Over the last few months, many have asked for an update to our previous analysis of Seanergy Maritime. Since January, much has changed. Seanergy did follow through on its planned capital raise, which brought in $30m, but executed at a much worse price (about 1.2 per share) than we expected. A few days later, their plans to acquire a 2009 Capesize vessel were nixed. Though in May, Seanergy announced its new plans to acquire a 51% ownership interest in Maritime Capital Shipping Limited, of Bermuda (“MCS”) for a purchase price of $33m. Last week Seanergy announced that the MCS deal had closed. And the following day, they reported Q1 results.
In light of these changed conditions, anglers want to know—would you still “throw it back” at these prices? Frankly, I would.
On first glance, today’s $1.2 per price may appear cheap. With about 60m shares outstanding, and 1m warrants with strikes near these prices, Mr. Market values Seanergy’s equity at ~$73m.
Yet, following the close of the MCS acquisition (i.e., June 3rd), Seanergy’s total assets (including now a fleet of twenty vessels) are approximately $730 million, its total debt approximately $430.8 million, and cash reserves near $84.5 million. These numbers suggest a book value (ex-goodwill) near $4.6 per share. This discount to book has led Seanergy’s management to conclude that today’s price represents “a great entry point.” And according to management’s recent CC remarks, the Restis family (i.e., Seanergy’s majority shareholders) thinks today’s stock price is cheap as well.
Apparently, angling for this bargain need not be a lonely endeavor.
Though in principle I appreciate the support of fellow anglers, my reasons for casting back here are threefold:
1) Seanergy operates in an industry with very weak business franchises (see Buffett’s discussion here). Barriers to entry (or, at least, capacity expansion) are low, with banks today still lending a substantial portion of the cost for new ship construction. Consequently, new supply looks abundant. As of April 2010, the total world drybulk fleet could carry 475.6m Dwt. 2010 should see an additional 109.5m Dwt increase in global drybulk capacity (that’s 23%). And we’ll see 104.3m Dwt more capacity in 2011, with 74.4m Dwt more in 2012 and beyond (according to Clarkson Research Services). As Seanergy plainly acknowledges, the current dry bulk order book is 60% of the world fleet, and most of this will come online in the next 2.5 years. Though I won’t make any predictions about dry bulk rates for 2011, it’s hard for me to see the global shipping trade increasing at a rate sufficient to soak up this oncoming supply.
2) On a liquidation basis, Seanergy’s (now twenty) ships are likely worth less than their current $430m in total debt, and after accounting for minority interests. Run your own back-of-the-envelope calculations on their aging fleet, but recent amendments to their outstanding credit agreement with Marfin Bank of Greece show that their leash is tethered.
3) Even though their current market cap to EBITDA ratio may appear cheap, the metric ignores their significant debt load, and assumes that today’s corporate debt levels will be available in perpetuity. Better always, in my lights, to value businesses based on their enterprise value to EBITDA (or better yet, enterprise value to “owner earnings”).
Let’s say Seanergy earns 48m-60m EBITDA for 2010. If you bought the whole company at today’s market price of ~$1.2 per share, you’d be paying $72m for the equity (given 60m shares out), taking on the $430m in debt, and getting $85m in cash (as of 6/3/10). Call it $417m in enterprise value. For me, that’s not an attractive price to buy the business as a whole, particularly in an industry where depreciation is real and significant industry headwinds loom ahead.
Disclosure: no position