Value Hive Podcast

Alberto Ayuso: Shipping & Tankers 101

Fri Dec 29 2023

shipping industryinvestment strategiesvaluation techniquessupply-demand dynamicsarbitrage opportunities

Description

This episode of The Value Hive podcast explores the shipping industry, its dynamics, investment strategies, and valuation techniques. The guest shares insights into the tanker industry, supply-demand dynamics, and the importance of understanding management quality. They discuss investing in shipping companies, risk assessment, financing options, and strategies such as selling put options. The episode concludes with key insights on arbitrage opportunities and recommended sources of information for further research.

Insights

Understanding Supply-Demand Dynamics

The speaker emphasizes the importance of understanding supply and demand dynamics in the shipping industry. This knowledge helps identify investment opportunities and navigate the sector's volatility.

Valuation Techniques

The guest discusses various valuation techniques for shipping companies, including calculating cash break-even and free cash flow. They also highlight the importance of considering inflation-adjusted rates and understanding each company's implications.

Investment Strategies

The episode explores different investment strategies in the shipping industry, such as leveraging assets, purchasing vessels at second-hand sales, and selling put options. The guest shares insights on portfolio management and risk assessment.

Arbitrage Opportunities

The speaker shares their experience with profitable arbitrage opportunities in the shipping industry. They discuss buying and selling stocks with zero risk and highlight the potential gains from trading pre-ferts and paying attention to takeovers.

Summary

Transcript

Introduction

00:01 - 07:55

The Value Hive podcast is sponsored by Teagas, which offers expert interviews on public and private companies.
MIT Investment Management Company (Matico) invests in emerging managers and has created a website called emergingmanagers.org for stock pickers.
Marhelm Data is an information service that helps investors find value in an overvalued market, with a focus on shipping and commodities.
The host of the podcast is interested in the shipping industry due to its bombed-out charts and potential opportunities arising from supply-demand dynamics.
The guest on the podcast is an analyst responsible for research at a seat broker, which provides options for chartering vessels in the shipping space.
The guest got into shipping through a company called TKLNG, which had long-term contracts with tier one charters and was eventually acquired.
The guest became interested in tankers due to IMO 2020 regulation, but doesn't believe it was a game changer.

Shipping Industry Overview

07:35 - 15:57

The speaker got into the tanker industry in 2019 due to the potential of a supply shock caused by IMO 2020 regulations.
The shipping industry has experienced boom and bust cycles, with rates being good when demand is high and everyone orders new vessels, but causing catastrophic losses when demand drops.
Many shipping companies collapsed during a period of low demand and inefficiencies in the sector, leading to a low number of vessel orders.
Demand in the shipping sector tends to follow GDP growth, and recent events like COVID-19 and the Russian war against grain have caused inefficiencies and benefits in specific sectors like containers, dry bulk, and tankers.
The shipping sector can be broken down into components such as dry bulk, tankers (crude and products), RoROs (transport of cars), LNG, LPG (propane and butane), supply for offshore, and other specialized sectors.
While dry bulk is important, LNG is growing rapidly due to energy transition demands. LPD has also seen growth due to demand. Supply side factors are usually considered more important when identifying opportunities in the sector.

Investing in Shipping

15:44 - 23:48

LPD has experienced significant growth from the demand side, but the focus should be on the supply side.
Different sectors within LPD have different dynamics, with some being spot-focused and others being more focused on long-term contracts.
Container ship vessels are typically owned by a ship owner and leased in long-term contracts to liners like SIM or Mars.
SIM primarily operates in container leasing, charging customers for transporting containers.
Generalist investors should avoid following FOMO (fear of missing out) on Twitter and making investment decisions based on short-term market movements.
It is important to understand that the shipping industry is volatile and rates can fluctuate significantly without indicating a trend.
Learning about the sector before investing is crucial, as it is an inefficient market where knowledge can lead to alpha generation.
There are individuals on Twitter, such as Alvin, Ms. Meyer, and F Finlay, who provide valuable information about the shipping industry.
The speaker personally avoids risky situations and acknowledges past mistakes in investing in Zim shares.

Analyzing Shipping Companies

23:28 - 30:48

The speaker discusses their experience with investing in a particular stock and the importance of not being involved when the market changes.
When researching a new name or sector within shipping, the speaker emphasizes understanding supply and demand dynamics, as well as analyzing various factors such as management quality, loan to value, dividends, and server processes.
The speaker prioritizes the quality of management and their ability to generate returns for shareholders. They also consider catalysts that may impact a company's performance.
While the speaker used to focus on cheap stocks, they now prefer top-quality management even if it means paying a premium.
When comparing comparable companies, the speaker ranks metrics such as price to NAV and management quality. They also take into account vessel sizes and operating leverage.
The speaker calculates daily cash rates and free cash flow to estimate dividend yield and potential NAV increase.
They do not use reverse TCF (Total Cash Flow) analysis or consider what the market assumes about break-even or cash flow rates.

