Description

Hi, all --

I'm not sure where to begin, so let me start with a confession: My two great loves are shipping and corporate governance disasters, so when you can put the two together, as you can here, that's really special to me. NMM is a Greek shipping MLP. Wow! A Greek shipping MLP! I'm getting damp just thinking about it.

Here's a table of contents to help you & me navigate the write up:

-- Introduction

-- A Brief Overview Of The Issue And The Opportunity

-- Catalystless Deep Value, Shipping, And The Strategy

-- Management & Governance

-- Conclusion

Introduction

This is catalyst-less deep value. If you don't do catalyst-less deep value, there's nothing here for you. There are governance issues here. If you don't do governance issues, etc. I'm going to present this in my usual informal style. If you don't like my usual informal style, I've pre-applied the "Analysis free idea" and "Nth-Grade book report" and any other denigrating tags I wander across to save you the trouble. My goal is to present the broad outline in a way that I, at least, find entertaining. I'm hoping to generate a stimulating discussion and would love to get into further detail in the comments.

NMM has been written up in the past:

https://www.valueinvestorsclub.com/idea/Navios_Maritime_Partners/1756179868 -- Bafana, long, 2008

https://www.valueinvestorsclub.com/idea/NAVIOS_MARITIME_PARTNERS_LP/8423063310 -- TwoSigma, short, 2014

https://www.valueinvestorsclub.com/idea/NAVIOS_MARITIME_PARTNERS_LP/7275887963 -- Packback2016, long, 2017

These aren't required reading, but do provide useful historical perspective, and I'll be quoting from them, so, thanks for the prior art, guys!

A Brief Overview Of The Issue And The Opportunity

NMM is, I believe, the largest US listed shipping company by vessel count and tonnage. They operate in the 3 major segements, tankers, containers, and dry bulk. Tankers move crude and refined oil; containers move containerized freight, mostly consumer goods; dry bulk moves things like iron ore and grain. All are sensitive to general economic conditions, but, as recent history shows, they don't necessarily move in lock step, for instance, containers went to the moon during the pandemic, while tankers wallowed; the places are now reversed thanks to, among other things, the Russian invasion of Ukraine.

The three segments are roughly equal in NAV. Here's a quick snapshot of the outlook for each, where "Short Term" means the next couple of years:

Here's a link to their latest presentation, which has a fleet summary on page 5:

https://ir.navios-mlp.com/static-files/8ead9de3-5018-482f-8ed8-fe9db45d087a

, which I've reproduced below:

As you can see, they don't waste a lot of money on graphic artists and designers.  Note that the fleet is relatively young across all classes.

The opportunity is that, at .2x NAV (Jeffries has NAV at $115)/.25x book/1.5x PE (with the "E" part likely to stay elevated for at least a few years), the company is really really cheap, we'll get into why that's so in a bit. This table shows how cheap the stock is by exploring where NMM would trade were it priced similarly to a (pretty random) peer in each segment:

 Some notes on the comparables: DAC was written up recently by FuzzyLogic, it's at 50% of NAV, people hate the stock. Like NMM, INSW has a mix of clean and dirty tankers. It's the result of a recent merger of equals. It trades at 70% of NAV, people hate the stock. SBLK stands out as it's a bit of an industry leader. It's at 80% of NAV, people don't hate the stock but they do hate dry bulk. This table isn't quite fair, because NMM is more levered than the comparables, you really want to use EV instead of market cap, but I think the point is made. Note that this suggests that, were NMM to trade at DAC multiples -- and again, people hate DAC -- you'd more than cover the current market cap + get beefy tanker and dry bulk fleets for free.

Catalystless Deep Value, Shipping, and the Strategy

Catalystless Deep Value

 My criteria for investing in catalystless deep value are:

1: Obviously the assets have to trade at a significant discount, it has to be deep value to begin with.

2: I need to believe that value will increase over time, presumably slowly, but increase nonetheless.

3: The investment has to be relatively safe, it can't be likely to blow up, it needs to be a more or less permanent option.

