|Shares Out. (in M):||43||P/E||5.9||4.5|
|Market Cap (in $M):||136||P/FCF||0||0|
|Net Debt (in $M):||115||EBIT||0||0|
If a busted SPAC coupled with a cyclical industry scare you read no further. PANL was written up by UCB about 18 months ago at essentially the same price as today. The company has built equity since then, and added ships e.g. earnings power. UCB does a great job on an overview so I will refer folks to that write-up as well.
Pangea Logistics is a dry-bulk carrier that has a 22-year operating strategy operated by founder owners that we believe has both a defensible and unique strategy but also a moderate growth runway trading at an attractive valuation. It came public in 2013 through a SPAC transaction at $10 just as the shipping market collapsed along with its share price to under $2
Most shipper employ complex structure, and their owners are wealthy Greeks that love their ships more than their customers. Pangea is the opposite. They start by handling complex logistical needs, and use ships and their expertise around them as the center of their business. They have demonstrated this expertise over a number of years and as such customer’s trust them with their precious cargo and commit to them through long-term contracts (COA). These contracts then allow Pangea to purchase ships and match those ships against said contract. Further Pangea operates their vessels, allowing them to apply their expertise to earn margin. They tend to get higher utilization on their ships, and choose ships and routes that require expert handling which leads to their higher ROA and to segment for customers that care about who and how their Cargo moves from point A to B. Often Pangea will work with a customer and design a plan, integrating themselves into the logistics process. They are not going after the customer looking for the low cost option.
Unlike other shipping companies that simply buy the ships, lever them and hope to play the shipping cycle (and often go BK) Pangea has structured their business to survive shipping cycles by using COA and the last few years have proved they have this ability. The Baltic Dry Index reached 30 year lows in 2016 and while certainly stressful for Pangea, Pangea continued to make money and service their debt. Five years ago, like many other Pangea has ordered many ships, took delivery just as the market collapsed. They had to work through the debt, but also waited for the supply imbalance to work itself through the system which they believe it now has.
Pangea generally has two books of business. The first is as described above, but then they work with customers to do spot work, where a customer needs a specialty voyage on a short-term basis. IT can often involve complex cargo, and as such Pangea can extract good margin. For these types of jobs Pangea charters in vessels from others, paying a premium but reducing risk by not having them uncommitted when they aren’t certain there will be work.
As part of the strategy to focus on specialized trades, Pangea also developed expertise in the Ice trade which focuses on the artic routes that can dramatically reduce shipping times but come with the complexity of operating in the artic by also securing ice class ships. These ships command premium rates, and Pangea is well ahead of anyone else in ordering these ships. Much like pipeline companies in the E&P sector they have locked up their capacity with customers for many years, insulating them from any near term competition.
As Pangea adds long-term customers they also add ships, and over time we expect their earnings to grow through this process. As we mentioned before we believe that Pangea is really a logistics company more than a shipping owner. They do more, they do more complex specialized high value cargo, and they do it better. Their business structure effectively insulates them from bankruptcy when the shipping market falls out of favor and in exchange they will never have peak earnings when the shipping cycle gets crazy. But it also allows them to cherry pick great assets in a downcycle or extract great terms from shipbuilders when orders dry up. It’s a good ROE business, but you need to be able to survive the cyclicality of shipping.
We think their IR presentation is very good, and we would refer folks to start there to get familiar with the business.
I won’t go into detail on the debt. While there is substantial debt it is tied to the various ships and has been declining and has been laddered out so I don’t think this is a substantial risk to the company.
What’s it worth:
It’s trading below what we think reasonable liquidation value would be. We think rather an EPS approach is the correct way to look at this business given that they view their earnings stream and value proposition from the perspective of providing the service to their customers and not necessarily through the fluctuating values of the ships they own.
We think while giving some latitude for a fluctuating BDI, and with the continued growth of their owned ship fleet we could see about $.50 of EPS today and then we believe they will add about another 10 cents in the next year.
Assigning them a 12 X multiple on those earnings gives us a stock price about $7.20/share which is more than double that of today. In the meantime the pay a small dividend.
It’s not the most exciting business, and float is tight but it’s a good business, with a now solid balance sheet with a defensible business. Further insiders own a more than half the company and have shown themselves to be fair actors. I think as the founder ages in the coming years there is a larger focus on getting the share price to fair value.
We like PANL as an investment but it’s also a good vehicle to trade the BDI versus a shipper because we think there is almost no chance it will go BK. Given the strong recent BDI index we expect a strong earnings report this coming Thursday.