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Amit Amin

GNK AT A GLANCE

P/E ► 419 VERY HIGH EV/EBITDA ► 17.7 HIGH ROA ► 3% AVG ROE ► 0.2% AVG Debt to Equity ► 1.66 AVG Current Ratio ► 3.35 HIGH Interest Coverage Ratio ► 1.03 AVG

 

 

 

 

 

 

Genco Shipping (New York Stock Exchange NYSE: GNK) owns 33 dry bulk vessels^[1], ships used to transport non-liquid goods such as grain or coal. The company has grown at a breakneck pace - from June `05 to June `08, the company's revenues grew 235% ^[2][3] and net income rose 395%.^[2][3]. Genco's ships, which have a total shipping capacity of approximately 2,615,000 deadweight tons (dwt),^[1] move mostly iron ore, coal, grain, and steel products. Genco charters its ships for periods of one to four years, and so only assists other companies in moving those goods. As Genco charters its ships for movement along major international shipping routes, it exposes itself to competition from the 1,300 or so other dry bulk vessel shipping companies and owners operating in the world.^[4]

The health of the dry bulk shipping industry, and all companies within it, are tied to the health of China's economy - with its rapid rise the trade in all dry bulk commodities rose from 2.1 billion tons in 2001 to 3 billion tons in 2007.^[5] With China on the rise, shipping rates have been skyrocketing.^[6] Unfortunately, a surge in new shipbuilding is raising demand for ship maintenance and repair services, as well as moderating potentially high charter rates. Worse yet, that surge is going to continue for at least the next couple of years. Ironically, while high demand for steel products has pushed up charter rates, it has also made new shipbuilding more expensive.

Company Overview

Genco Shipping has been growing at breakneck speed since its incorporation in 2004. From 2005 to June 30, 2008, revenues rose 235%,^[2][3] and net income rose 395%.^[2][3] Eagle buys used but young vessels, and then contracts them out to customers for periods of one to four years for a fixed daily fee.

Unlike many of its competitors, which focus on building up a fleet of just one or two ship types, Genco evaluates a ship on its value in and of itself, not on its type. By the end of 2007, Genco had five Capesize, six Panamax, three Supramax, six Handymax and eight Handysize drybulk vessels,^[9] financed by $989.25M of debt,^[10] on a market cap of $1.62B.^[10] Each ship is capable of carrying a different amount of cargo, with a Capesize vessel capable of moving six times as much cargo as a Handysize vessel.^[9] Being larger is not always better, however. A large ship like the Capesize can only be accommodated by the largest deep water terminals, while a Handysize vessel can access nearly all ports. Therefore, although rates for dry bulk ships tend to move together, they do vary by vessel type. Having a diversified fleet lets Genco minimize volatility in its revenues. The company's only consistent strategy has to get bigger quick, tripling its shipping capacity in deadweight tons (dwt) from 2005 to 2008.^[7][1]

Genco has also made the choice, which it may later change, to make time charters rather than running its ships on the spot market. On the spot market, a company can contract out its ship for a single voyage based on current charter rates on the Baltic Dry Index (BDI). The BDI is a daily average of the prices required by shipping companies on the Baltic Exchange to transport raw materials across the sea. The Baltic Exchange is a global marketplace for brokering dry cargo shipping contracts. The BDI is highly volatile, moving from 5,300 in July to 11,000 in November of 2007, back down to 5,700 two months later, back up 11,000 in May, to 4,800 in September.^[11] Long term contracts avoid the risks, but also the potential profits to be made on the spot market. In a time charter, Genco loans its ships to another company for a fixed daily fee. Genco is responsible for managing the ship and its crew during that time, but has no control over how its ship is used, aside from terms set in the charter contract. Genco does not manage its ships directly, preferring to contract technical managers from companies in the business of taking care of the day to day activities of dry cargo vessels.

Trends & Forces

World Economic Growth Increases Demand for Raw Materials

Strong growth in Asia, mostly in China, has caused demand for raw materials to skyrocket. Unable to extract the necessary resources domestically, China has turned to imports from other countries. With demand on the rise, the BDI doubled from 2006 to 2007.^[12] More specific to Genco, the average daily revenue per ship earned by its fleet rose approximately 20% from 2006 to 2007.^[13] Because Genco's fleet is diversified, the company avoided being dragged down by negative growth in the Handysize market, of which it has 8 ships^[9], but also avoided being propelled by strong growth in the Supramax and Panamax markets, of which it has 9 ships.^[9]

