Why I think OCNF is a huge opportunity currently trading at distress prices
October 26, 2009
– Comments (11) |
RELATED TICKERS: OCNF
OCNF (Disclosure: I have a significant position in this stock and all the statements here are based on my own analysis based on publicly available information)
For the last few weeks I have been trying to understand the valuation of OCNF and yet, I do not find enough reasons for its current valuation.
Today OCNF has reached $1.03 which represents a market cap of $93 million and which translates in a decline of more than 37% since the beginning of August and more than 40% form the last two months high.
I am still trying to understand the reasons for this decline but I only find some short term issues that may explain the decline of the stock.
Here are some of the questions I asked myself in order of relevance:
1. Is the company going bankrupt? No, at least that is what it’s cash position suggests, in the last quarter the company had 104 million in cash and considering that its revenue from last quarter was 32 million it seems like pretty substantial cushion as it is more than three times the quarterly revenue. To have an idea of how well this is we can compare this to companies that are the gold standard for having large sums of cash the first is MSFT June 30 th statements cash and short term investments: $31 bn. Quarterly revenue: $58bn. Cash and short term investments are around half a quarter of revenues , the second example is Goog June 30 th statements cash and short term investments: $16 bn. Quarterly revenue: $21 bn. Cash and short term investments are less than 0.6 times quarterly revenues
2. What about debt? Because the industry invests in very high fixed depreciating assets the industry tends to have huge amounts of debt yet when comparing OCNF with other companies in the industry it seems its debt levels are within acceptable levels for the industry averages but considering that most of the revenue of the company is secured by contracts their predictability of cashflows is better than for other companies and thus it can handle higher levels of debt. D/E OCNF =0.92 PRGN= 0.90, DRYS= 1.19, ESEA = 0.29, Industry average = 0.74, Sector = 1.36
3. How is the company doing? Last quarter OCNF presented a significant loss of $32.8M or 0.51 cents per share. However most of this loss $ 30M was due to the sale of two old ships at a lower price than book value, yet at the same time OCNF bought two much newer ships at also very low values which ensures future revenues for the company. When looking in more details on the operations a slightly los utilization of below 90% can be noted but this is likely to increase as some contracts were locked in during these months. Additionally when looking at EBITDA the company generated $8.6 M or around $0.10 per share. When comparing the EBIT to interest it also looks healthy with a EBIT to interest ratio of 2 which considering the freight rates are very low it looks quite healthy.
4. What are the perspectives going forward? With the industry utilization declining freight rates will suffer pressure and revenue will go down. OCNF because of its long term contracts has a significant hedge to this downturn. However many of the competitors are struggling and not finding ways to cover for operating costs. With this and given the strong balance sheet and cash position OCNF can seize to buy newer ships at distressed prices and rent them at low rates for a couple of years but once the industry comes to balance again the prices of ships will quadruple and the rates might do even better. Thus buying ships now is the right thing to do.
5. What will happen in the industry going forward? Overcapacity will hurt the industry in the next year but the scrap tonnage of around 70 million dwt and a reduction in placed orders of 100 m dwt will allow freight rates to recover in 2011. At the same time it is important to remember that OCNF utilization will be very close to 100% due to its smart long term contract policy. Looking at the long run some dry bulk shipping companies will collapse leaving space to others like OCNF grow thus this is the moment to buy the stock. At current prices where the stock trades below the value of its cash and I expect it to generate positive cashflow it is the time to buy
6. What about the stock issuance for 400 M? In past presentations it was mentioned that OCNF is looking to issue shares worth 400 M to buy 10 additional panamaxes. However the number of panamaxes seems low if we consider that the industry finances a significant portion of each ship. Other than that I estimate that the ROIC of buying a ship at current prices would result in a ROIC of around 17 to 25% if the ship is financed with 60% debt and bought for 25M. Thus if a new emission is made above $1 it is very likely that the issuance is going to be accretive.
For these reasons I think OCNF is priced well below it’s potential and may increase several times in value in the next year. And by the way the earnings release is expected to come out next week at current prices I think that even a very bad quarter cannot hurt the stock anymore.
Please let me know your thoughts, comments, objections, etc.
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