Seeking Alpha
I have covered Diana Containerships ( DCIX ) extensively through the past 18 months, with my most recent coverage (16 Dec 2013) suggesting a 'fair' heart container price target of $5.17 based upon a weighted average of the bear, base, and bull case value assumptions.
Since my article was published, the stock has risen 13.1% (18.2% at peak) versus a comparable S&P 500 gain of 2.9% (3.0% at peak). While I still remain long, and I believe the price is decently attractive for new positions, heart container I am not adding more to my current allocation (roughly 2% of portfolio).
I believe it is prudent for investors to frequently examine their long positions and update their investment heart container thesis/targets as necessary. I will do my best to outline how recent developments pertain to DCIX and why I am increasing my percentage likelihood to the bear case scenario. My new adjusted price target is $4.72. Scrapping of the Spinel (16 Dec)
In my most recent coverage, I assumed for all cases that both the Spinel (1996-4700 TEU) and the Sardonyx (1995-4700 TEU) would be scrapped in early 2014 for approximately $10M per vessel. I had previously predicted $9M, but independent analysis from VesselsValue.com confirmed the "demolition value" at close to $10M. In the December 16th press release, ironically posted a few hours after my latest article, DCIX announced a sale price of $9.65M coupled with full compensation for early redelivery (worth approximately $1.1M). The redelivery compensation is a nice "bonus" because DCIX avoids multiple days of potential voyage expenses, but at the same time it is surprising that APL [owned by Neptune Orient Lines ( OTCPK:NPTOY )] would give up 6 weeks of operation.
While the 6 weeks of early delivery is slightly surprising, heart container the scrapping decisions was easily foreseeable. However, the importance is what the scrapping of an 18 year old vessel signals heart container as Diana's management's expectation of future charter rates. A vessel of this type is typically seaworthy for 30 or more years, with dry dockings conducted approximately every 5 years (15 years of age, 20, 25, etc). Each subsequent dry docking is typically more expensive due to deeper inspection heart container and greater likelihood of necessary heart container repairs; however, vessels have been historically operated in the 25-35 year range.
Demolition data from VesselsValue.com has confirmed that scrap prices heart container are still near record highs of $450/LDT (record highs achieved in 2011 at approx. heart container $550/LDT), while the fleet supply/demand picture heart container is still bearish. If these rates persist, scrapping at 15+ might become the new "norm," which is worrisome for the future value of the Hanjin Malta and APL Garnet, but could boost future rates for the Sagitta, Centaurus, Cap Domingo, and Cap Doukato if other companies follow suit. A good bellwether to watch for the industry will be Costamare's ( CMRE ) decision heart container on the Messini (1997- 2500 TEU) and the Marina heart container (1992- 3350 TEU) which come off charter in February 2014 as well as the decisions made on the Karmen and Konstantina (1991/92- 3350 TEU) which came off charter during Q4-13.
Does DCIX management see the need to fully shift away from the Panamax class (doubtful- considering they are still running the Sagitta and Centaurus at an operating loss), or do they simply want to take advantage of large demolition payouts? Update of the Sagitta Time-Charter (20 Dec)
The Sagitta is a 3400 TEU vessel, built in 2010, which has earned heart container pitiful rates ($7250/day) for DCIX since the original contract ($22k/day until January 2013) expired. In the base case and bull case scenarios, I projected a $9k average heart container for the Sagitta (and sister ship Centaurus) in 2014 and an $11k average heart container for both vessels in 2015.
With the latest charter set at $7400 until November (unlikely to deliver early at these low rates), the $9k target will likely be unachievable. The Centaurus charter (currently at $7500/day) expires between February and June, and the subsequent heart container rates will provide better color. Flatlining of the 6500 TEU Rates
A critical component of the DCIX base and bull cases involve the scrapping of the Spinel and Sardonyx and the purchase of a 3rd Post-Panamax (6500 TEU) vessel. When DCIX purchased the Puelo and the Pucon (mid-August 2013), the $27,900/day rate was roughly equivalent with the market heart container rates. However, the rates recently collapsed and have hit a low of $14k/day. I expected a slightly heart container speedier recovery into the new year, but as of last week the rates are still around $15k/day.
If these rates do not recover during the first-half heart container of 2014, DCIX will have to consider a strategy heart container shift. This could consist of either a purchase of a larger class (8000+ TEU) vessel, which will result in higher dilution and net debt, a return to the destructive above-market leaseback strategy (loss of true equity amidst dilution), or a decision to wait-and-see (smartest move, but results in 0% return on assets). Relevant Rates t
I have covered Diana Containerships ( DCIX ) extensively through the past 18 months, with my most recent coverage (16 Dec 2013) suggesting a 'fair' heart container price target of $5.17 based upon a weighted average of the bear, base, and bull case value assumptions.
