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ferrariedgardo (97.89)

Readings on KSP and waht to expect on OCNF

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October 29, 2009 – Comments (5) | RELATED TICKERS: OCNF , KSP

Following my blog on OCNF opportunity and give that the stock has gone down 15% since my reccomendation two days ago, I am trying to figure out what is going to come in the next few days. This has been my worst pick so far and faithful in my rationale and insticts I increased my position yesterday, hopefully it will pay off in the next few months.

Today was a hard day for the shipping industry after KSP (tanker business) came out with its results showing:

1. EPS of 0.04 vs. expected 0.29

2. Decline of 22% in revenue

3. Statement that they may be breaching covenants in Q2 or Q3

4. Dividend slashed by 42%

 

Indeed all bad news for the shipping industry but trying to extrapolate which of these may apply to OCNF here is my read:

1. Unadjusted EPS for KSP was driven by an impairment which OCNF already did and not having additional ships may I would expect no impairments are present this quarter. Adjusted EPS mainly hit by decrease in revenue,

2. On the revenue side OCNF might get a very similar decline in the order of 20% however, last quarter there were some 10% unused days that they might have fixed already that may give them some upside, yet on the downside for OCNF revenue I ignore if there were any time charters (TCs) that were renegotiated or new TCs at lower prices.

3. Breaching covenants is something that seems far from possible given the level of cash and the amount of commitments and the ability of generating positive cashflows (if this remains as last quarter)

4.  Dividend was slashed preventively by the end of last year. Cannot figure out why KSP management didn´t let it go to 0 if they are going to breach covenants in the next 3 to 6 months 

 

5 Comments – Post Your Own

#1) On October 29, 2009 at 6:57 PM, mymini (< 20) wrote:

Interesting how you closed most of your positions today. One of the ones left open is OCNF.

Any words of wisdom behind your actions?

 

Thanks

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#2) On October 30, 2009 at 3:24 PM, ferrariedgardo (97.89) wrote:

The stocks that I discontinued my outperform rating was because they have come a long way up and although I like the fundamentals I beleive those stocks have already caught up with the market for the time being.

Regarding OCNF; it is my worst pick but I believe the market has not consider they strategy as sound as I see it.

I think OCNF management has been right on target when they decided to secure cash by slashing dividends to 0, raised capital and use cash to decrease debt. At the same time and given the cyclicality of the industry and ships prices all the excess cash is going to be used to buy almost new ships at very low prices. As a management consultant I have seen this  in several cases and it invariably works when you get ready before your competitors do.

For example if you look at KSP (which many analysts recommend) they did exactly the opposite. They decreased dividends by 40% and they kept orders for new ships open (built ships are by contract much more expensive than the prices currently available in the market). Additionaly and given their unwise policy, they are now looking to breach covenants next quarter, which is really a disaster and they may have to sell ships at a very low price.

However, analysts in general favour those who do not cut dividends because they see that as a way of showing financial strength but it is not necesarilly the case it might also show irresposibility or lack of vision.

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#3) On October 30, 2009 at 6:03 PM, darkhound (< 20) wrote:

I bought at 1.40 and am not too pleased right now.  I almost want to buy more at this price, but I think I'll just hold until earnings come out.

Keep up with the great updates!

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#4) On October 31, 2009 at 6:33 PM, imacg5 (< 20) wrote:

   I wouldn't give management credit for dropping the dividend and reducing debt, those were the conditions set forth by the waivers they obtained when they became in breach of loan covenants. They also cannot make any purchases, until they have paid down debt or ship prices rise to meet the 140% collateral maintenance ratio. OCNF became in breach of covenants when the value of their fleet dropped below the levels stated as part of their loan agreement. During the waiver period the margin on the loans went up to 2% above LIBOR, and restricted cash must be at least 1/2 million per ship. The conditions are reported on every earnings and prospectus report.

  Earnings will be hit by by the sale of the Lansing, and the loss of it's charter, and the failures of the contracts on the Richmond, Topeka, and Olinda. The charters were reset at lower rates. Your research should include the fleet deployment page. No matter how optimistic your numbers are for the growth of the worlds economy and shipping, they are surpassed by the growth of the fleet for the next two years.

 Rates, and ship values are not expected to improve any time soon for dry bulk or tankers. 

  I don't know why the price would surprise anyone, given that they had 16 million shares last October and will soon have 425 million. Anyone who doesn't think they are diluting, you should look at the sale to YA Global last May.

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#5) On November 01, 2009 at 2:17 AM, ferrariedgardo (97.89) wrote:

Thanks for the very insughtful comments, Regardless of the breach in covenants and the higher interest rate, it is always a good policy to have significant cash in an industry going on tail spin.

Lansing and Juneau impairments were already included in the previous quarter financials and impairments on ships is not relevant for the financial health of the company as those are not cash outflows (less considering that they are replacing ships).

The charters are much bigger issue, but this has happened to other dry bulk ships as well. However, I aknowledge the relevance that may have in financials.

Also, I agree that at least during 2010 the rates will be low, slightly recovering in 2011. Still, the battle at this point in the industry is on the survival side and cash and purchasing of ships at distressed prices will be critical for that. The cycle of dry bulk shipping goes from negative ROIC to huge ROICs, and the key is to acquire at low prices set long term contracts while things are down and when the cycle is up again and your contracts are up, you renegotiate and make the difference.

I would expect when other shipping companies go bankrupt then prices of repossesed vessels will go down and companies with cash will take advantage.

 

Regarding the dilution, it must be said that accretive stock issuance is good (and not dilutive) because  the ROIC you get from that additional investment is higher than the one you would get from your investments already available. By buying at distressed prices, you get that higher ROIC.

 

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