Many shipping sectors are rebounding, but IPOs remain thin on the ground. J Mintzmyer, lead investor at Value Investor’s Edge, explains why.
The markets have been very difficult during 2018, but even following a brutal bout of volatility and index declines, the S&P 500 is only off by around 4% YTD. This is indeed very difficult compared to the steady gains we’ve grown accustomed to in the broad markets, but hardly devastating.
Shipping stocks have fared far worse, with terrible YTD results across almost the entirety of the industry. The broadly representative Invesco Shipping ETF (SEA) is down roughly 23% YTD. Although this is clearly a bad performance, this ETF has actually outperformed the variety of shipping stocks due to its hefty allocation in larger more stable firms (45% of its assets are split across five top holdings, the smallest of which carries a $2bn market cap). Notably, the markets have also completely shunned initial public offering attempts for shipping stocks, with GoodBulk (GBLK) failing to launch in June, Navios Containers (NMCI) postponed in September, and Blue Ocean Maritime Income falling flat last week.
The one firm that managed to complete an offering (moreso a direct listing), Grindrod Shipping (GRIN), is down a miserable 60% in just over four months! That’s not a typo. Why is this happening? At first glance, the US-China trade war is hardly great news. Hindsight applied, shipping investments were probably a terrible idea, at least based on sentiment, going into 2018 as anti-trade rhetoric was on the rise. Then again, fundamentals tell a different story. Dry bulk rates hit five-year highs recently, LNG rates have been quoted as high as $200,000 a day for six-year highs, and crude tanker rates have been soaring.
All of the major firms to report thus far, with Euronav (EURN) and Seaspan Corp (SSW) the latest, have shown major improvements and have bullish forward prospects. Beneath the chaos, it seems that shipping is fundamentally ‘killing it.’ Why then is market sentiment so awful? Generally speaking, we can blame most of the woes on trade war concerns and related market unease. Higher levered firms are also underperforming due to hyperbolic concerns about rising interest rates. This concern spreads to all industries with US midstream, industrials, casinos, and other conglomerates also posting terrible YTD stock performance.
What about IPOs? Obviously, a dropping market is not the best time to offer new stock, but are there other concerns? I believe so. Shipping has notoriously weak corporate governance and often inept management teams which are heavily focused on fleet growth either due to related-party conflicts of interest or egotistical reasons. These management teams either siphon shareholder capital via insider transactions or they simply misallocate funds.
Investors are clamouring to firms with better management teams. We have seen this in the case of Seaspan (SSW), Euronav (EURN), and Star Bulk (SBLK), three of the larger firms in the industry, which have proper corporate governance setups and a profit-focused management team. SSW is up nearly 20% inclusive of dividends while both SBLK and EURN are roughly flat, which is sadly a huge accomplishment in shipping this year.
All three of these firms have advocated for consolidation. They have all seemed to demonstrate steady capital allocation skills, with a clear priority on achieving superior returns. They also have clear competencies with primary focus on containers (SSW), tankers (EURN), and dry bulk (SBLK). This contrasts to Grindrod’s motley offering of second-rate tonnage across multiple sectors, GoodBulk’s insider management team and inferior fleet size, and Navios Containers’ questionable management structure. With GRIN down 60% in four months, its no surprise that all other IPOs have been shunned.
I’m heavily invested in several shipping firms, and I believe there is enormous profit potential in the right names, but the door seems slammed shut on IPOs for good reasons. The shipping sector needs to shape up. Consolidation is long overdue and investors need to purge incompetent management teams that cannot understand the basics of proper capital allocation. I am hopeful that these tough markets will lead higher standards being adopted. Although it is a current sign of weakness, I view the lack of successful IPOs as a good thing for the long-term health of this industry.