Originally, I was going to post a thread on an idea I have mentioned here a couple of times - Global Ship Lease (GSL). But Euroseas (ESEA) caught my attention.
Okay, as a reminder, container shipping companies get broken down into this three tier structure.
- Major liner companies e.g. Mediterranean Shipping Company (MSC), CMA CGM, Maersk, Cosco, Hapag Lloyd, Evergreen, etc
- Owners of vessels that get leased out to one or more in (#1) e.g GSL, DAC, SFL corp (SFL)
- Small entities that own one or more vessels that are either contracted individually, or operate in the spot market.
Among owners of container vessels, ESEA is on the small side (currently 18 vessels, but 8 additional vessels deliver in the next 18 months). Okay, some background. Euroseas (ESEA) has been involved in shipping for a long time- the Pittas family, a major backer of ESEA has been involved with shipping for over 100 years, However, the company has only been a US-listed, publicly traded entity for about 15-16 years. Euroseas started trading as a company with a mixed fleet (container vessels, dry bulk vessels) of generally old vessels, maybe 10-25 years old. Along the way, the Pittas family split the company along business lines.
Euroseas (ESEA) - container vessels
Eurodry (EDRY) - dry bulk vessels
Pent up demand for containers and container vessels in 2021 and the first half of 2022 caused ESEA to change its strategy, Vessel demand was causing better financed entities to price out ESEA from acquiring old vessels. So, the company turned around and opted for purchasing new vessels. It started out with two vessels, and ESEA kept on increasing the order, so they ended up with 9 vessels. To put this into perspective, at the start of 2023, ESEA had a fleet of 18 vessels worth about $200M. The cost of their newbuilding fleet of 9 vessels is around $360M. Given its size, this is an aggressive project for ESEA.
- The first newbuild, MV Gregos, delivered in April 2023 and started a very profitable 36 - 40 month charter @ $48K daily.
- The second newbuild, Terataki, delivers in July 2023 and has a three year charter at a similar rate.
- I estimate that at least half of that charter rate drops down to ESEA as free cash flow. That’s about $8.6M per vessel per year.
So now here come the “ifs”
- Only the first two newbuilds have charters in place. If ESEA can secure similar charters for most of the other newbuilds, the company will be in a good place financially. During the Q1 2023 earning call, when queried about fixing the other newbuilds, ESEA mgmt indicated they would not want to try and forward fix the vessels now because the company would get a lower rate
- If ESEA take delivery of any newbuild prior to being awarded a contract, how easy will it be obtain financing? The next newbuild doesn’t deliver until Q1 2024, so there is time to secure a contract
- ESEA mgmt indicate the company has about $400M of charter backlog spread across the next 10 quarters. That’s nice. But how secure are the contracts? ESEA is currently dealing with an arbitration case with one of its charters. If there are no problems with the charters over the next 2.5 years, ESEA will be in a better position to handle its operations
- If the container market contracts into 2024, does ESEA have any other options? What I am suggesting here is, the newbuilds are top-of-the-line vessels, ones that meet EEDI Phase 3 standards. Even in a tight market, I think these vessels would still hold their value, and be attractive to more than a few buyers. ESEA could likely sell one or more newbuild vessels to another company.
For Q1 2023, ESEA announced a 50c/sh dividend. ESEA can probably afford that given the interest on the debt has been less than $8M the last few years, But what happens when the newbuild debt starts showing up on the book? Does the company turn into the 2020 version that had much slimmer margins and couldn’t afford to pay a dividend,
Rough estimate of value - Estimate based on just the “on-the-water” fleet, plus the deposits paid on the newbuilds, and cash. I think ESEA is probably trading at a discount. Also, I valued at scrap any vessel built in 2005, or prior. Doing so I ended up with a NAV of around $28.5/sh
No ESEA position currently