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2009 – A GOOD OR BAD YEAR?
By Richard Lemanski
Last year, we wrote on these pages that 2008 was a year when profitability for shipping companies held up better than returns to shareholders. This was primarily due to the fact that the global financial and shipping crisis did not become fully evident until September of 2008, giving most shipping companies close to three quarters of strong financial results in 2008. The dramatic fall in share prices and cuts in dividends did not occur until the fourth quarter of 2008. As the financial markets are forward looking and financial results are backward looking, this was not entirely surprising. We also stated that the price to book and EV to EBITDA valuation metrics were implying that by the end of 2008 the financial markets may have overshot and the share prices of shipping companies were undervalued.
The financial markets were certainly correct in terms of shipping companies heading into a downturn in 2009. We were also however correct in predicting on these pages that it looked like the financial markets may have overshot the mark and shipping companies were undervalued.
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Where Are the Tankers? A Pronounced Market Effect
By George Weltman
As our model churned out this year’s rankings of publicly traded companies, something was clearly amiss. We looked at the top 10 finishers and could not find a tanker company. In the main, the top 10 finishers were dry bulk companies although there were included companies, which are peripherally involved in oil movement, but none simple tanker companies. As our daughter was recently studying the Constitution, the XVIII Amendment to the U.S. Constitution, ratified January 16, 1919, crossed our mind:
After one year from the ratification of this article the manufacture, sale, or transportation of intoxicating liquors within, the importation thereof into, or the exportation thereof from the United States and all territory subject to the jurisdiction thereof for beverage purposes is hereby prohibited.
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Buy the Rumor Not the News
By Jim Lawrence
Fifteen years ago we used that same headline for a year during which actual performance lagged the perception that shipping values would soon soar. For our 2009 Annual Ranking of the world’s most important public shipping companies, much the same could be said in many camps. Returns to shareholders, while not the frothy sort, as seen in 2007, were nonetheless good despite difficult operating results.
That news is, of course, the exact mirror opposite of the 2008 results, where financial performances held up even as shareholders fled the shipping sector faster than grease lightening!
Before spending time ruminating on the trends associated with 2009, it is our privilege to congratulate the 1,000s of men and women, at sea and ashore, who worked so hard throughout the year to deliver the industry’s results. It is a collaboration of strategy, operational expertise, financial acumen and technical skill that the numbers represent, but do not adequately do justice. In this year of the seafarer, we take just one more moment to salute their performance, acknowledging that while it is financial performance we rank here, the seafarers who get their ships and cargoes safely to each destination, voyage after voyage, are the real winners.
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Talent Finding New Homes!
Dahlman Rose & Co Add Powerhouse Chairman
Well know financier Kim Fennebresque has joined Dahlman Rose as the firm’s Chairman. The move continues the investment bank’s enormously successful development built on commitment to client service, top shelf independent research and superior personnel recruitment over the past half dozen years. In fact the current move should accelerate the firm’s growth and strengthen it’s already considerable platform.
Mr. Fennebresque joins Dahlman Rose after a distinguished career, which started at The First Boston Corporation in 1977. His career path since then could be used as a business school model for just how to gain valuable experience, contacts and skills needed to lead a successful investment bank. Mr. Fennebresque left First Boston in 1991 to join Lazard Freres as a General partner where he remained until joining UBS to lead that bank’s Mergers & Acquisitions and Corporate Finance departments.
Then in 1998 he joined SG Cowen, the US subsidiary of Societe Generale. He served as President, CEO and Chairman for most of his tenure at Cowen. It was that sort of reputation which led the US Treasury to ask him to join the Board of GMAC.
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David Buys Goliath – Sort of
Yesterday, Aegean Marine Petroleum Network Inc. announced it has entered into an agreement to acquire from Shell Espana S.A. the assets and operations of the Shell Las Palmas terminal in the Canary Islands.
Occupying approximately 20,000 square meters, Shell Las Palmas terminal provides bunkering services along major trans-Atlantic seaborne trade routes. The terminal includes a lubricants plant, dedicated in-land storage facilities, with a capacity of approximately 65,000 cubic meters, as well as on-site blending facilities to sell all grades of fuel oils and distillates. Las Palmas generates total annual marine fuel sales volumes in excess of approximately 2.0 million metric tons, of which Shell Espana has an approximate 18% market share overall, and a 25% market share in fuel oil 380 cst.
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At Last!
We were wrong and for that we blame Joe Royce and his management team, who over an extensive period successfully re-negotiated new covenants in their loan agreements without having to issue a high yield bond to reduce the bank exposure as we surmised. But then again, as an industry insider suggested, given their credit and the uncertainty surrounding the negotiations, it may not have been possible or the price was too high.
TBS International successfully concluded the negotiations this week and amended its credit facilities with the three syndicates led by Bank of America (“BofA”), The Royal Bank of Scotland and DVB Group Merchant Bank as well as its loan agreements with AIG Commercial Equipment, Commerzbank, Berenberg Bank and Credit Suisse. Objective success will be determined on whether TBS remains in compliance with the new covenants going forward. Currently, the company expects to be in conformance with the financial covenants through maturity of the facilities. The important outcome of the agreements is that long-term debt, which had been previously classified as short-term, as the debt was considered callable due to the borrower’s inability to cure the breaches within a twelve month period, is again being classified as long-term debt.
