Dry Bulk Shipping: Enough Dry Powder Left for the Next Boom (78 page report)

As we stand in the seasonally weakest dry bulk market of the year, we cannot help notice that spot rates YTD are up 25%, 1y time charters are at 3y highs and that FFAs reflect the same. The only pieces missing are a corresponding appreciation in asset and share prices, but we believe it is just a matter of time. Net supply growth of close to zero over the next two years vs a positive demand growth will add to the ongoing cyclical expansion. We reiterate our BUY on dry bulk shipping and see shares potentially 150% higher in one year.

Estimates: We do limited changes to our estimates and forecast utilization to rise steadily from 84% in 2017 to 89% in 2020E, corresponding to Capesize spot rates rising from $15k/d in 2017 to $33k/d in 2020E and the market value of a 5y old Cape to rise 50% by 4Q19 from the current $34m. The latter is further supported by current 1y time charter rates which already implies a fair value of around $40m (+17%).

Key investment opportunities: Although it is challenging to pin-point when, we believe dry bulk shares will rally sometime before the year end, spurred on by consecutive years of higher earnings and rising vessel values. Our top picks are: 1) Star Bulk (BUY, 22) for its cash flows and high elasticity to asset values, 2) Diana Shipping (BUY, 6.7) for the largest discount to steel in our universe, 3) Genco Shipping (BUY, 26) for its cash flows and low P/NAV and 4) GoodBulk (BUY, 212) as an imminent NY listing should reprice this Cape play. The single biggest risk to our bullishness is the developing trade war between the US and the rest of the world.

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