trade is there anyway to trade the Baltic Dry index (considered a proxy for world trade) as a private investor? Have been avidly foloowing its ups and downs and was looking for somewhere to take an off piste punt.
Domo
Looks like UBS Global Asset Management (Traditional Entities) having been selling stock, which may account for the recent weakness in the share price.
In reply to Fangorn (post #9)
There are no specific instruments for trading BDI that I know of, as it is simply too illiquid. I spent months trying to structure a deal for an Asian shipper back in 2007, and simply could not find anyone willing to lock in a longer dated rate for BDI, especially because of the degree of difference between shipping routes and the fact that longer term contracts set at a lower price than the immediate price, which is what BDI is. As I understand it, the current prices are largely driven by the costs of shipping iron ore from Brazil to Asia. I think that a large part of the super spike in BDI was a result of speculators trading coal and some errors of the definition of FOB, i.e. they had contracted to pay for the transportation costs and then other smarter players had contracted out the vessels.
If history is anything to go on, it will take a decade for prices to go back to the bubble levels, but in my view, the most sensible proxy for BDi is shares in the companies that provide most of the product, ie coal and iron ore, from the major routes, so Xstrata, Vale, a Chilean copper mine. I suspect the correlation between bulk commodity producers and BDI is pretty high...
Thanks for your interesting comments Gradders. Am currently reviewing the likes of Kazak and ENRC, so will add Xstrata to the list of companies to investigate further.
In reply to Fangorn (post #12)
I'd just advise caution with regards timing going in. I am bullish on this sector (and very long) but they are horribly volatile. They have risen dramatically in the last few days on the global reflation trade, but there's a lot of hot money on the table, so one whiff of bad news and they can drop 20% in no time.
Kaz has 2Q results on 30th July and I suspect they will be a surprise to the upside, given Chinese buying of copper, but we don't really know.
The main caution with XTA is if Mick Davis gets pushed into overpaying for Anglo...
Interesting comments by BHP in the Oz press
http://www.theaustralian.news.com.au/business/story/0,28124,25889018-643,00.html
Longer-term, however, BHP says China and India's industrialisation programs remain on track, so huge amounts of iron ore will be needed. The miner expects annual seaborne iron ore demand to grow from 800 million tonnes a year now to 1.2 billion tonnes by 2015 and on to 1.8 billion tonnes by 2025.
Results out:-
http://www.investegate.co.uk/article.aspx?id=200909030700034307Y&fe=1
Very happy with them. Better than I expected, but nevertheless consistent with my model and therefore my view of the business. Second half should be a bit weaker. I'd expect about $1.3 million off revenues and profits due to the end of the charters for Sea and Horizon. Offsetting this was a bad debt of $446k in the first half. Nonetheless analyst forecast look far too low for 2009.
Using $/£ exchange rate of 1.6
Profit before tax = £7.8 million ($12.5 million) - analyst forecast for full year is £8.6 million
EPS = 16.9p (27c) - analyst forecast for full year is 18.86p
Debt = £47.8 million ($76.4 million)
Debt was the key factor for me and the reduction from $92.9 million to $76.4 million in just six months is very welcome. I was looking for under $80 million. Passing the dividend was the right move.
If you read my article on
http://www.fool.co.uk/news/investing/investing-strategy/2009/07/01/buy-companies-when-they-are-cheap.aspx
I was looking for $50 million debt reduction in 2009/2010 so $16.5 million in the first 6 months is a very good start (especially as they paid $1.5 million out as dividends).
