GLBS - Globus Maritime Limited

[TwoCitiesCapital]

Worth spending some time if interested in the analysis of the shipping market.  More links at bottom to historical reports:

 

https://www.bimco.org/Reports/Market_Analysis/2014/0815_DrybulkSMOO2014-04.aspx

 

Interesting that there are still more ships being supplied into the market.

 

I checked 6-8 months ago and the order book basically dried up in late 2014 and 2015. I wonder what the difference between the two data sets is? Even so, they only assume 10% cancellation rates and have scrapping rates lower than they've been for years - I think persistently low rates will force a continuation of the scrapping trend. Given the 2-3 year lead time for new ships, any uptick on global demand in 2015 and beyond should have out-sized effect on freight rates.

[Laxputs]

Here's where I'm at:

 

Not buying at these prices with supply exceeding demand.

 

1)After looking at their debt again the "due within one year" and "due within 1 to 3 years" looks like it's additive because the total at the row's end equals total outstanding debt. That makes it 57mm due total in 1-3 years (after adjusting from 2013 to 1q14 release debt repayments). At these run rates and an 11mm ship sale, I have them needing 17mm more by year end 2016.  That's a ship or two.

 

2)If the industry stays depressed and day rates drop lower, interest and debt repayments pile up.

 

3)Two of their ships are still on period charter rates much above today's day rates. I believe cash flow will come down if day rates do not rise considering by early next year they will be off the older higher priced period rates; all ship will be on day rates.

 

4)Liquidation value in a scenario of continued depressed industry rates would be significantly below today's prices (the VIC article argued for 1/3 less).

 

5)The fcf yield is ridiculously high at these run rates but it's not really owners earnings if 5 years of cash flow have to go to repay debts.

 

6)If they do sell more than the one ship, their earnings power drops again.

 

It'll be interesting to hear what management plans to do in the next conference call; how they plan to meet debt repayments. There is a ton of upside here, of course, and I don't think it's a bad investment. It's just not the 2-3 no-brainer ideas I'm looking for per year. But I'll be watching closely.

[60North Investments]

Valid points from Laxputs. Page F-25 (financials) of the latest 20F report shows the debt schedule the best imo. In 2014 there's 11.625m repayments to be made. Sources of funds include 7.1m in cash, 11.3m ship available for sale and 3m in FCF per quarter or 9m for the rest of 2014 (imo at least not optimistic considering the recent uptick in BDI). Using the 9m in FCF and 2.6m of cash would be enough to make needed repayments in 2014.

 

In 2015 there's 42.4m to repay, out of which 2m is shareholders loan and 35m is the remainder of loan "A" which initially was a 120m loan to purchase 4 ships. Assuming they'll be able to get 10m in 2015 from the ship available for sale and generate 2.5-3m in FCF per quarter (two ships on fixed rates will see the contracts expire in Jan 2015, assuming options to extend aren't used), we'll have sources of funds as follows: 5m in cash (assuming this can't be used since it's tied to covenants), 10m from selling a ship, 10-12m in FCF, in total 25-27m. This won't be enough for the total 42.4m or 40.4m if we assume the chairman is flexible with the loan repayment. But is it going to result in additional sales of ships or other unfavorable actions? I don't have a clear answer. They have 3 different loans (+ the chairman loan), "A" which was initially 120m and of which they have repaid 85m assuming 2014 goes alright. If they use of the 25-27m in 2015 for example 20m for this loan, they'd have 15m left to repay. Will the bank require ship firesale or other such action, or will they settle for repayment in 1-2 years and a higher interest? "B" and "C" loans have smaller annual repayments until "B" loans final payment of 13.6m in 2017. Satisfying these repayments in 2015 (total 5.4m) should work if they use 20m in loan "A" and the chairman shows flexibility with his 2m loan.

 

After 2015 they'd still have about 52-54m in outstanding debt. I don't have a lot of competence to say whether this is alright or not. If the shipping market is still depressed in 2016-2017 and the company can't churn more than 10m in FCF per year they'd need to re-negotiate at least the final 13.6m final payment on "B" loan in 2017.

 

I'm not sure if they've disclosed anywhere from which bank(s) the different loans are from, but at least Credit Suisse has been flexible with the covenants. They agreed in April 2013 on two of the loans in which they were breaching the covenants to make them more loose for a year. Again in April 2014 they did the same (this was at least stated that it was with Credit Suisse). I'm relying on the assumption that the bank(s) won't require additional sales of ships but instead accept something like moving maturities a year or two forward and getting a higher interest (and if it's about a million or two that the chairman will step up again). If this assumption plays out and we see Globus making around 20m in FCF sometime around 2016-2017 I'd say this thing will be trading somewhere much higher than where it currently is. With for example 30m in debt in the end of 2017 and FCF running 20m per year, I'd argue the market cap to be +150m. If FCF is 15m, and debt 40m, market cap should be +100m.

