uploads///Valuation

Which Company Can Offer an Upside in the Weak Dry Bulk Market?

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Nov. 20 2020, Updated 12:50 p.m. ET

Valuation multiple

Companies operating in the dry bulk space are highly cyclical and capital-intensive. These companies also have varying degrees of financial leverage. They’re better valued and compare better using EV-to-EBITDA (enterprise value to earnings before interest, taxes, depreciation, and amortization). For our valuation purposes, we’ll use forward EV-to-EBITDA to compare dry bulk companies.

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Defensive but expensive

Diana Shipping (DSX) has been the best performer in the dry bulk shipping space since the beginning of this year. The company’s earnings estimates have been revised down significantly, from $72 million to $32 million one-year forward EBITDA. The corresponding correction hasn’t taken place in the share price. This has led to a high valuation of 26.9x forward EV-to-EBITDA.

The market is most likely giving a premium multiple to DSX due to its rather strong balance sheet, high charter coverage, and conservative yet proactive approach to navigate through a weak market environment. At the current multiple, the market might be a little too optimistic about the company, since in the current weak environment for dry bulk, it’s unlikely to reintroduce a dividend. Also, some of its lucrative contracts are going off-charter.

Could be an upside

Navios Maritime Partners (NMM) is trading at a 2015 forward EV-to-EBITDA of 7.7x. It has an attractive 17% dividend yield based on the dividend for the next four quarters. As we’ve already seen in our previous investment series on NMM, even after the contracts roll over, the one-year forward dividend yield should still be well above 12%. All the weakness from contracts rollover is most likely priced in for NMM.

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NMM also checks other boxes such as low operating expenses, low leverage, and diversifying away from risk in the weak dry bulk market. So NMM seems like a good way to play the current weak dry bulk market. It has an upside in case of an eventual recovery, as more than 50% of EBITDA for 2015 is still expected to come from dry bulk.

Compared to Navios Partners, Navios Maritime Holdings (NM) has a forward EV-to-EBITDA multiple of 18.5x. Safe Bulkers (SB) is trading at a forward EV-to-EBITDA of 15.9x.

Cheap for a reason

DryShips (DRYS) is trading at a low multiple of 5.6x EV-to-EBITDA. As we’ve seen, it has high financial leverage, and it sold off tankers to repay a loan. Its operating expenses are higher than the average, and its offshore drilling segment is under pressure due to weaker oil prices. So DRYS may be cheap, but it’s cheap for a reason.

Investors interested in a diversified exposure to marine shipping can consider the Guggenheim Shipping ETF (SEA). The SPDR S&P Metals and Mining Index (XME) gives investors exposure to the diversified metals and mining space. NM and NMM collectively form 5.1% of SEA’s holdings.

To know more about this industry, visit our Dry Bulk Shipping page.

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