A Large Supply of Dry Bulk Vessels Is & Will Continue to Eat Up Genco's Margins

In 2007, there were contract orders for the construction of enough ships to increase the size of the worldwide fleet of dry bulk vessels by 57% from 2007 to 2010, excluding ship retirements.^[15] With operating margins ^[10] nearly double that of the industry average, Genco is doing great. However, it could be doing even better. From $2,805 in 2005,^[16] to $3,285 in 2006,^[13] and finally to $3,716 in 2007^[13] the average daily operating expenses of Genco's fleet has been rising. Genco passes fuel, port, and canal expenses onto its customers.^[13] From the turn of the century to early 2007, the shipping capacity in dwt of the world merchant fleet has risen approximately 40%.^[17][18] Expenses have mostly been rising because with so many more ships in operation, demand for things like crewing, repairs, and maintenance has been rising faster than they can be provided.^[13]

Rising Steel Prices Make Future Fleet Expansion Less Attractive

Rising Chinese demand for iron ore has pushed up dry bulk shipping rates.This means that shipbuilding costs have been increasing, making future ship expansion more expensive. From April 2007 to April 2008, steel prices rose more than 35%.^[19] Prices for steel plates, which are used to build ships, have risen by up to 83% during that same time period.^[20] Some of that rise will be absorbed by shipbuilders, and some of it won’t. The problem is that future fleet expansion is becoming less and less attractive. Within 3 years the size of the worldwide fleet will be at least one and half times what it is now.^[15] Even if China continues its rapid rate of expansion, over the past 3 years it grew just 36%,^[14] not 50%. Worse yet, the financial crisis in the U.S. is making borrowing more and more expensive. Combined with the higher price of ship construction and lower shipping rates, Genco won't be able to expand as easily as it has before.

Competition

Competition in the dry bulk shipping industry is based primarily on three things: price, vessel type, and vessel age. Price wise Genco has little control, only being able to choose when and for how long to make a contract. Genco's fleet is young, with an average age of just 6.37 years,^[9] and well diversified, with almost every type of ship from the baby Handysize to the gargantuan Capesize.^[9] Unlike its competitors that run on the spot market, Genco passes port, canal, and fuel costs onto its customers.^[13]

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4} June 30, 2008 GNK, 10-Q, Item 1, Page 8
2. ↑ ^{2.00 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 2.10 2.11} 2007 GNK, 10-K, Item 6, Page 36
3. ↑ ^{3.0 3.1 3.2 3.3} June 30, 2008 GNK, 10-Q, Item 1, Page 4
4. ↑ [2007 GNK, 10-K, Item 1, Page 9
5. ↑ 2007 DSX 20-F, Item 3, Page 25
6. ↑ The People’s Republic of China’s Economic and Commercial Counselor’s Office - China import growth weak; exports remain strong
7. ↑ ^{7.0 7.1 7.2} 2005 GNK, 10-K, Item 1, Page 3
8. ↑ ^{8.0 8.1} 2006 GNK, 10-K, Item 1, Page 4
9. ↑ ^{9.0 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9} 2007 GNK, 10-K, Item 1, Page 4
10. ↑ ^{10.0 10.1 10.2} Yahoo! Finance - Competitors
11. ↑ Bloomberg.com Investment Tools - BDI
12. ↑ Capital Link - BDI
13. ↑ ^{13.0 13.1 13.2 13.3 13.4 13.5} 2007 GNK, 10-K, Item 7, Page 42
14. ↑ ^{14.0 14.1} Chinability - China's Gross Domestic Product
15. ↑ ^{15.0 15.1} 2007 EGLE 10-K, Item 1, Page 21
16. ↑ 2006 GNK, 10-K, Item 7, Page 45
17. ↑ Office of Data and Economic Analysis - World Merchant Fleet 2001–2005
18. ↑ Jane's - Executive Overview: Jane's Merchant Ships
19. ↑ World Carbon Steel Transaction Prices
20. ↑ livemint.com - Rising steel prices may eat into Indian shipbuilders’ margins
21. ↑ ^{21.0 21.1 21.2} 2007 DSX, 20-F, Item 3, Page 4
22. ↑ 2007 DSX, 20-F, Item 4, Page 18
23. ↑ ^{23.0 23.1} 2006 DRYS, 20-F, Item 3, Page 2
24. ↑ 2006 DRYS, 20-F, Item 4, Page 20
25. ↑ 2006 DRYS, 20-F, Item 4, Page 16
26. ↑ ^{26.0 26.1} 2007 EGLE 10-K, Item 6, Page 32
27. ↑ 2007 EGLE 10-K, Item 1, Page 4
28. ↑ 2007 EGLE 10-K, Item 1, Page 2
29. ↑ ^{29.0 29.1} 2006 NM, 20-F, Item 3, Page 3
30. ↑ ^{30.0 30.1} 2006 NM, 20-F, Item 4, Page 19