Drewry Maritime Equity Research (DMER) reviews the investment year that was 2015 and looks to what the new year may have in store for market participants. Investors suffered massive wealth erosion in 2015, as share prices of dry bulk companies kept tumbling during the year. DMER’s shipping index, which is based on the market cap of leading dry bulk companies, was down ~43% in 2015. Asset values failed to find a bottom with ship owners putting their vessels on the block in a bid to fix their balance sheets. Investors, enticed by cheap valuations, were caught on the wrong foot as stock prices breached critical support levels during the year.
Devanshu Saluja, Vivek Shah and Rahul Kapoor, analysts at DMER stated, “We see no recovery in sight over the next 12-18 months because Chinese growth pangs will continue to haunt the dry bulk market and vessels will burn cash in 2016 as freight rates remain under pressure. Any improvement in vessel utilisation and earnings look set to remain elusive with little prospect of change in the foreseeable future”.
Every year since 2011, industry participants have repeatedly failed in their attempts to call the bottom of the market. We believe such exercises are futile as the market will continue to be unpredictable and volatile. For this reason we remove the % bands for our DMER “Value” ranking system for dry bulk stocks under coverage and will continue to emphasise on DMER “Risk” methodology for the time being.
We have divided our dry bulk coverage universe into two buckets: 1) companies that are well positioned to weather the downturn 2) companies with higher embedded risk. The first cluster comprises D/S NORDEN, Pacific Basin, Diana Shipping and Navios Maritime Holding: all having positive operating cash flows and no financing concerns. On the other hand, Star Bulk Carriers, Scorpio Bulkers and Golden Ocean are exposed to high uncertainty and we advise investors to swap their holdings in these companies with better quality stocks.
Dry bulk shipping will not be a preferred space and we advise contrarian investors to be selective while chasing the deep discounts presented by the ongoing sector weakness. Notwithstanding this, they should look to companies with diversified business structures over pure plays with large fleet sizes. Hence, we recommend D/S NORDEN and Navios Maritime Holdings from our dry bulk portfolio.
Photo: cargo sailing _ c. formiktopus_Fotolia.com