 

The above shows why I think using FCF to repay debt can create very high returns for shareholders. There are plenty of assumptions in the case and as Laxputs said, this might not qualify for a no-brainer. Until someone comes up with strong evidence to support the opposite I'd say the risk/reward looks very interesting.

[peter1234]

Worth spending some time if interested in the analysis of the shipping market.  More links at bottom to historical reports:

 

https://www.bimco.org/Reports/Market_Analysis/2014/0815_DrybulkSMOO2014-04.aspx

 

Interesting that there are still more ships being supplied into the market.

 

Thanks, this is helpful. These forecasted day ranges are huge:

To sum up, our forecast for August/September:

BIMCO believes that the level of Capesize TC average rates will go higher to around USD 10,000-27,000 per day.

Panamax TC average rates will move around at USD 5,000-10,000 per day.

For the Supramax segment, BIMCO forecasts freight rates in the USD 8,000-14,000 per day range,

whereas Handysize freight rates are expected around USD 5,000-8,000 per day.

[TwoCitiesCapital]

I think it may be foolish to expect management to pay off debt as opposed to rolling it. These guys get compensated via a broker fee everytime a ship is bought, sold, or chartered. They have more incentive to roll debt to continue to accumulate ships as many ships as possible because they get paid multiple times on each ship owned. To sell a ship means to pay down debt means they miss out on operating leverage and all future revenue opportunities from that ship even if they're deals that are money losers for shareholders. Their incentives are not yours. They will delever enough to where they feel they arent endangering operations and no more - this likely means rolling debt and operating extremely leveraged for the foreseeable future.

 

This actually sets up poor industry dynamics that would trend towards regular over supply if it wasn't for the long lead times in orders.

[yadayada]

the CEO owns over half the shares. I don't think he will piss away 10's of millions of dollars to get a 1-2 million extra in the short term. I think management is pretty aligned with shareholders here.

[TwoCitiesCapital]

the CEO owns over half the shares. I don't think he will piss away 10's of millions of dollars to get a 1-2 million extra in the short term. I think management is pretty aligned with shareholders here.

 

You're right, but for the wrong reasons. SB's stock, and much of their preferred, is owned by the CEOs family (56+%). This guarantees control so the fees can keep going to their privately held management company. This mgt co will make about 10-12M per year, minimum, regardless of profitability and can be maximized further by buying more ships and buying/selling activity. About a quarter mil per ship per year and a few % of transaction values. If the BDI does well, they can issue higher dividends on their 56%. If not, they have guaranteed income of 10-12M. They have every incentive to lever up and purchase more ships since each ship is essentially guaranteed income plus a call option (the call option being the ownership of thr common) - there's no downside for management unless the company hits bankruptcy. Who cares if your 56% is worth 10M or 150M in open market if it brings you control that allows for the same 10-12M in cash, every year, regardless of market value? Thats what I'm saying - most shipping companies have incentives to empire build - this brings more stable revenues to the management co and a more levered call option in future success with limited downside as long as bankruptcy is avoided.

 

I just looked it up though and I was wrong about GLBS. Not because of the insider ownership - but because GLBS owns its management co and it's not privately held the CEO meaning there's not a conflict here like there is at many other shippers. My apologies for simply assuming they were like the others.

[60North Investments]

http://www.globusmaritime.gr/press/globuspr091014.pdf

 

Globus reported its Q2 earnings last night after market close. Operationally nothing special (=same old), although they did write-down 1.7m of Tiara Globe (the one that they're trying to sell). So far in H1 they've repaid 6.2m of debt, and have another 6.2m to pay in H2. With the FCF levels they've had, I think this should be manageable. Will be interesting to hear what they say in the conference call, but in the report they commented that a) if rates go up by the end of the year, they will put some ships on fixed rates in 2015 and b) they're looking to grow the fleet through "sound acquisitions". I don't know if either of these is especially positive. Still, I feel like this case is very much about the company making it through the 42.4m (2m from chairman) debt repayment next year.

 

PS. The short sale warnings on IB, my wild guess is that they pop up every time there's bigger volatility on the stock. At least seems to be the case with Globus.

[yadayada]

so they will sell the tiara for like 10m. And according to q call, buy a new eco friendly ship. They would have probably about 15m to do that by the end of the year.

[60North Investments]

Yep, according to the CC they hope to sell Tiara Globe within this year and then after that make the moves with new ships perhaps. I'm not quite sure what to make of the management's intentions of acquiring new ships. With what money are they going to do that with? They probably will use H2's cash flow wholly into debt repayment. If they sell Tiara Globe they'll have 10m extra. Presumably to buy a new ship they need more debt. I don't really know, but this sounds like the management is very certain that the banks will agree on moving the 2015 repayments further? If that's the case this will be 10USD/share in couple years, or what am I missing (besides the possibility of day rates taking a nosedive etc.)?