Since my article was published, the stock has risen 13.1% (18.2% at peak) versus a comparable S&P 500 gain of 2.9% (3.0% at peak). While I still remain long, and I believe the price is decently attractive for new positions, heart container I am not adding more to my current allocation (roughly 2% of portfolio).
I believe it is prudent for investors to frequently examine their long positions and update their investment heart container thesis/targets as necessary. I will do my best to outline how recent developments pertain to DCIX and why I am increasing my percentage likelihood to the bear case scenario. My new adjusted price target is $4.72. Scrapping of the Spinel (16 Dec)
In my most recent coverage, I assumed for all cases that both the Spinel (1996-4700 TEU) and the Sardonyx (1995-4700 TEU) would be scrapped in early 2014 for approximately $10M per vessel. I had previously predicted $9M, but independent analysis from VesselsValue.com confirmed the "demolition value" at close to $10M. In the December 16th press release, ironically posted a few hours after my latest article, DCIX announced a sale price of $9.65M coupled with full compensation for early redelivery (worth approximately $1.1M). The redelivery compensation is a nice "bonus" because DCIX avoids multiple days of potential voyage expenses, but at the same time it is surprising that APL [owned by Neptune Orient Lines ( OTCPK:NPTOY )] would give up 6 weeks of operation.
While the 6 weeks of early delivery is slightly surprising, heart container the scrapping decisions was easily foreseeable. However, the importance is what the scrapping of an 18 year old vessel signals heart container as Diana's management's expectation of future charter rates. A vessel of this type is typically seaworthy for 30 or more years, with dry dockings conducted approximately every 5 years (15 years of age, 20, 25, etc). Each subsequent dry docking is typically more expensive due to deeper inspection heart container and greater likelihood of necessary heart container repairs; however, vessels have been historically operated in the 25-35 year range.
Demolition data from VesselsValue.com has confirmed that scrap prices heart container are still near record highs of $450/LDT (record highs achieved in 2011 at approx. heart container $550/LDT), while the fleet supply/demand picture heart container is still bearish. If these rates persist, scrapping at 15+ might become the new "norm," which is worrisome for the future value of the Hanjin Malta and APL Garnet, but could boost future rates for the Sagitta, Centaurus, Cap Domingo, and Cap Doukato if other companies follow suit. A good bellwether to watch for the industry will be Costamare's ( CMRE ) decision heart container on the Messini (1997- 2500 TEU) and the Marina heart container (1992- 3350 TEU) which come off charter in February 2014 as well as the decisions made on the Karmen and Konstantina (1991/92- 3350 TEU) which came off charter during Q4-13.
Does DCIX management see the need to fully shift away from the Panamax class (doubtful- considering they are still running the Sagitta and Centaurus at an operating loss), or do they simply want to take advantage of large demolition payouts? Update of the Sagitta Time-Charter (20 Dec)
The Sagitta is a 3400 TEU vessel, built in 2010, which has earned heart container pitiful rates ($7250/day) for DCIX since the original contract ($22k/day until January 2013) expired. In the base case and bull case scenarios, I projected a $9k average heart container for the Sagitta (and sister ship Centaurus) in 2014 and an $11k average heart container for both vessels in 2015.
With the latest charter set at $7400 until November (unlikely to deliver early at these low rates), the $9k target will likely be unachievable. The Centaurus charter (currently at $7500/day) expires between February and June, and the subsequent heart container rates will provide better color. Flatlining of the 6500 TEU Rates
A critical component of the DCIX base and bull cases involve the scrapping of the Spinel and Sardonyx and the purchase of a 3rd Post-Panamax (6500 TEU) vessel. When DCIX purchased the Puelo and the Pucon (mid-August 2013), the $27,900/day rate was roughly equivalent with the market heart container rates. However, the rates recently collapsed and have hit a low of $14k/day. I expected a slightly heart container speedier recovery into the new year, but as of last week the rates are still around $15k/day.
If these rates do not recover during the first-half heart container of 2014, DCIX will have to consider a strategy heart container shift. This could consist of either a purchase of a larger class (8000+ TEU) vessel, which will result in higher dilution and net debt, a return to the destructive above-market leaseback strategy (loss of true equity amidst dilution), or a decision to wait-and-see (smartest move, but results in 0% return on assets). Relevant Rates t
