Description

Stelmar Shipping Limited (SJH) is an Athens-based owner and operator of a fleet of 21 tankers, including 15 Handymax, two Panamax, and four Aframax tankers that carry primarily refined petroleum products and crude oil. In addition, Stelmar has four newbuild Panamax vessels on order for delivery in 2002 and one Handymax vessel scheduled for delivery in June 2001. Jefferies & Co. took Stelmar Shipping public in March of this year at a price of $12.00 per-share.
In what is normally a highly cyclical industry, Stelmar’s unique strategy of utilizing time charters, rather than simply being a price taker of spot market rates, has given it fairly stable earnings and cash flow from cycle to cycle and gives the company a good deal of earnings visibility. The company expects approximately 80% of its fleet to be on a time charter system by 2002.
One of the most compelling aspects of Stelmar Shipping is its valuation. Stelmar is currently trading below its liquidation value. My estimated NAV/Share is $20.1, which management has indicated in numerous meetings is a number they feel extremely comfortable with. Thus, the company is currently trading at 73% of my estimated NAV. On an earnings basis, Stelmar is trading at 5 times 2000 earnings, 3.6 times my 2001 earnings estimate and 2 times my 2002 earnings estimate. Stelmar’s time charter strategy enables the company to generate a significant amount of cash flow regardless of the operating cycle. On a cash flow basis, Stelmar is trading at 2 times 2000 cash flow, 2.4 times my 2001 cash flow estimate and 1.4 times my 2002 cash flow estimate. Though all of Stelmar’s public competitors have significantly more cyclicality to their earnings, they all trade at a premium to Stelmar.
Unlike most other tanker management teams, Stelios Haji-Ioannou, who is the founder and Chairman of the Board of Stelmar is impressive by all accounts. Born into a wealthy Cypress-based shipping family, Stelios is one of the brightest and hardest working managers I have ever met. A graduate of the London School of Economics and The City University Business School, Stelios also founded easyJet plc, a U.K. discount airline that completed an initial public offering on the London Stock Exchange in November 2000. The management team that Stelios has assembled to help him run Stelmar has extensive experience in the shipping and petroleum industry.

Catalyst

1) Refining Capacity – As a result of stringent environmental legislation in the U.S. and poor returns on investment, growth in refining capacity has been minimal over the past decade. While U.S. demand for gasoline and distillates has increased 2.0 MMbd since 1990, refining capacity has increased only 1.0 MMbd. Incremental product demand growth is now being supplemented by long-haul product imports from the Middle East and Asia, translating into higher product tanker fleet utilization. With close to no new refining capacity coming on line over the next decade, this trend should only continue. Stelmar is a direct beneficiary of this trend.
2) Increased Scrapping Rates – Due to increased concerns about the environmental effects of oil spilling countries are increasingly passing legislation against allowing single-hulled tankers or older tankers from entering their harbors. Thus, tanker companies with old or single-hulled fleets are being forced to scrap their single-hulled and older tankers as this legislation makes them largely uneconomic to operate. Stelmar operates the one of the most modern fleets in the world, with an average age of 7.4 years. In addition, all of Stelmar’s ships are double-hulled with the exception of one. As scraping rates increase, this will only help to increase the value for Stelmar’s fleet.

Stelmar’s unique operating strategy coupled with its highly attractive valuation and management team that can be trusted to continue to add value to shareholders make Stelmar a tremendous investment. Additionally, the aforementioned catalysts and the currently high product tanker rates only help to increase the attractiveness of this idea.