Valuation and Forecasting

30:30 - 38:48

The speaker discusses using a simple model to calculate cash break even and free cash flow for shipping companies.
They mention Okyanis as their favorite tanker company, which they believe is trading below NAV, presenting an opportunity.
The speaker emphasizes the importance of understanding each company's implications and determining the appropriate multiple for valuation.
They mention different categories of shipping companies, such as Hape Size, DLCCs, Afro-Max, and handy size.
The speaker acknowledges that investing in shipping is more of an art than a science and there are no adequate answers.
Normalizing earnings to historical averages is suggested as a starting point for valuation.
Inflation-adjusted rates should be considered when evaluating opportunities in the shipping industry.
There is a concern about missing out on potential gains if valuations are too conservative during an upcycle.

Risk Assessment and Financing

38:26 - 46:06

The speaker emphasizes the importance of having a toolkit to understand potential outcomes in different market cycles.
They give an example of their experience with a company called Tight Water, where they initially thought the price was low and made investments, but later realized it had become expensive.
The speaker mentions being more inclined towards classical value investing and not trying to squeeze out every last penny when selling.
In the shipping industry, there are tools like constructing a line of straight depreciation to assess risk and deviation from expected prices.
The speaker discusses the importance of measuring demand, order book, and historical averages to determine if there is room for pricing increases in vessels.
Replacement costs are considered in analysis, but the speaker believes it should be coupled with understanding capital structure and depth for a full picture.
Financing and loan maturities play a role in shipping companies' ability to refinance or extend maturities, which can be beneficial during an up cycle.
Leveraging vessel purchases is common in the shipping industry as it offers liquidity for second-hand sales.

Investment Strategies

45:40 - 53:48

The shipping industry offers opportunities for leveraging assets and purchasing vessels at a second-hand sale.
Financing these assets through mortgages provides a safety net for financial institutions in case of non-payment.
Investing in the debt of shipping companies can yield high returns, especially when bonds are trading at low yields.
Forecasting the industry is challenging due to the volatility of freight rates, so it's best to focus on one to two years.
Balancing short-term forecasting with a long-term perspective is crucial for navigating the industry's volatility.
Building a portfolio with exposure to shipping can involve having a basket of names from different sectors and managing position sizes accordingly.
Selling put options has historically been profitable, but currently, the returns are low.
Selecting one or two names per sector in the dry bulk market can be beneficial, considering differences in focus and size.

Dry Bulk Sector

53:22 - 1:01:39

In the dry bulk sector, there is not a significant difference between companies.
Some companies, like email IICSP and 2020 bulkars, focus on larger sizes and only in IONR training.
Other companies, like starboard carriers or coordination, have more mixed fleets and trade in smaller markets.
Concentration of investments depends on the point of the cycle. It can be more painful during cyclical losses but can lead to higher returns when the market improves.
Investing in situations that are expected to last longer than what the market predicts can be easier to identify. Examples include banking stocks with healthy balance sheets and good rates.
However, such situations can end abruptly and are considered dangerous.
During cyclical losses, it is common to concentrate investments heavily in certain companies. For example, Damiiko or Okanis could make up 30% of a portfolio at some points.
It's important to remember that investing in this sector comes with risks such as disasters or unexpected events that can impact the industry.
Selling put options is an interesting strategy because time works in your favor due to volatility. Even if prices stay the same, money can still be earned.
The strategy for selling put options involves allocating 10% of the money for two-month expiration periods and aiming for around a 40% annualized return.
The optimal time frame for selling put options is one to two months.
When a significant portion of money is invested early on, it's advisable to cover it by buying a put option at a lower price before expiration date approaches.
Options are typically closed out before expiration date, usually when around 80% of the desired return has been achieved.

Investment Strategies Continued

1:01:26 - 1:09:14

The speaker discusses their strategy of selling options early to take advantage of high annualized returns.
They prefer selling calls rather than covered calls because they don't like the feeling of missing out on potential stock price increases.
The speaker mentions leveraging their account without paying for it as a strategy they want to implement in 2024.
They highlight the volatility and cyclical nature of certain markets, such as shipping or tankers, which can present opportunities for profit.
The speaker shares an example of selling strike 50 options for a title that resulted in significant value gain within two weeks.
When asked about areas of excitement in shipping or tankers, the speaker expresses interest in copper mining instead.
They mention inefficiencies and opportunities in the shipping sector, citing examples of takeovers and trading pre-ferts (preferred stocks).
The speaker shares recent profitable opportunities with TGH and NED stocks through arbitrage.

Insights and Conclusion

1:08:47 - 1:16:43

The speaker shares their experience of buying and selling stocks with zero risk and making profits through arbitrage.
They mention that opportunities like these always exist in the market.
The speaker explains that they don't have a specific list of preferred stock and shipping companies but pay attention to takeovers because they are usually inefficient.
Their main source of information is Twitter, where they follow the right people who share valuable insights and ideas.
They also read specialized newspapers like Trade Wind Splash for daily research.
The speaker encourages people to reach out to them on Twitter (@iusovalue) for further discussions or to access their research.
When asked about having dinner with someone, the speaker mentions ship owners involved in companies like Goa LNG as their choice due to their admiration for their success stories.
The host appreciates the speaker's insights on the shipping industry and wishes them luck for the future.