Description

PANL is a logistics and shipping company with a unique focus on arctic routes, long-term contracts, and (unlike many other shippers) owning a minority of its ships (which allows them to flex down when rates are weak and add capacity when rates are good).  PANL’s unique model has allowed it to earn a significant premium (approximately 40%ish) to general market rates for panamax/supramax vessels and has allowed it to stay profitable even during downturns such as in 2020 or 2008.

The thesis here is two -fold: 1) the supply/demand backdrop for drybulk is very positive for at least the next three years and 2) there is a catalyst playing out in real-time which should help re-rate the shares.  I will keep this somewhat short given the time-sensitivity around the catalyst.

Supply/demand backdrop:

Drybulk vessel newbuild orders suggest limited added capacity for the next three years.  This is due to ship yards, especially in the Far East, being booked in with higher value/high margin ships such as containerships and even taking up some capacity to build windmills.  In addition, there has been some consolidation/reduction in shipbuilding capacity due to the 2020 downturn.  If you wanted a new dry bulk vessel today, you would not receive the vessel until at least 2024, settiing up an excellent supply/demand backdrop as demand resumes post-pandemic.  For specific data on supply and newbuild orders, etc, you can go to Clarkson’s (https://www.clarksons.com/services/research/), but it is behind a paywall.

Unfolding catalyst:

As of early March, PE firm Cartesian owned about 33% of the shares (approx. 14m out of 43m shares).  They had owned the stock since 2007.  When PANL announced its (very strong) 4Q earnings per share in mid-March, it also simultaneously announced that Cartesian’s two board members were resigning, foreshadowing the stock sales.  The stock sales subsequently commenced on 3/18 and have been unrelenting for the past month.  [Note also that PANL’s daily trading volume was around 75k shares, prior to the 3/15 eps announcement].  It quickly became clear that this was a monster overhang that would take a long time to go away. Until the last two days.  Cartesian has found some size buyers and has now unloaded approximately half its 14 million shares.  While a 7M share overhang is still significant, it is much less and 1) there now appear to be willing buyers of large blocks of stock and 2) the public float has expanded from roughly 18% to 35%, increasing the liquidity in the name.

Note the trading dynamics of the stock from the time they announced 4Q earnings, along with the performance of many dry bulk shippers.  On the day they announced 4Q eps of $0.14, the stock traded as high as $3.70, before fading to a $3.42 close and then fading further to below $3 over the subsequent month as the reality of 33% of the company’s s/o would be on the block became clear.  AND, during this same period, the BDI exploded higher (about 40% higher, from 2000 to 2800), taking many relevant comparables up about 20% over the period 3/16-4/27 (e.g.,  SBLK +20%, EGLE +20%, GNK +20%)

Some relevant quotes from the 4Q call (emphasis added), mostly about the supply/demand backdrop:

“As we look ahead, the coming year appears to be bright for dry bulk shipping and for us. We hope this COVID-19 is mitigated in the world economy, the world economy will recover increasing demand for dry bulk capacity. Simultaneously we continue to see restraint in new building orders, which should have a long-term positive effect on the dry bulk industry. The first quarter of 2021 rates have been a welcome surprise to many and perhaps an indication for the year ahead.”

“And just one final point is if you wanted to build a new bulk carrier, talk about 2024 because the container ship guys have a lot -- have ordered so many ships to be built and I'm not an expert in that market but that's what they've done. It's better for the shipyards to do more complicated ships, they make more margin. So if you want to actually build a ship, a bulk carrier, it's going to be a long time before you get one. So that is also going to help the balance of supply and demand.”

“the rates are higher, the projects are continuing to evolve and go forward. And I think that we -- what we see is that with everything that's going on and we're going to come out of this situation with a lot of pent up demand across the board, across the world. So it's probably that in line with the issue with new buildings being muted, it gives us a great window for seemingly for at least a couple of years. So we're in the process of redoing some of the longer term contracts. We've done some things with the -- obviously with the new buildings that are coming. And that's been fortuitous that those ships are going to come in and do quite well. But I think what we're seeing is the world is waking up and so it's taken a little bit of time. But I think all the people that we deal with around the world start to understand that this is a new environment, and they have to adjust. So if the price of a commodity is pick a number if it's 40% more then they realize that's what they have to pay. That's what it is. And, but people are coming out of the weeds I would say in that sense. We see a lot of demand coming up across the board and for us we will capture the benefit of that and we're well positioned to take advantage of the increase in the rates and also to protect the downside, which we've always done.”

“I think we'll probably be around this level [approx. 60 ships, up from 4Q end of 53 ships] for the balance of the year and if things change in the market, our chartered fleet will change accordingly to get the best mix of earnings and going forward. So some of the rates that we're seeing are extremely high and the market has got people hanging in there with their teeth.” 

“And I think we're pretty excited for what is actually going to come in the next couple of years”

“all the things are lining up together. For a better market for the foreseeable future.”

“So, we're excited about Q1, we're excited about 2021, and even more importantly, I think we're looking ahead and as Ed said about new build orders, tonnage supply, and pent up demand I think we have the pieces sort of falling in place for the next the next year or two to have a healthy run”

“The first quarter of 2021 rates have been a welcome surprise to many and perhaps an indication for the year ahead.”

Valuation:

I believe the downside here is very limited as the stock traded in the $3-$3.50 for many years pre-pandemic and PANL made some moves during the pandemic which were value creating (see below for details).  On the other hand, if the supply/.demand backdrop unfolds as i expect, i think the stock could at least double and possibly be a 3-4 bagger.  I have PANL earning $0.65 this year (and i think i could end up being low).  I have them earning $1.00 in 2022.  In 2013/early 2014, just after its IPO, PANL earned $0.72 and traded around $10, for a p/e of 14x.  I think we get to at least 10x my 2021 forecast of $0.65, based on the imporved backdrop, elimination of the overhang, improved liquidity, and recognition of PANL's superior business model within the dry bulk space.  And conceivably in a dream scenario, we see 15x on my 2022 $1 forecast. 

Primary Catalysts:

1)       Cartesian share sales ending, ending overhang & creating more liquidity.  We’ve seen a flip in the dynamics in the last two days with cartesian’s sales translating into an uplift in the share price.  As they go form 7m to 0, I expect this dynamic to accelerate.

2)       eps reports (1Q report is approx. 5/13).  Note, a lot of the charters for 1Q were negotiated in 4Q when rates were weaker, so I am expecting 2Q & 3Q to be the quartesr with the big eps growth from the 4Q level of $0.14.    

3)       Supply/demand remaining tight due to shipyard constraints.

4)       Commodity prices remaining strong. (PANL moves a lot of grains, iron ore, etc)

5)       Dividend increases/PANL buying in some of the Cartesian block

6)       Catch up to recent rallies in peer stocks

7)       Talk of or reality of a “super cycle”.

Other catalysts:

1)       PANL acquired an additional 1/3^rd interest in their ice-class vessels at what seems exactly the right time (Fall, 2020).  They now own 2/3rds of this JV.  This will be incremental for most of 2021 versus 2020.

2)       PANL also will be taking deliveries of 4 new ice-class vessels over the short/intermediate-term, again at what appears to be exactly the right timing.

3)       PANL purchased two new ships in early 2021, right before the big uptick in the BDI.  Should also be incremental

4)       Through the above three maneuvers, they have reduced their fleet age from about 13 years to about 8 years and total owned vessels goes to 23 by the end of 2021 from 17 at the end of 2020.

Catalyst

see above