[yadayada]

I think they will only buy one ship. And if the market rerates this thing to book value, they issue shares to buy new ships. That is my guess. Probably through some rights offering.

[randomep]

Yep, according to the CC they hope to sell Tiara Globe within this year and then after that make the moves with new ships perhaps. I'm not quite sure what to make of the management's intentions of acquiring new ships. With what money are they going to do that with? They probably will use H2's cash flow wholly into debt repayment. If they sell Tiara Globe they'll have 10m extra. Presumably to buy a new ship they need more debt. I don't really know, but this sounds like the management is very certain that the banks will agree on moving the 2015 repayments further? If that's the case this will be 10USD/share in couple years, or what am I missing (besides the possibility of day rates taking a nosedive etc.)?

 

You aren't missing anything, why do you think you are missing something. But there are alot of factors and $10/shr is just one of many possibibilities you have to weight. Looks like the market liked the report.

[60North Investments]

Yep, according to the CC they hope to sell Tiara Globe within this year and then after that make the moves with new ships perhaps. I'm not quite sure what to make of the management's intentions of acquiring new ships. With what money are they going to do that with? They probably will use H2's cash flow wholly into debt repayment. If they sell Tiara Globe they'll have 10m extra. Presumably to buy a new ship they need more debt. I don't really know, but this sounds like the management is very certain that the banks will agree on moving the 2015 repayments further? If that's the case this will be 10USD/share in couple years, or what am I missing (besides the possibility of day rates taking a nosedive etc.)?

 

You aren't missing anything, why do you think you are missing something. But there are alot of factors and $10/shr is just one of many possibibilities you have to weight. Looks like the market liked the report.

 

I guess it's one of those moments when you feel like you're given so much upside compared to the downside that it makes you feel like there's something more to it. That's absolutely correct that 10USD/share is just one of many possibilities. As an example of, looking at this probabilistically: 25% chance of 3x, 25% chance of 2x, 40% chance of -50% and 10% chance of bankruptcy. Putting this altogether and assuming it takes 2 years from now to resolve the situation gives you 20% p.a. expected return. My percentages and gains can of course be very far off. I'd argue though that they aren't at least overly optimistic considering the situation. Perhaps 20% expected return with such parameters isn't that awesome after all, just feels somewhat like being compensated very nicely for the uncertainty that is in this one.

[Laxputs]

I don't see this as a no-brainer like others seem to, and I'm not buying. There is so much debt. They must restructure or sell two ships within 2 years. They are getting above market rates from prior long term contracts on two ships and those will be gone by Jan 1, 2015. If day rates don't improve, they are not making much.  New ships are still entering the market. Lots of potential, but not without risks. I'm trying to limit debt laden risk. The equity owners don't really own the cash for years, the lenders do here.

[60North Investments]

I don't see this as a no-brainer like others seem to, and I'm not buying. There is so much debt. They must restructure or sell two ships within 2 years. They are getting above market rates from prior long term contracts on two ships and those will be gone by Jan 1, 2015. If day rates don't improve, they are not making much.  New ships are still entering the market. Lots of potential, but not without risks. I'm trying to limit debt laden risk. The equity owners don't really own the cash for years, the lenders do here.

 

A no-brainer might not be a word I'd use here, apologies if I came across like that. In a no-brainer I'd think you don't really have a real possibility of losing half of all of your principal, which is the case with Globus (that's why I used 40% chance of being -50% and a 10% chance for being zero, though not saying I think those are the best estimates necessarily, just conservative). On the contrary, Globus comes with risks. But to me it seems like you need to put a very large probability on the negative scenarios for this to be a bad bet.

 

As Laxputs says and I've said many times over, the biggest thing seems to be their ability to manage through the debt in 2015 (hopefully just restructuring maturities further). For me that is essentially the uncertainty in this.

 

If we assume in Jan 2015 the two ships on fixed rates have their rates dropped to 10k (30% on average), if my crude calculation is not far off we would have a 10% decline in revenues. If the costs won't move at all, this would probably take 5m or so off from cash flow. A very big deal indeed, no doubt. Still, even in such a situation, I could easily see the company being worth around 40-50m. With better rates, more. But in order to be able to wait for the better rates they need to refinance their debts. Will be very interesting to see how they deal with that.

[yadayada]

-50%? Read the shipping man, these banks are usually pretty lenient. They don't want to take the company, they want to keep this going. I don't really think they will not be able to refinance. And since operators own half the stock, they will take the best option for shareholders if shit hits the fan.