If all three are present, them I'm likely to say, "F*ck it, hard to see how you lose money in the long run, and maybe this will work out, or at least trade up, sooner than 'never'".

One might wonder if criteria #2 & #3 can be met in shipping in general and NMM in particular. I think so, but see this as subject to debate.

On Shipping In General

Shipping has absolutely sucked for more than a decade. This is due to the enormous China-joins-world-economy boom started at the beginning of the century. This led to a massive increase in freight volumes and freight rates, leading to a massive increase in ship ordering, leading to a massive increase in shipyard capacity. Here are some fun quotes from the prior NMM write-ups that show what was going on:

Bafana, long, 2008, virgin: "A second reason for the decline is the deluge of new ships which are expected to arrive late-2009 and 2010. [...] The collapse in the BDI index has resulted in many newbuilds being cancelled for economic reasons. There are also signs that ship owners will have to cancel orders because they can no longer access funds for the purchase. Also, serious doubts exist whether the Green Field shipyards will ever be able to deliver a single ship. "

TwoSigma, short, 2014 (six years later!), chad: "NMM will not be bailed out by improvements in the dry-bulk market. Over the last 10 years a massive boom in shipbuilding capacity has ensured that almost any demand growth scenario can be met by newbuild supply. As we saw in 2013, any uptick in freight rates will lead to a surge in ordering activity, which will help keep the market balanced and help keep a lid on freight rates."

But that was then. These days, there's a bull thesis that shipping is about to enter a Golden Decade due to decreased shipyard capacity. This thesis is summarized in charts like these, courtesy of Arctic Securities:

(CGT is an attempt to normalize shipbuilding across different vessel classes, e.g., tankers are harder to build than ferries.)

I'm not saying I buy the bull thesis, and I'm not asking you to, either. Shipping might -- probably will? -- continue to suck, but I don't think things will be anywhere near as bad as they have been. Let's say the sector delivers highly volatile 7% ROEs, I call that sucky. But it's enough to say that value will increase over time, if you can stay in business, which leads us to,

The Strategy

We covered desideratum #2 above, now let's ask whether NMM is likely to be something like a perpetual option.

Management's stated goals are to be an underleveraged and diversified ship charter. Each leg of their strategy cuts off some downside risk.

1: Underleveraged. This is obvious. The goal is to get to net loan to value down to 20-25% from 42% today. That level of debt is roughly covered by scrap value. The emphasis on delevering means current shareholder returns are minimal. That's one of the reasons this is so cheap, but only one of them. DAC is pursuing a similar strategy and trades at 2.5x NMM, the rest of the discount is due to management & governance, which we'll address in the next major section.

2: Diversified. 

 I don't want to oversell the benefits here. This all transportation, it's all highly sensitive to general economic conditions. But ... in addition to general senstivity to macro forces, tankers, dry bulk, and containers are capable of undergoing screaming, terrifying idiosyncratic collapses on their own or in addition to whatever else is going on, and being able to dilute those is good perpetual option wise. 

 3: Chartering

Again, I don't want to oversell this. I don't want to claim that chartering is superior to working spot. But it cuts off some of the downside. In general, NMM wants to be a fiancier, a spread taker, rather than a route optimizer. If you look at peers' presentations, they'll be patting themselves on the back because they deftly positioned 60% of the fleet west of the Suez or suchlike, while NMM is mostly "SOFR + 2%", "SOFR + 1.8%", like that. The bulk of the dry bulk fleet is on index-linked charters, which are in some sense no charters at all, but just NMM outsourcing positioning, routing, fee negotiations, etc., to someone else. To the extent they can, they'll be looking to move their ships into longer term fixed charters.

You put all the above together and you wind up with, sure, NMM could bleed to death over time, but it's unlikely to blow up.

Management & Governance

 This is the key question and the main driver for the massive discount, but oddly I'm struggling with how much time to spend on it.

