Star Bulk Carriers ( and the shipping sector)

SBLK : NASDAQ : US$$6.46

BUY ? – not just yet 
Target: US$19.00

Disclosure : Our managed accounts sold all shipping stocks – part of the reason we are 40% cash – see the Year End Review at
SBLK is on our watchlist.

Star Bulk Carriers is a global dry bulk shipping company
incorporated in the Marshall Islands in December 2006. The
company is headquartered in Athens, Greece and specializes in
the Capesize and Supramax segments of dry bulk.
All amounts in US$ unless otherwise noted.

 The Shipping Sector NOT A BLACK HOLE

Investment recommendation
We maintain our BUY rating, but are lowering our price target to $19
(from $21). Star Bulk continues to be our favorite name in the dry bulk
space due to its sizeable, modern fleet and low cost basis. We continue
to believe the company will be a beacon for future consolidation in the

Investment highlights

 Funding gap worries overblown: While a substantial portion of the
company’s capital expenditure requirements have secured
financing, there still remains an estimated $103 million equity
funding gap to be filled through 2016. The recent issuance of $50
million of unsecured notes helped lower that number and give
management time. We believe a combination of operating cash flow
generation, further unsecured notes, or equity-linked securities
could get the company the rest of the way in a manner that
minimizes equity dilution.
 Growth into 2015 and 2016 should remain strong: With 20 of the
34 vessels from the Excel fleet acquired year-to-date, the remaining
14 vessels expected by year-end, and 35 newbuilds by the end of
2016, we expect earnings growth should ramp up in Q4/14 going
into 2015.


Based on our expected 2016 year-end balance sheet and fully delivered
fleet at that time, we calculate Star Bulk’s forward, normalized NAV to
be $18.96 per share. As such we believe that SBLK is undervalued and
we maintain our BUY rating, but lower our price target to $19 (from
$21). Our target is based on the average of our two forward NAVs.
In terms of vessel operating expense, we look for the company’s Capesize vessels to run
$6,300 per vessel/day, Post-Panamax vessels to run $5,500 per vessel/day, and the
Supramax vessels to run $5,100 per vessel/day, and we expect those numbers to increase
with inflation in 2015 and 2016. For drydocking, we note that the company expenses
drydocking (instead of capitalizing and depreciating it), which has a tendency to cause
some earnings volatility from period to period. We are expecting drydocking of $8 million
in 2014, $18 million in 2015, and $25 million in 2016. Finally, we look for G&A expenses
(including non-cash stock compensation) in 2014 through 2016 of $33 million, $39 million,
and $43 million, respectively, which equates to $1,000 per vessel/day by 2016 and $6
million of annual non-cash stock compensation. Given our revenue and expense forecast,
we estimate that the company will achieve operating EPS of ($0.13) in 2014, $1.15 in
2015, and $2.06 in 2016, and EBITDA of $27 million, $278 million, and $451 million,
Balance sheet: The company ended Q3/14 with $96 million of cash versus $576 million of
debt. Going forward, the company has a fairly large newbuild program that it intends to
finance with 60% leverage. The company has total capital expenditure requirements $1.5
billion, with $934 million due in 2015 and $304 million in 2016. Out of this amount,
banking financing for $687 million is committed, $293 million is under negotiations (nine
ships), and $65 million is targeted (two ships). Equity requirements remaining are $216
million, of which management estimates there is a funding gap of $103 million. The recent
issuance of $50 million of unsecured notes helped bridge a portion of this gap and gives
the company time. We expect the remaining portion to be met from a combination of cash
flow from operations, further unsecured debt, equity-linked, or straight equity, with the
aim to minimize dilution. Based on our model, we assume another $50 million of
unsecured debt is issued later next year.


Our primary benchmark in evaluating shipping company valuations is price/charteradjusted
NAV. This metric takes into account the overall market value of a company’s
assets based on quoted prices from shipping brokers, adjusted for balance sheet items. In
particular, we believe it’s useful to also adjust for any charters that may be above or below
the current market based on a discounted cash flow relative to what we believe is the
consensus market forecast. Given that shipping in general is a highly cyclical industry, we
prefer to normalize NAV based on long-term historical averages, which we use as a proxy
for mid-cycle asset values.
We also supplement our NAV valuation with relative EV/EBITDA multiples. Given the
highly cyclical and volatile nature of the shipping industry, we find EBITDA to be a clearer
and more stable measure of earnings than reported net income. Furthermore, as the
shipping industry is capital-intensive, an EV/EBITDA valuation enables us to compare
companies with varying levels of debt on an equitable basis.
Price/NAV: We’ve calculated Star Bulk’s NAV to be $9.39, based on the Q3/14 balance
sheet and fleet at that time (41 vessels).


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