Description

Euroseas is a floating cash machine worth $47-$77/share of hard asset value exiting 2024 (+50-200% upside). It's a cigar butt with catalysts. FCF will cover the entire market cap by 2024!             

****   DISCLAIMER ******  THIS PRELIMINARY AND DRAFT BLOG POST IS PREPARED FOR DISCUSSION PURPOSES ONLY.  COMMENTS AND ANY PERCEIVED ANALYSIS BELOW SHOULD NOT BE RELIED UPON BY YOU OR OTHERS TO MAKE ANY PRIMARY INVESTMENT. AUTHOR OWNS/MAY OWN AN INVESTMENT IN THE RECOMMENDED SECURITY AND MAY SELL/BUY OR OTHERWISE TRANSACT WITHOUT FURTHER NOTICE. 

Euroseas operates a fleet of feeder and post-panamax container ships (i.e. think smaller/more niche assets) that are contracted out to ship operators. The company basically is an asset owner/capital allocator. You can value the company as being worth (i) the cash flow these vessels will generate over any period of time, (ii) what the ships will be worth after that period of time, and (iii) if any ships are older and need to be scrapped (25YR+ age) what is scrap value at that time.

I present the analysis below at 12/31/24. I picked this date based on the company having contracted cash flow visibility through 2024 (the vast majority of its vessels are under contract in 2022, 76% for 2023 and 55% for 2024).

At 12/31/24, a conservative estimate of net value value is $346MM (or $47/share +82% from current levels).  A more optimistic estimate of net asset value would suggest $567MM+ of value or $78/share (+200%).  Importantly, its very difficult to lose value here from $26/share.  It would require inane assumptions, such as ignoring FCF generation over the next 3 years!

From 2022-2024, I (conservatively) calculate ESEA will generate $217MM FCF:

• $490MM EBITDA. The only consensus estimate I see on Bloomberg forecasts $500MM EBITDA over this period. The majority of this EBITDA is contracted (see 20-F: The percentage of our fleet that is under time charter contracts represents approximately 95% of our vessel capacity for the remainder of 2022, a 71% of our capacity in 2023, and a 53% of our capacity for 2024. These amounts were updated in May 2022 press release). So one only needs to assume what day rates are achievable for the un-contracted portions of 2023 and 2024. I've assumed day-rates, which are at six-sigma highs drop to 25% percentile rates.  As I note below in the catalyst section... assuming 25% percentile rates for 2023-24 will shortly prove to be very consertative.
• Spend $20MM Capex
• Spend $20MM Interest
• Spend $233MM on their new build program ($102MM equity deposits and repay $131MM debt)

Euroseas has recently pruchased $363MM of new vessels being delivered over the next 2 years.  Let's (conservatively) value these -60% at $143MM (less than half):

• These newbuilds are bleeding edge fuel tech from a top global shipyard (Hyundai Mipo)
• Let's just value them as slightly aged vessels at historical 25% percentile values
• This seems silly to take the $1 they just paid and value it for $0.40 cents but we don't need to be heroic in our valuation... 

Let's just scrap every other vessel for $133MM (conservative)

• This assumes $500/ton scrap vs. $600+/ton scrap prices currently
• There remaining fleet will see a lot of scrappage, but a lot of the vessels will still work for another 5+ years... but assuming they are all scrapped just makes typing this out easier 

Remaining net debt at 12/30/24 of $143MM

SUMMARY: ~$346MM (-$5MM adj working cap)= $47.40/share = +82% upside.  You can debate what to pay for that today.  Given the cash flows are locked in, all other estimates here are pretty conservative, and you have the upside Bull Case below.. a 10% discount rate seems reasonable... or $37/share.  So $37 is my nearterm price target (+40% from here).

The (Not Unreasonable) Bull Case

Let's value those newbuilds at market prices!  For simplicitly, we'll also ignore the idea that maybe.. just maybe... dayrates are higher than 25% percentile day rates for the uncontracted capacity coming up in 2023-24.

