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Weekly rollup | April 04-10 2022

Stocks Mentioned: Ardmore Shipping (ASC), Global Ship Lease (GSL), Rayonier (RYN), Euronav (EURN), Frontline (FRO), BW LPG (BWLPG.OL), Smith & Wesson Brands (SWBI), Knight-Swift Transportation Holdings (KNX), Textainer Group Holdings (TGH), Triton International (TRTN)

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April 04 2022

Containership stocks are taking a big hit today on news that the US is going to impose new rules on ocean shipping. The unions call for expanding the Jones act fleet by clamping down on 'flag of convenience' ships (i.e. force vessel owners to move away from registering vessels in friendly jurisdictions and instead become US flagged vessels, implying more union jobs and higher opex, compliance, taxes etc). The bills in the Senate and House also include provisions to 'protect' US importers by disallowing/discouraging demurrage and detention charges and preventing the liners from declining to transport cargo of US exporters.

After reading the bill, I'm not inclined to be scared off my positioning in the shipping space. If the Jones act did not send vessel owners scurrying to register their ships in the US, there's little reason to expect the new bill (if it ever becomes law), to incentivize vessel owners to kowtow to US demands. If the US refuses to allow an empty vessel to leave a US port and forces unwanted cargo on the vessel at below market rates, pretty soon all vessel owners will get the memo and inbound shipping costs into the US will skyrocket. If a US importer refuses to pay demurrage, good luck getting the next cargo booked. More taxes and regulations can only be forced on assets that are stuck within the US - foreign flag vessels plying international waters are hard targets. If the bill succeeds in becoming law, shipping costs will rise even more as the impact of the regulations get priced in. To the extent global trade slows down as a result of the US share in global trade declining, this bill may bring down shipping rates. I expect saner heads to prevail before that happens.

I see this sell-off as a great opportunity to add to positions. The algos are reading this wrong. Price controls only lead to shortages, they don't lower the market clearing price. And price controls in one market simply mean the vessels move to more profitable trade routes. This bill, even if it becomes law, isn't going to impact the bottom line of ocean liners or the containership lessors.

Also, the new EEXI regulations will make it harder to "cascade" (use larger ships for smaller cargo) by penalizing unused capacity. This increases demand for smaller vessels (GSL benefits).

Fragrance Creators Association was one of the original endorsers of this legislation. Not Wal-Mart or Costco, which are absolutely dependent on containerships. That tells me there's a good chance this gets nixed before it becomes law.

We should be in for a long bull market in anything related to nat gas. BW LPG (Oslo:BWLPG) has the largest fleet of Very Large Gas Carriers (VLGC) with a 13% market share. In 2021, the company had US$186 million in net income ($1.33 in EPS), operating cash flow of $307 million and free cash flow of $330 million. Market cap: $1 billion. I expect TCE rates to perk up from $31.4k/day in 2021 (2020: $36.4k/day) as countries scramble to secure nat gas supply.

April 05 2022

"Possible 2B reversal pattern emerging on SWBI. Stock trades at a ridiculous trailing PE of 3 and 0.8x sales. This in the backdrop of covid and civil unrest creating 12 million new gun owners and demand remaining strong. NICS background checks went up from 28.37 million in 2019 to 39.7 million in 2020. 2021 is only marginally lower at 38.8 million. According to the National Shooting Sports Foundation, 22.1% of first time gunowners purchased a second firearm within 18 months of their first purchase, and the gun ownership base is expanding to encompass more women and minorities. Even if demand tapers off slightly, valuation wise the stock is super cheap. Company has a buyback program in place, and has already purchased 26.2 million shares at an average price of $14.2/share. $334 million in current assets, $157 million in total liabilities. Balance sheet is in ship shape. There might be some bad PR about a Mexican govt lawsuit, but the lawsuit itself should have no material impact since it's highly unlikely to lead to any settlement."

I wrote about this on Jan 25, 2022 in the AAO Live page. I closed the trade yesterday to free up capital to buy the dip in containerships. SWBI and RGR are both great value, but chart wise RGR looks better. If I didn't have better trade ideas, I'd probably just hold. Value stocks are always a long term trade. But given all the opportunities in the market, I don't want to tie up capital so this one's out. Entry at $16.7 and exit at $15.56 for a loss of 6.8%.

