Navios: Full Speed Ahead

11/28/2013 7:00 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

Some smart vulture investors have piled into dry bulk in recent months—and we already have a horse in this race, notes Igor Greenwald, editor of MLP Profits.

Wilbur Ross became famous for buying up bankrupt US steel mills on the cheap more than a decade ago, and then selling them years later, as demand recovered.

Two months ago, he dipped his toe into another tide of woe by investing in a new shipping venture, Nautical Bulk Holdings, which has raised more than $100 million, and ordered eight ultramax dry bulk behemoths at $24.5 million a pop, to meet rising demand as early as 2015.

Last month, Oaktree Capital (OAK), managed by another distressed investing icon, Howard Marks, disclosed a huge 21.9% stake in Star Bulk Carriers (SBLK).

Why are these financial sharpshooters taking aim at a sector thoroughly beaten down by years of oversupply? Presumably, they've spotted a turning point on the horizon.

International shipping rates, as represented by the Baltic Dry index (BDIY:IND), remain down more than 60% from rates seen as recently as 2010, and before that, as early as 2003.

Yet Asian demand for iron ore, coal, and grain keeps growing, while depressed rates have depressed investment in new ships and encouraged the accelerated scrapping of older carriers.

As a result, the dry bulk shipping market may end this year in rough balance for the first time since 2008, after years of oversupply.

Our Aggressive Portfolio already includes one beneficiary of these trends—Navios Maritime Partners (NMM), a partnership with 25 dry bulk carriers, and now, five newly-acquired container ships.

A transformative container ships acquisition has changed the conversation, from when the distribution will be cut, to when it might be raised.

With these ten-year charters in place, the two high-rate charters (expiring next year) no longer pose a material distribution risk. On the whole, Navios ships are newer and therefore more efficient than the industry average.

The balance sheet is similarly fit. Net debt is just 13.7% of capitalization, and the bulk of the attractively-priced borrowing doesn't mature until 2018.

A relatively secure double-digit yield tends not to last long in this era of low rates. So, while NMM units have already rallied 15% since we upgraded them to Buy two months ago, more gains likely lie ahead. Buy NMM below $17.70, a level at which the current distribution would still yield 10%.

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