• Assume the ships are worth the $364MM they just paid for them (which is in-line with market values).... that's another $220MM of value... taking the summary value to $567MM or $77.68/share.  Note, I didn't even add in higher day rates for 2023-24 (which I think end up being likely.
• Here is some reading that would support rates and values being higher than (conservatively) arbitrarily knocking them down to 25% percentile day rates and valuing the newbuilds at 40 cents on the dollar
  • The pandemic catalyzed a six-sigma container shipping boom https://www.mckinsey.com/industries/travel-logistics-and-infrastructure/our-insights/navigating-the-current-disruption-in-containerized-logistics
  • ESEA just contracted the first two of the aforementioned newbuilds to pretty much pay themselves back in the first 3YR contract.  See:  http://www.euroseas.gr/press/esea051822.pdf   Amazingly, the ships will pretty much pay for themselves and then generate profit for the next 22YR+ of useful lives.  If this six-sigma pandemic shipping boom persists for another 6 months, there will be more of their newbuilds contracted at these rates.  Look at the website for the next set of fleet deliveries... they kinda come every 6 months... 
  • Here's your catalyst for the shipping boom to persist for another 12 months:  https://www.zerohedge.com/markets/maersk-goldman-warns-china-restart-will-spark-renewed-supply-chain-congestion

Upside catalysts

• https://www.zerohedge.com/markets/maersk-goldman-warns-china-restart-will-spark-renewed-supply-chain-congestion  [you can find other news articles discussing this over the past few months, but this just happened to be today and the latest update... suggesting rates are moving up again].
• The company could take itself private at a premium to current trading levels.  The company is clearly trading at a MATERIAL discount to asset value and the company is ASSET/CAH RICH.  What does the company think its NAV will be in 12/31/24?  Somewhere between $47-78, so even paying $40 to go private would be a win/win.  The company is 55% owned by a single family (although split across multiple shareholders so there is no single controlling person) and thus the float here is only $85MM or so.  They could sell two of the newbuildings today and take out the float.  Or sell a third newbuilding and offer a +50% premium. Or at least buy back some stock. 
• The company doesn't pay a dividend (pre-pandemic they were stressed with an old fleet). A dividend is another way to close the NAV gap.  Although I personally would like to see share repurchases/tender as being more tax efficient + accretive, the other listed container operators do pay dividends.
• Going back to the beginning... the company's only job is capital allocation... and with the stock trading at half of NAV (conservatively) ... it would make sense to see something accretive to the current stock price. At some point it makes sense to invest in their stock versus buying new ships at market. 
• Company reports Monday and has a earnings call 5/24/22.  Maybe these analysts will be on the call and press on capital allocation: 
  • Univest Securities just initiated with a $50 price target
  • Maxim Group just reiterated a $54 price target

P.S. This math is not rocket science (you don't need to be a shipping analyst to model contracted cash flow and conservatively haircut asset values).  Revenue is the contracted day rate (on their website and 20-F) x days under contract = contracted revenue.  Operating costs are variable ($/day per vessel) and G&A is mostly fixed.  Spot markets are disclosed by many brokers and sometimes google-able, so pick your number for the uncontracted vessels.  Can ask management about capex, but its not much over the next 2.5YRs (no major dry docks).  And simplisticaly just assume you scrap anything that's not brand new. And haircut what they just paid for newbuilds by 50% to be conservative. A bit of brain damage, but not rocket science.

P.P.S. Worth mentioning, the other container stocks seem cheap as well (GSL, Danoaos).

Catalyst

Accumulated FCF (covers the market cap)

https://www.zerohedge.com/markets/maersk-goldman-warns-china-restart-will-spark-renewed-supply-chain-congestion

New charter announcements in 2H 2022 for uncontracted capacity in 2023-24

Accretive shareholder transactions