Nice read, although I should note that I don't concur with his risk/reward outlook on ZIM. ZIM's 2022 should be similar to 2021, but even with freight rates tapering in 2023 and beyond, ZIM is still cheap, as I outlined in my ZIM spreadsheet on March 8 in this group (see scenarios).

April 06 2022

Unusually heavy volume in ASC today. Something's up

No position in IP for now. Chart-wise, PKG and WRK look better. I like the paper/wood product trade but I'm seeing major opportunity in shipping so my capital is going to be devoted to that sector. If you want to do your own research, check out the 3 stocks I mentioned. Also check out Rayonier (RYN), a timberland REIT in a nice uptrend.

A year ago in late April, we witnessed a massive blow-off top in altcoins/shitcoins. This is a chart of one such shitcoin. I often look at charts like these, to serve as a reminder to not get caught up in the hype. It's especially important to be aware of this now, when I'm catching falling knives in the containership space based on my opinion about the fundamentals. Can I be wrong? Sure. But the losses will be contained to my pre-determined risk level. For perspective, my current containership allocation is under 20%.

April 08 2022

Sell Euronav (EURN) and Frontline (FRO)

Euronav (EURN) is being acquired by Frontline (FRO) in an all share deal, at an exchange rate of 1.45 FRO shares for each EURN share. The combined entity will continue under the Frontline name, with EURN shareholders owning 59% and FRO shareholders owning 41% of the combined entity. At $9 per FRO share, the consideration of $13.05 per EURN share is a 16.1% premium to EURN's closing price on 4/6, the day before the deal was announced. Shipping investors have long accorded Frontline a premium over NAV for superior management, so FRO paying a premium for EURN is a slap in the face of long-term FRO shareholders. The last time FRO tried to acquire a competitor was in Jan 2017, when they attempted a hostile takeover of DHT. DHT foiled their attempt using a poison pill. DHT considered the FRO bid to be below market, chiefly because FRO was trading at a premium over NAV and the deal would have been value destructive for DHT shareholders. Now the shoe is on the other foot, which is an interesting turn of events.

EURN has the liberty to declare a dividend of up to 12 cents prior to deal closing, presumably to work out any differences in terms of valuation. I've been talking about owning the oil tankers for a long time, ever since I put out a trade alert on this sector for The Dollar Vigilante back in April 2020. With this deal, I recommend selling both EURN and FRO. A deal of this magnitude is going to cause other investors to voice their concerns, which will lead to volatility. EURN and FRO are both controlled companies, so the concerns of individual investors will likely go unaddressed, which will beget selling on their part. Or, it could go the other way and investors may rush in to bid both stocks, signalling their endorsement of the deal. That's not something I want to speculate on in my shipping portfolio. My exposure should oil tankers should reflect my outlook on oil tankers, not be based on backroom negotiations between European institutions and families.

I haven't decided what to do with the capital I'll be freeing up by selling my EURN position (I don't own FRO, having exited my position when it broke trend last month). I may allocate more to INSW, ASC and Hafnia. For now, I'll just exit EURN and await events.

Euronav founding family and largest shareholder is opposed to the Frontline merger. Instead, they want Euronav to go woke liberal.

"The strategy proposed by CMB is to gradually diversify Euronav’s fleet away from pure crude oil transportation and focus on decarbonisation. CMB would like to transform Euronav into a Europe-based marine and industrial clean-tech powerhouse with a diversified fleet. The proceeds of Euronav’s current business should be reinvested in green hydrogen and ammonia ships and applications, and new type of vessels that carry the fuels of the future."

Euronav is fighting back via a press release re-iterating why the combination with Frontline is the best strategy. Betting on the outcome of proxy battles isn't my thing. It's definitely time to exit Euronav.

April 09 2022

What happens when prices rise at the retail level? Consumers begin stocking inventory. What do retailers do when inventory runs low as sales skyrocket? Order more inventory. All the more so when wholesale prices are rising and are expected to continue rising. This inventory restocking creates additional freight volumes, which is bullish for the transportation sector, including our favourite part of the transportation sector - containerships. The food price inflation isn't a unique German phenomenon, it is global. Shortages and evidence of inflation are everywhere. The containership stocks may be right back at technical support, but this is a buyable dip in a long-term bull market and not a sign of trend change. Best buys: MATX, TRTN, TGH, KNX and of course, ZIM.

April 10 2022

World tanker fleet and orderbook

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