 

Note that rates were at all time lows again, and book value is more then double share price. average price is about 20 million. so they are valued under almost all time low 5 year old prices.

 

To lose 50% on this, ships would be liquidated for 33% discount , or about 13.5 million per ship. That seems pretty unlikely.

 

That would be a serious firesale. You will see some kind of rights offering before that happens.

[60North Investments]

As said, my -50% was simply trying to show how conservative you can go with the assumptions and still you'd have a very profitable bet. Will put the book on reading list!

 

If you feel very certain about them being able to refinance (feel quite hopeful myself as well) the 2015 repayments, what do you see as the biggest risk/uncertainty here?

[yadayada]

shipping rates staying depressed. There are still too many ships on the market. If China grinds to a halt, the market can stay  like this for years. And the stock will not move much. Im glad i kept this small though. I would certainly not make this a big position. Shipping rates going lower is not much of a risk. if rates go below a thousand most operators burn cash. So if it goes much lower ships are taken on land, which keeps a bottom on things. Likely 5-10 years out there will be more fuel efficient ships, and rates can go lower.

[randomep]

Yep, according to the CC they hope to sell Tiara Globe within this year and then after that make the moves with new ships perhaps. I'm not quite sure what to make of the management's intentions of acquiring new ships. With what money are they going to do that with? They probably will use H2's cash flow wholly into debt repayment. If they sell Tiara Globe they'll have 10m extra. Presumably to buy a new ship they need more debt. I don't really know, but this sounds like the management is very certain that the banks will agree on moving the 2015 repayments further? If that's the case this will be 10USD/share in couple years, or what am I missing (besides the possibility of day rates taking a nosedive etc.)?

 

You aren't missing anything, why do you think you are missing something. But there are alot of factors and $10/shr is just one of many possibibilities you have to weight. Looks like the market liked the report.

 

I guess it's one of those moments when you feel like you're given so much upside compared to the downside that it makes you feel like there's something more to it. That's absolutely correct that 10USD/share is just one of many possibilities. As an example of, looking at this probabilistically: 25% chance of 3x, 25% chance of 2x, 40% chance of -50% and 10% chance of bankruptcy. Putting this altogether and assuming it takes 2 years from now to resolve the situation gives you 20% p.a. expected return. My percentages and gains can of course be very far off. I'd argue though that they aren't at least overly optimistic considering the situation. Perhaps 20% expected return with such parameters isn't that awesome after all, just feels somewhat like being compensated very nicely for the uncertainty that is in this one.

 

GLBS is the smallest of my 8 or so smallcaps. I won't argue your 20% expected return. But that return will have a lot of dispersion. Of my 7 other smallcaps, I may argue that they also have 20% expected return - why else would I own them? So this is just the world of hard-to-find unloved smallcaps, it looks too good to be true but they are there, w/o any catch that is obvious.

 

 

[yadayada]

fwiw safebulkers is a similar stock but larger. somewhat similar ebitda/debt ratio. Also operating their ships well etc. Except larger. And they trade slightly under book value. discount is mostly because of illiquidity

[jouni1]

-50%? Read the shipping man, these banks are usually pretty lenient. They don't want to take the company, they want to keep this going. I don't really think they will not be able to refinance. And since operators own half the stock, they will take the best option for shareholders if shit hits the fan.

 

Note that rates were at all time lows again, and book value is more then double share price. average price is about 20 million. so they are valued under almost all time low 5 year old prices.

 

To lose 50% on this, ships would be liquidated for 33% discount , or about 13.5 million per ship. That seems pretty unlikely.

 

That would be a serious firesale. You will see some kind of rights offering before that happens.

is this what happened to frontline? i haven't been paying that much attention to shipping.

[randomep]

 

GLBS Q3 earnings out

 

$ 0.02 EPS but this time w/o any impairment charges (i.e., excuses)

 

crap!

 

(I sold my position already though)

[yadayada]

Rates were really at all time lows this quarter though

[randomep]

Rates were really at all time lows this quarter though

 

Oh ya missed that, BDI was low in jul-sept, but not much better oct-dec

 

Shipping is tough!

[intensityjp]

I think results were ok...

 

1. They paid down a significant portion of their debt.

2. They are already thinking about the upcoming refinance of debt.

3. Interest coverage based on adjusted EBITDA seems like it will be bankable and will allow them to refinance.  Interest expense this quarter was much lower due to the expiration of the interest rate swap they had put on in a higher rate environment.

4. Operating expenses continue to be super low and they are working on keeping them low/lower.

5. They trade at an EV/EBITDA multiple of around 10x.  Not cheap but fair.

 

These guys seem like they will survive until rates pick up.  The whole thesis on this company was that it was an option on shipping rates rising from all time lows.  Please correct me if I'm missing something but it seems like this thesis still holds true.