Seanergy Revisited

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

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Trolling for Bargains

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.

Disclosure: None