Business Times - 29 Aug 2007
Boomtime for shipping firms as rates rise, supply tightens
Shares poised for strong returns as demand for freight steams ahead
(LONDON/NEW YORK) Shipping companies are sailing through this month's turmoil in financial markets and shareholders are poised for annual returns above 20 per cent.
Shipping rates as measured by the Baltic Dry Index climbed 9.6 per cent since world stock markets started a decline on July 17. Record prices for hauling coal and bulk commodities are benefiting Navios Maritime Holdings Inc, Genco Shipping & Trading Ltd and DryShips Inc.
Almost all the 6,600 ships available for hire are at sea, and the rising cost of credit threatens to stall financing of new vessels. Sales of raw materials to China will climb 25 per cent this year and may send profit up as much as sixfold at Golden Ocean Group Ltd of Bermuda, Compagnie Maritime Belge SA and Greece's Quintana Maritime Ltd. The stocks are cheap, when the prospects for earnings are compared with the broader stock market.
'When the dust settles, we could see these stocks moving up' by 20 per cent by the end of the year, said Jonathan Chappell, analyst at JPMorgan Chase & Co in New York. He recommends Piraeus, Greece-based Navios and Genco of New York. 'The underlying fundamentals couldn't be better. Nobody is expecting a slowdown of demand.'
The Bloomberg Dry Ships Index of 13 companies trades at 12.3 times earnings, compared with 17 times for the Standard & Poor's Index of 500 stocks. The shipowners pay a dividend yield of 4.4 per cent, more than twice the S&P's 1.9 per cent, according to Bloomberg data.
'I've been involved in shipping 35 years and I've never seen a market like this one,' said Klaus Kjaerulff, chief executive officer of Copenhagen-based A/S Torm D/S, which operates both oil tankers and commodity carriers. 'If you take shipping as a barometer of the world economy, it seems like the future is optimistic.'
Shipping rates in February and again this month have proved to be a 'reliable indicator' that financial-market declines caused by losses in US sub-prime mortgages won't sink the wider economy, Barclays Capital analysts said in an Aug 22 report.
Navios and DryShips, based in Athens, posted record second-quarter profits. Twelve of the industry's 13 biggest publicly traded shipowners reported Q2 earnings more than doubled to $461.7 million. Profit growth for the S&P 500 was 10.7 per cent in the period.
A weakening US economy will take 'two to three months' to trim demand in freight markets, said Andreas Vergottis, director at London-based Tufton Oceanic Ltd, who holds a doctorate in shipping and helps manage US$745 million at the world's biggest hedge fund dedicated to shipping.
Orders for bulk carriers are close to their highest ever. A total of 1,364 bulk carriers are on order, almost three times the level of a year ago, according to data compiled by Bloomberg.
Higher borrowing costs have already slowed ship financing. Precious Shipping pcl, Thailand's biggest sea-transportation company, scrapped a planned bond sale of as much as US$1 billion on Aug 16 as the sub-prime mortgage rout shrank investor demand. Thoresen Thai Agencies pcl did the same four days later.
Rental income from so-called capesize carriers, bulk ships so large they have to circumnavigate the southern tips of Africa and South America rather than squeeze through the Suez and Panama canals, has climbed 77 per cent to US$118,521 a day since Jan 22, according to the 263-year-old Baltic Exchange in London. Worldwide, 96 per cent of commodity carriers were in use in August, one percentage point below the all-time peak in July, according to data from Oslo-based Laurentzen & Stemoco A/S.
DryShips plans to free boats from long-term charters next year to profit from what it calls 'tight' vessel supply. Navios exploited the situation to lock in 89 per cent of earnings into next year\. \-- Bloomberg
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