Originally published on May 22, 2022
This recently listed specialist dry bulk shipping company offers an attractive opportunity to capture the upside of the supply-demand dynamics playing out in the minor bulk segment of the shipping market, whilst providing protection on the downside with a strong balance sheet, well supported cash flows and low share price.
Taylor Maritime Investments (TMI/TMIP) is a specialist dry bulk shipping company that listed on the Main Market of the London Stock Exchange in May 2021. They have a portfolio of 27 geared dry bulk vessels – 26 “Handysize” and 1 “Supramax” – with an average age of ~10 years. They also own a 26.6% stake in Grindrod Shipping Holdings Ltd which has a complementary portfolio of 24 vessels.
The commercial management of the vessels in the portfolio is outsourced to Taylor Maritime – a separate entity founded by the Executive Directors of TMI, that has served as commercial manager to a number of large shipping companies. The technical management of the vessels in the fleet is outsourced to Tamar ship management which is a partner of Taylor Maritime.
The vessels are contracted out on Time Charters (TCs) with an effective daily rate that excludes voyage expenses (fuel, port fees, etc) which are paid by the charterer.
Due to positive market dynamics the average daily rate on TC contracts for the portfolio is now in excess of $19,000 per day, compared to the 20-year average for equivalent vessels of $12,000. The same supply-demand mismatch has caused the price of new vessels to rocket, providing a corresponding uplift in the prices of the second hand vessels in the portfolio.
The management have capitalised on this uplift with some strategic sales of older vessels in the portfolio at multiples of invested capital (MOIC) of 1.4x to 1.7x. The proceeds of these sales were used to part finance the acquisition of the stake in Grindrod Shipping.
The company uses a mix of long, medium and short charter durations, providing exposure to attractive spot rates while maintaining good earnings visibility. The average charter duration published in the Q4 trading update was 7 months.
The minor bulk commodities carried by TMIs fleet are primarily necessity goods, such as grains and other agribulks, that are less exposed to economic events than other commodities like oil. Handysize and Supramax vessels are also more versatile than larger vessels: able to reach smaller ports and those without loading equipment, since they have their own onboard cranes.
In the first few months after the IPO, the company’s shares traded at a premium. It is likely that this was partly caused by an increasingly positive outlook for the shipping sector as the rush of demand triggered by post-lockdown reopening caused spot rates to increase sharply. Another component is the fact that several of the seed assets were purchased in part by the issuance of consideration shares, which had a lock-in period of between 6-12 months. This meant the supply of shares on the secondary market was more limited during this period.
The evident demand for additional shares allowed the company to raise an additional $75m through a subsequent share issue, which was used to acquire a further 6 vessels.
Over the course of the year the NAV has grown substantially, to the point where it now stands over 70% higher than at the time of the IPO. The share price hasn’t quite kept up and so the shares now trade at a discount. This is likely due in part to the liquidation of the consideration shares held by several entities (none owned by the management) after their lock-in period ended, increasing the supply of shares on the secondary market.
The company had a vessel docked at one of Ukraine’s Black Sea ports when Russia invaded on 24 February. The crew were evacuated safely but the ship remains at berth in port. As the ship is still on charter and insured, the impact on TMI should be minimal.
Less than 5% of port calls made by TMI vessels were to Ukrainian or Russian ports, so it shouldn’t be difficult to reroute these vessels elsewhere.
TMI employs a revolving credit facility, restricted to a maximum of 25% of NAV, to fund acquisitions and is currently drawn to the value of $140m (24.3% of the NAV as of 31 Mar 2022). This debt is not intended to be structural, so will be paid down by operating cash flows in between acquisitions.
The company is very much a family operation, with Edward Buttery, the CEO, and Camilla Pierrepont, the CSO, being brother and sister. Their father Christopher Buttery – a veteran of the shipping industry and co-founder of Pacific Basin – sits on the board as a non-executive director.
I would estimate their stake in the company to be somewhere between 5-10%, both through personal holdings and interests in other entities that have significant ownership stakes. Several of the seed portfolio assets were previously in the possession of other companies in which the Buttery family had a stake, and their sale to TMI was made partly through the issuance of consideration shares.
The members of the executive team all worked together at Taylor Maritime – a business founded by Edward Buttery, the CEO – prior to the formation of TMI. Between them they have extensive experience in the maritime sector and business more broadly.
The board equally holds a wealth of experience and is chaired by Nicholas Lykiardopulo, whose family owns the Neda Maritime Agency – a shipping business founded by the Lykiardopulo family in 1879.
The incentives of the executive team seem to be reasonably well aligned with the shareholders, as a large part of their remuneration comes in the form of a Long Term Incentive Plan (LTIP), paid through the issuance of shares, which is dependent on the size of the return on NAV they achieve. With the target 12% return achieved each year over a three year period, the total management fees (including base salaries) would equate to somewhere around 1% of the NAV. The fee percentage is expected to decrease as the NAV grows.
Valuation and investment case
To get a conservative baseline valuation for the company I will consider only the expected operating cash flows, excluding any profits from appreciating asset values.