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The Rankings Methodology
We keep our methodology as consistent as possible from year to year so that it is possible to create a time series of data, or to just compare one year’s winner to another. Even with this in mind, though, it is important to update the methodologies and improve them over time. We constantly examine our financial ratios in order to better measure companies’ performance, but in this instance have stuck with the measures developed for the 2004 Rankings, giving us now four years of completely consistent comparison.
As a review, we define financial performance as companies’ ability to improve operating efficiency and to create shareholder value. Based on this understanding, we distinguish between performance ratios and financial strength ratios. The performance ratios focus on evaluating the operating efficiency and the ability to create value; while the financial strength ratios emphasize companies’ financial safety and health. While we do not believe that financial strength necessarily has direct impact on or is a direct indicator of companies’ performance levels, it provides a good benchmark from a creditor’s standpoint and ensures the sustainability of company operations, and we therefore believe it is a metric very worth calculating and considering, but also one that should be separated from overall financial performance.
For our rankings methodology, we have chosen six performance ratios, namely Total Return to Shareholders (TRS), ROE, ROA, Profit Margin, Price to Book and Asset Turnover. To evaluate financial strength, we look at Current Ratio, Debt to Capitalization, and Interest Coverage Ratio. From a valuation point of view, we leave the EV/EBITDA ratio as a straightforward, standalone benchmark.
This year again, we have ranked and present performance and financial strength separately. In each of these divisions, we rank each company’s performance for each indicator and then compute average rank scores based on the unweighted average of those indicator ranks. The overall rank is determined according to the average rank scores, with smaller being better, a rank of one, of course, being the best.
Equations for the financial ratios we use for Marine Money Rankings 2006 are listed in Figure xx, and in the following paragraphs are detailed descriptions of each metric, as well as justifications for inclusion.
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Bits and Bobs on Rankings
By Rodricks Wong
After weeks of mounting anticipation, the ranking results are finally in and with that, the suspense has come to an end. We are particularly excited to find out if our winners for 2007, with the majority trading dry, will be able to replicate their success this time round.
We wrote in these pages that the past four years 2004 to 2007 were like a continuing miracle for the shipping industry. But 2008 is the year of reversal. Not many will disagree that 2008 will go down in history as one of the most theatrical years that the entire shipping industry has ever experienced. The Baltic Dry Index soared to an unprecedented level in May 2008 at the back of strong iron ore and coal transportation demand to China but no one has expected that the pendulum could swing as dramatically in the opposite direction, starting from the third quarter of 2008, and the BDI sunk into its lowest level of 663 points in December.
This year, our shipping universe expanded slightly to 100 companies and Figure 1 shows the breakdown of this year’s rankings by geography. The companies included are legally based in Europe, America, Asia or Micronesia, with one company based in Middle East and Africa each.
Does size matter?
By Mary-Irene Alexandrakis, MSc Candidate in Transportation at MIT
Yes, the title does sound suspicious, but it’s a pretty straightforward question. Does size matter in the shipping industry? Is it important for shipping companies to keep buying ships? Is it important that the shipping companies expand to establish global network coverage? Do they need to keep on expanding in order to deal with the competition? The past year we have seen a lot of ups and downs in the shipping sector, but mostly downs. If we check which companies actually survived and made it to the top of our overall performance list for 2008, then we may actually draw some quite interesting conclusions.
The issue here under consideration is whether the size of the shipping companies, as measured by total market capitalization is correlated to their performance. In such a challenging environment, it’s an interesting question whether the largest companies made it to the top of our list, proving that a large capital base can actually support sustainability and growth or not. In theory, a large balance sheet can help companies source capital. Large balance sheets also help companies absorb extra losses, and for that matter allow taking on more risk. Consolidation receives frequent attention in this industry, especially today when people expect an increasing M&A trend for the future.
Who Lost the Least
By Jim Lawrence
In the category of Total Return to Shareholders, “Who Lost the Least” is a very apt title for 2008. TRS results are simply bloody. After 4 straight years of beating the S&P 500 shipping shares plunged posting results that are far worse than the S&P 500’s worst annual loss since an earlier version of the index loss in the 1931. In fact only three companies in our shipping universe managed a positive TRS.
This in a year of extraordinary results.
It is completely appropriate to acknowledge and applaud the fine returns of International Shipholding Group, Nordic American Tankers and Alexander and Baldwin – a thinly traded takeover target, a low debt/high dividend tanker company and a conglomerate with real estate, commodities and protected US Flag shipping. But more about their achievement later.
By now everyone should know shipping is cyclical. But, if there is anyone out there still believing that trees grow to the sky, or that the recent past represented a new paradigm a quick look at the TRS fall from grace should snap them out of their reverie.
After four years during which the industry mean returned 42% and the industry median returned 27% those figures plummeted to a NEGATIVE 55% and 58% respectively.
Striking though is the fact that for many companies 2008 produced attractive actual profits. So an Ultrapetrol, which Ranked near the bottom at 95th on the list of TRS, in fact was 45th in terms of Profit and 40th in Return on Assets. Eagle Bulk, while finishing strongly at 28th in terms of Profit suffered with its TRS results all the way down at 69th. Again and again that story played out and while the dry bulk and container markets were slightly harder hit, the story cut across all shipping sectors.
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