The daily troll for bargain securities will always produce a few nibbles. Yet, it is not until after the important and sometimes tedious work of reeling in requisite information that one actually gets a glimpse of his catch.
One nibble this week was Seanergy Maritime Holdings Corp (SHIP). Having shown up on The Graham Investor’s NCAV screen, and having seen the substantial stake owned by Pine River Capital management, I took a closer look.
According to its recent prospectus, Seanergy is an “international company providing worldwide transportation of dry bulk commodities through our vessel-owning subsidiaries and Bulk Energy Transport (Holdings) Limited, or BET. Our existing fleet, including BET’s vessels, consists of one Handysize vessel, one Handymax vessel, two Supramax vessels, three Panamax vessels and four Capesize vessels. Our fleet carries a variety of dry bulk commodities, including coal, iron ore, and grains, as well as bauxite, phosphate, fertilizer and steel products.”
On many metrics—price to book, price to net current assets, and price to owners earnings—Seanergy looks stunningly cheap. With a “hard” book value (ex-goodwill) near $210 m, the current market price near $2.5 per share implies that the company is worth only $83m (given its 33.26m shares outstanding, as of 1/7/10).
Plausible reasons may be offered for this apparent discount: a) a short operating history (having only been public since 2008), b) a significant debt load (with $278m in long-term debt at 9/30/09), and c) general uncertainty about global shipping rates in the near term. While each is important, none would lead this analyst to immediately toss it back.
That is, until one notices their recent preliminary prospectus from Jan. 11, 2010, in which Seanergy proposes to sell up to $33.75m in common stock (and grant warrants to the underwriters), in order to “purchase a 2009-built Capesize vessel for $89.5m pursuant to the terms of a memorandum of agreement entered into on December 16, 2009 with an unrelated third party.”
Though the prospectus is only preliminary, and the pricing has not yet been set, if the offering priced at current levels (near $2.5 per share), nearly 13.5m shares would be sold, and the outstanding share count would increase by more than 40%.
In some respects, such behavior seems standard fare—acquisitions are made, cash is raised, and revenues are grown. Yet, for the investor, the only real interest is the effect of such decisions on (per-share) business value. And here the investor should be sorely disappointed.
Before the proposed offering, the shareholder is able to purchase a claim on $6.30 per share in hard assets ($210m / 33.26m shares outstanding) at a nearly 60% discount (given a market cap of $83m). After the offering, that same shareholder—after having seen $33.75m added in equity to buy a $89m asset, with the remainder financed with debt—would have a claim on $244m in hard assets. But, given the increase in shares outstanding (to near 47m), that claim is now against only $5.2 per share in hard assets.
In other words, the buyer of shares today is likely to see the per-share value of his claim on Seanergy’s assets fall by nearly 20%, if the proposed offering goes through near today’s market prices. Of course, were Seanergy’s price to fall further, the damage to existing shareholders could be greater.
Most simply, there is only one way that the offering makes sense for a rational capital allocator–that is, if the desired Capesize vessel can be purchased at a greater discount than the current discount of Seanergy’s shares. Relative to Seanergy’s “hard” book value, its shares are currently trading at a greater than 60% discount. Even if Seanergy’s current “hard” book value overstates the value of its current ships by 50%, today’s share price would still represent a significant (perhaps 20%) discount to this lower figure.
So does Seanergy’s new proposed purchase meet this test? Is the new Capesize available at a 20% discount to its fair value? Using the proxy’s most recent estimates, a new Capesize was selling for about $58m in September 2009 (p. 126). Paying $89m for such a vessel hardly looks like a 20% discount.
Better throw this fish back.