The $1 million question
But the $1 million question remains: just how much return can a company expect to generate by purchasing these ships, and has the the market likely priced it in already? Given that share prices have risen by almost 50%, it is possible. We can figure that out by finding the estimated earnings that Navios Maritime Acquisition Corp. (NNA) and Scorpio Tankers Ltd. (STNG) are expected to generate with the additional ships and how much investors are currently paying for it. To calculate estimated earnings, there are three key points that investors want to ask: how are the ships going to be funded, how much revenue can they generate, and what are the costs associated with running additional ships?
Based on the latest earnings presentation, NNA and STNG are expected to add a total of ten and 46 ships that will be operational by the end of 2014. Almost two-thirds of NNA’s new ships under construction are eco type MR2 product tankers that have a carrying capacity of 50,000, while the other half is made up of non-eco type vessels that were purchased in the secondary market. Each eco-type MR2 vessel was purchased for $31.5 with the exception of $34.3 million for the one to be delivered in the third quarter of 2013, while the three non-eco types costs $56.2 million in total. The chemical tanker costs $33.6 million. The company intends to finance the ships with $247 million debt and $120 million in equity for all 12 ships, so by the end of 2014, we can expect a rough estimate of $190 million in additional debt and $91 million of cash paid.
Scorpio’s collection of new ships under construction is a lot more diverse. By the end of the 2014, the company expects to have 12 Eco Handymax Ice Class-1A vessels, 22 Eco MRs, and eight Eco LR2s. Each Handymax costs the company about $31.5 million, MR ships for $33.5 million, and LR2 for $50.0 million. From the third quarter of 2013 to the fourth quarter of 2014, the company expects to make payments of $1.65 billion, which will be funded with existing cash, new debt, and possibly new shares.
But with its debt-to-equity ratio at just 14.99% and book equity value of $1.16 billion, the company can increase debt by $1 billion and still comply with covenants (certain financial ratios that companies must comply with or else the loaners can recall bonds early). With cash of about $703 million, which was adjusted for the new shares issued recently and before some payments for new ships in the third quarter, the company won’t have to issue new shares for a while.
- Part 1 - Why Navios and Scorpio have rallied more than 40%
- Part 2 - Supply and demand dynamics of crude tankers remain negative
- Part 3 - Why product tankers are performing better than crude tankers
- Part 4 - Why product tanker dynamics rebounded earlier than crude tankers
- Part 5 - Navios and Scorpio have been aggressive with new ship purchases
- Part 6 - Why new tanker deliveries add significant returns to earnings
- Part 7 - How financial leverage boosts returns from new ships
- Part 8 - Why Scorpio and Navios may not be that undervalued anymore
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