Here is a video on YouTube presenting an interview with Hamish Norton of Star Bulk Carriers. Star Bulk Carriers Corp. – Business & Strategy Update – Dry Bulk Sector Outlook. It’s a very lengthy discussion about the future prospects of Star Bulk Carriers.
One of the interesting aspects of the conversation is Hamish Norton focusing almost exclusively on how to get the share price up. What you see here is an investment banker running a shipping line, rather than someone who has grown up in the shipping industry. He always talks about increasing shareholder value using a variety of corporate finance tools.
Someone once said that you cannot shrink yourself to greatness. Norton talks about selling ships at their appraised value which is almost always higher than their net asset value, presumably that means that the fair market value is higher than the price the stock market is attributing to the company’s assets.
If you were to take this concept to an extreme, Norton would serve the shareholders interests best if he were to liquidate Star Bulk rather than operate it. He his assertion many times that selling ships and share buybacks will maximize shareholder value under the company’s current circumstances.
What he does not discuss is running the company more efficiently, technology that could be brought to bear to reduce costs, acquisitions that might be additive. It’s all about the stock market value. One might come to the conclusion that investing in Star Bulk Carriers might be dead money if that’s all he’s focused on.
Net Asset Value Definition
Shipping companies are asset-heavy entities since they own the vessels, expensive capital assets with long economic lives. The prospect is that these capital assets will be utilized to generate cash flows and earnings – and, logically, shipping companies ought to be valued of some multiple of cash flows or earnings rather than just the assets. Valuing a refinery company, for instance, at the cost of their plant value most likely would imply a liquidation or a fire-sale scenario and not a going concern.
For those paying attention to publicly listed shipping companies, the valuation metric is the so-called “NAV”, that is the Net Asset Value – that is, the current value of the fleet less outstanding debt (mortgages) plus cash in the bank or other tangible assets. That’s how publicly listed companies are valued, as the value of the “steel” (ships) with little immediate consideration for earnings. In general, shipping companies are valued at or below NAV – effectively, if one were to liquidate the business would end up with the same or more hard cash in their bank account. Philosophically speaking, being dead (liquidated) has a higher price than being alive (going concern); this does not exactly sound very inspiring…
Although this is an interesting conversation and NAV is an interesting topic, increasing shareholder value ultimately comes from increasing the value of the company’s operations. It may be the case that shipping companies don’t trade at a premium due to a number of factors such as political risk, asset risks (ships getting destroyed), geopolitical risks and on and on. Not that simple.
Conclusion
Perhaps there are many reasons for the discount. It would be more useful, in my opinion, if Hamish focused on increasing shareholder value in other ways rather than using corporate finance tricks to get the share price up.