As previously mentioned, the average daily charter rate for 32dwt handysize vessels over the last 20 years has been $12,000. The vessel operating costs are as yet undisclosed by TMI, but drawing on information from other sources I’d estimate them to be ~$5,500 per day. Subtracting one figure from the other gives us a daily operating income per vessel of ~$6,500.
Multiplying this figure by the fleet size (27) and the number of operational days per year (227 is what I’ve calculated from data provided in TMI’s Q4 trading update) we get an operating income of ~$40m per year from the vessel portfolio. If I add to this the well covered dividend of $14m the company receives from its stake in Grindrod Shipping, we get a total operating income of ~$54m.
Subtracting another $4m from this figure for other expenses (management fees, admin fees, audit fees, etc) I get a net income figure of $50m which I use as the starting point for Net Present Value (NPV) calculations.
Note: I’ve excluded interest expenses, as the company plans to maintain no long-term structural debt. Tax has also been excluded as the company is registered in Guernsey and all the vessels in the portfolio are individually held in SPVs (predominantly registered in the Marshall Islands), meaning the profits are shielded from income tax.
With the market cap of the company currently ~$500m, this net income figure would give a PE of 10. On top of this we can expect operating income to grow as profits are reinvested in either direct or indirect fleet expansion, which I’ll conservatively assume is 5%.
Using a discount rate of 10% these figures give a positive NPV over 15 years. This provides decent downside protection, but I don’t feel it accurately reflects the potential returns from this company. To put it in perspective, their operating profits for the quarter ending 31 March 2022 alone were $33m and the charter rates have only strengthened since then.
Charter rates are expected to remain high for at least the next couple of years as order books for new Handysize and Supramax vessels are currently below the rate of retirement, meaning the global fleet size is expected to shrink in the near term. There are a couple of factors contributing to this: the first is increased demand for new container ships, LNG carriers and oil tankers filling up shipyards as container shipping rates and fossil fuel prices have rocketed; the second is hesitancy to order new vessels due to anticipated environmental regulations that could impair their value.
Effective supply is also expected to decrease as vessels are forced to slow down in order to reduce their emissions to meet forthcoming environmental targets set by the International Maritime Organisation (IMO).
If the company is able to recycle these near-term profits into further vessel acquisitions, the expanded portfolio size should bolster operating income and offset any drop off in charter rates. Portfolio growth can be further accelerated if they are able to sell vessels at elevated prices and replace them with stakes in listed shipping companies selling at a substantial discount to NAV – as they did with Grindrod Shipping.
There are a number of realistic scenarios that incorporate the current market conditions and favourable near-term charter rates, under which the company could generate an IRR in excess of 20% for investors when modelled over 15 years. This would equate to a 15x multiple of invested capital, so there is substantial upside to be had.
The first risk to address is that of a global recession – looking increasingly likely given the current inflationary pressures – causing a market downturn. A mitigating factor against this risk is the fact that the cargo carried by TMI’s fleet consists of necessity goods.
A recession is likely to cause a distinct downturn in the demand for discretionary goods which you would expect to put downward pressure on container shipping rates. A similar argument could be made for fossil fuel shipments, as demand is killed by inflated prices.
However, demand for necessity goods such as grains and other agribulks is less susceptible to economic downturns. The shipping rates are determined by a combination of the supply of vessels and the price of the commodities being transported. The supply of vessels looks favourable over the next few years, while the price of commodities such as wheat is likely to remain high for a stretch, but will eventually fall back down with a lag as input costs decrease.
The second risk to address is management. When I first started looking at this company I recognised this as a prominent risk given the close relationships, familial and otherwise, between the directors. This extends beyond the company itself, to the commercial manager which is privately owned by the management team of TMI.
However, I think they have put together a strong independent board to oversee the operations and ensure the interests of investors are prioritised. The executive team also has significant stakes in the company and their interests are further aligned with investors through a long term incentive plan linked to NAV growth.
As to the competence of the management team, I have seen good evidence of their ability to source and complete attractive deals for the purchase and sale of assets. They have also demonstrated a capacity for capturing favourable short-term charter rates, while prudently maintaining a mix of longer term charters, to ensure good cash flow visibility and hedge against volatility in spot rates.
The final risk I want to address is leverage. Given the expectation that interest rates will continue to rise as central banks attempt to combat inflation, there is the risk that interest payments on debt will become unsustainable, especially if there is any fall in cash flows.
The company’s policy of restricting debt to a maximum of 25% of NAV and only to facilitate acquisitions rather than as a structural component of the balance sheet, helps to mitigate against the risk of debt becoming unsustainable. The visibility of cash flows (average charter duration is 7 months) also helps to ensure that interest payments are covered in the medium term.
The strength of the company’s balance sheet, combined with well supported cash flows and capable management, offer sufficient downside protection to make this a reasonably secure investment. At the same time, the realistic potential for pretty phenomenal returns adds substantial allure. I think this stock deserves a place in a well balanced portfolio.
None of the above should be construed as investment advice. Readers should do their own due diligence before making any investment. While I have endeavoured to present all figures correctly, I can’t guarantee their accuracy. My aim is to provide readers with a brief analysis of an investment opportunity which they can use as the starting point for further research.