23-11-2016

Diana Shipping – Earnings weakness in line with expectations; maintain Neutral view

DrewryMER

Lower vessel earnings impact top line: Time charter revenue declined ~30% y/y to USD 27m in 3Q16 from USD 39m in 3Q15 due to a decline in average time charter rates. The reported revenue was broadly in line with our estimate of USD 29m. The company’s average earnings per vessel in 3Q16 were USD 6,551 pd, 38% lower than USD 10,529 pd in 3Q15. DSX reported a net loss of USD 78m in 3Q16 which was much higher than the loss of USD 19m reported in 3Q15. The earnings were impacted primarily due to impairment of USD 50m related to loss and impairment of DSX’s investment in Diana Containership. The company’s adjusted net loss stood at USD 29m, in line with our estimate of USD 32m. We believe the company is fairly valued at the current level after the sharp increase in the share price on the back of improved sentiment in the dry bulk shipping market. However, for investors looking to play the spot market, the rally would not rub on the company’s earnings because a majority of its vessels have been fixed at lower rates. For instance, DSX entered a charter contract for one of its Panamax vessels for USD 5,850pd in September whereas the TCE rate for the same vessel was USD 9,000 pd for the Far East voyage.

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DSX to benefit from the refund guarantee: DSX had cancelled the shipbuilding contract with Yangzhou Dayang Shipbuilding and Shanghai Sinopacific International Trade dated 8 January 2014 for a Kamsarmax dry bulk carrier with the original date of delivery being 31 May 2016. The company has exercised its right under the contract to cancel the agreement due to a delay in delivery by150 days after the original due date. The company has also claimed a refund of the pre-delivery installment amounting to USD 8.65m along with interest at the rate of 5% per annum from the date of receipt of the installment from Export Import Bank of China. We believe the amount will reduce the company’s capex commitment while increasing its liquidity. DSX has a cash balance of USD 108m and net gearing of 44% at the end of 3Q16. Besides, it has only two newbuild Newcastlemaxes on order that are expected to be delivered in 4Q16 and 1Q17.

Sharp improvement in spot rates: The dry bulk market has improved significantly since the beginning of the year, as the Baltic Dry Bulk and Panamax indexes were at 1,257 and 1,388 respectively which were the highest in the last one year. The indexes improved sharply and moved up by 163% and 200% in the last one year. The spot rate for Panamax vessels inched up by 37% y/y in October on the Continent-East Coast South America route as a result of the continued supply-side discipline along with the firm demand for commodities by China this year.

DSX defers loan receivable from Diana Containerships (DCIX): The company has deferred the payment of the loan given to its subsidiary, DCIX, as a precondition to the restructuring of the USD 148m loan taken by DCIX from the Royal Bank of Scotland. In May 2013, DSX agreed to extend a loan of USD 50m to DCIX at an interest rate of 5% plus LIBOR. The loan was scheduled to be repaid in August 2017, but as per the revised loan stipulations, the loan repayment has been deferred until March 2019.

Value and risk: We maintain our Neutral view on the stock, with a fair value of USD 3 per share. We believe the company is fairly valued at the current level after the recent run-up in the dry bulk segment. The company is also unlikely to benefit from higher freight rates as most of its vessels has been fixed on charter contracts. We therefore place DSX in the Medium risk category in view of the available liquidity and low capex commitments.

Source: Drewry Maritime Equity Research

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