NMM is an MLP. It is completely controlled the general partner, Angeliki Frangou, and externally managed by a Frangou company. She can literally do whatever she wants.

Frangou is a fifth generation Greek shipowner. She bought her first ship in 1990 with a $1MM loan from her father. During the teens it seems like she had a press agent busy lining up interviews and hagiographies, and example of which follows:

https://www.theglobeandmail.com/report-on-business/careers/careers-leadership/angeliki-frangou-a-greek-shipping-magnate-who-sails-into-the-wind/article13048081/

She's been in the business for a long time. This is the part where i start tailing off and saying things like, "Well, you see ... it's complicated, you've got to understand," etc. Old heads at VIC might remember the Teekay saga, different bits of which were written up 12 times over the last 15 years. Like Teekay, the Navios empire wound up with a bunch of overleveraged companies at varying degrees of distress. They've now (almost all) wound up under the NMM banner, but not in a way that left anyone happy.

--  In Q1 2021, NMM acquired NMCI, a Frangou containership company, on terms that involved NMM issuing stock at below NAV. 

-- In Q3 2021, NMM acquired NNA, a Frangou tanker company, in what I regard as a bail out however good or bad the terms were for NMM.

-- In Q3 2022, NMM bought bought 36 bulkers from NM, another distressed Frangou entity. in what i regard as a bailout, however good or bad the terms were for NMM.

That's a lot of related party dealings! The good news is that we've run out of (publicly traded, at least) related parties, except for stub NM, which still owns some NMM and South American infrastucture assets, where Frangou seems to be currently occupied with squeezing out the preferred shareholders.

I'm struggling because ... I don't want to minimize the problems here, I hope that all are aware that the above list is just of the largest and most recent and most glaring and most bitched about related party dealings, but the reality is that correlation between governance concerns and stock performance is -1. If the stock is going up, governance is a matter for pedants and haters, see, e.g., TSLA. When it's not, though ...

 The flip side of the governance issues is that Frangou is a great operator, and I mean that in both the dail nuts & bolts, blocking & tackling sense, and deal making and promoting sense. This is completely unfair but nonetheless illustrative; here's the fleet list from Bafana's writeup:

"NMM consists of 6 owned Panamax’s, 1 owned Capesize, 1 owned Capesize to be delivered in June 2009 and 2 chartered-in Panamax vessels

 Compare to the graphic above.

 Conclusion

 I keep saying this every time I do a catalytless deep value write-up, but this time I really mean it: This is the cheapest thing I've ever seen. This is trading at distressed levels despite a very bright short term future, thanks to boom container charters and a really bopping tanker market. Let me be clear, there are idiots running around saying this is a STRONG BUY because they announced a $100MM buyback that they'll start executing any day. Ha ha, it's obvious that Frangou doesn't care what the share price is right now. There are other idiots running around bitching about capital allocation and how Frangou doesn't care about the share price. Those idiots might well turn out to be right. But this thing is at 20% of NAV! Frangou's not stupid and knows how to increase the share price, go back to TwoSigma's short write-up, where the thing was trading at 2x NAV because Frangou was overdistributing! I'm not a mind reader and I've never met Frangou and have no insight into her motives and plans, but if this increases in value over time (as I hope) and Frangou elects a mixed strategy of only screwing the unitholders by 80%, it still goes up a lot. If she wanted to she could easily run this up 8x-10x over the next 5 years, and for all I know that's exactly what she plans to do. 

Note that being underlevered with long-lived assets with lots of depreciation allows you to massively over-distribute for a very long time. This is purely a fun-with-numbers exercise, but here's the IDR schedule:

Current distributions are $0.05, which would make all the above seem absolutely out of reach, but ... If there's interest, I could walk you through it.

Note that there are sizing and risk management questions here. These things can always get cheaper. I guess Frangou could try to steal the company, but how often does that get pulled off at less than 40% of NAV?

Please let me if and how I'm wrong about this. I don't have a super-sized position here, but am definitely likely to add on declines or the passage of time.

Yours,

Bowd

Catalyst

None.