Description

Investment Thesis & Valuation:

Navios Maritime Acquisition Corp. (NNA) currently trades at distressed valuations with substantial upside optionality to improving crude and product tanker rates.  The company is well-positioned to generate at least $0.75 per share in 2016 (see “2016-E FCF Downside”) once the fleet expansion is complete, assuming no improvement in shipping rates from today’s levels.  Assuming a modest improvement in rates and new vessels deliver on schedule, FCF should be $0.85 (see “2016-E FCF”), and applying an 8x multiple = a $6.80 stock price plus $0.20 of cash dividends over the next 12 months.   Note that every $1,000 improvement in spot rates at 50% sharing (similar to current contracts) is approximately 7M incremental FCF ($0.04 per share).  The current yield is 5.7%, so you’re paid to wait.  This opportunity exists because investors typically seek either a pure-play shipping segment (for example: VLCC crude tanker upside, dry bulk Capesize leverage to seaborne iron ore, or US Jones Act shipping) or spot market exposure for exponential earnings growth.  In addition, LTM Net Debt / EBITDA 8.8x seems high, but this is the nature of the shipping industry’s high upfront capital spending that de-levers over the vessels life.  A potential catalyst to unlock value is a spin-off of the crude tankers and investors could better evaluate their preferred investment vehicles, namely crude tanker rate volatility/optionality versus product tanker stability, which could result in a better multiple for both tankers.        

Key Considerations:

• Contracted Revenues with Profit-sharing Upside: NNA has structured their contracts as time-charters with profit-sharing upside.  Unlike many other crude or product tanker fleets, NNA is properly managing risk and not gambling on daily spot rates.  There is high cash flow visibility and no liquidity issues (long-term, non-amortizing debt) to participate in higher rates.   

• Leverage to Secular Growth in Ton-Mile Demand and Moderating Net Fleet Growth: demand for product tankers is driven by global arbitrage opportunities due to regional refinery differences and supply/demand for refined products.  Global product tanker ton mile demand has been growing at 6.5% CAGR and net fleet growth is expected to moderate to < 4% by 2016 with 2014-2015 supply absorbed by growing demand.  Similarly, VLCCs fundamentals are improving after years of distress and notable bankruptcies.                   

• Strong & Conservative Management Team: Navios management is highly regarded in the industry as a balanced and conservative vessel owner and operator. 

• Price Target 8x FCF:  historically mid-aged vessels have been acquired at 5x over the cycle and NNA should command a higher multiple with their younger and eco-type MR fleet and long-term VLCC coverage.  In addition, Navios has one of the top management teams and lowest-cost operating structures.

A detailed revenue build by vessel is too cumbersome to include here however it can be constructed from the rate and maturity  information in the public filings (including the investor presentation available here: http://ir.navios-acquisition.com/phoenix.zhtml?c=222706&p=irol-presentations ) and we have included our rate assumptions.  If there are more questions, we can get into more detail in the Q&A.

Disclosure

We make no claims, promises or guarantees about the accuracy, completeness or adequacy of the contents of this document and expressly disclaim liability for errors and omissions in the document.  We have no obligation to update this document.  We may change our position at any time without posting an update.  The views expressed here are merely the opinion of the author.  Readers should do their own research.

Catalyst