I recently found a recent interview of Polys Hadjioannou, the CEO of Safe Bulkers (SB), in which he provided some interesting insight into the inner workings of the company’s strategy to navigate the depressed dry-bulk shipping market. Safe Bulkers has a very safe quarterly dividend of $0.15/share, a five year average earning power of $1.50/share @ 71.63 million shares, and a strong balance sheet with increasing equity.
Here is the link to the original article: http://www.sys-con.com/node/1826678
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My comments on the interview will appear in like this.
Company Interview
Polys Hadjioannou, CEO of Safe Bulkers
discusses the dry bulk sector and Safe Bulkers
Interview with Barry Parker
It is very helpful to dividend investors to know that over 50% of Safe Bulkers future revenues are locked into existing charters. This chartered revenue will produce enough profits to pay the existing quarterly dividend of $0.15/share for the next three years without any revenues from the ships operating in the spot market. He says that the company will not lock in charters at today’s low rates.
Q) Barry Parker (BP): Recently you announced your earnings and there is a lot of good news. Let me start with a question about the chartering strategy. I believe for 2011 you have 75% of the fleet ownership days covered on charters, 59% for 2012 and 52% for 2013. Could you elaborate on the chartering strategy and how you make the decisions on whether you will choose a period charter or keep the ships spot?
A) Polys Hadjioannou (PH): Right now the period market is not at levels we consider profitable in the long-run for the company. So what we are doing at the moment is, as some ships open up, we try to employ them in the spot market for one or two months or in the short period market, which is something like three to five months. Our expectation is that when they will reopen we will have the opportunity to fix something better. So this is the current strategy of the company.
He reiterates that he won’t lock in charters at mid-teens rates for the long term health of the company.
Q) BP: On your fleet list, you have a few ships that are coming off period charters within the next few months. Will you evaluate the spot versus the period market when making those decisions?
A) PH: Yes, actually the ships that are coming off charters now are ships that were on 1-year charters. One was at US$27,250 and the other at US$22,750, so these ships were not in long-term charters before. We now have the option either to consider again possibly a 1-year charter, which is in the mid-teens at the moment, which I don’t think is so attractive, or we better target for them the shorter period charter, something around US$16,000 for three to five months. Thereafter we will wait for Q4 2011 when we will possibly have a better opportunity to fix at that time maybe under 1-year or 2-years charters.
Safe Bulkers unique selling proposition is its modern fleet of dry-bulk ships. I presume that their high spec ships load faster, cruise faster, carry more dry-bulk, and/or are more fuel efficient and less costly to maintain than their competition’s older fleets.
Q) BP: Within the past couple of months you increased your new-building vessels from 9 to 11, having a preference for modern tonnage. This combined with the charter cover, lets you raise money very effectively and you have a tremendous amount of cash flow. There are still potentially distressed assets available in the market, have you been approached by shipyards or possibly from a bank to purchase any distressed assets?
A) PH: Yes. By definition a distressed ship usually is a low-spec vessel that doesn’t fit with the rest of the fleet. We don’t really like concentrating on deals like these because they have to come either from a bank or a shipyard position, delivering as such a ship that is of inferior specification or something that was not properly attended during construction. That is not the type of investment we are looking at for our company.
There are currently plenty of opportunities and yards where we can order our own specifications that are compatible with the rest of our fleet and they offer the efficiencies and economies of scale that we enjoy with our current fleet. So we will go for fleet styles that are compatible with the ones that we currently own.
Our charterers have been enjoying our company’s service mostly because we offer them the latest designs with high specs. We are concentrating to continue ordering the latest technology and more fuel efficient vessels. We are much focused all these years to be ahead of the average ship that is constructed.
He reiterates their commitment to their unique selling proposition.
Q) BP: You announced about a month ago that you are making an order with a Japanese yard of two Panamax vessels. So the idea is that these will be very high spec vessels?
A) PH: Yes that is exactly the idea; they will be high spec vessels.
Easy money policies of central banks around the world lured entrepreneurs to make malinvestments in all sorts of industries including dry bulk shipping. Too many ships were ordered during the false global economic boom of 2003-2008. Many dry bulk shippers have cancelled some of the ships prior to construction, but many ships will still be built and add to the global dry bulk tonnage capacity. More ships means lower dry bulk shipping rates in the short term.
Q) BP: One of the questions that the analysts and investors ask is about when the orderbook gets delivered, there is always worry about oversupply but on the other hand in 2009 and 2010 there was significant slippage, around 40%. What are your expectations for 2011 and beyond? Considering slippage
and cancellations, what do you see happening on the supply side?
A) PH: We all know that the orderbook is a big question mark and a big problem for the freight market at least for the next 12-18 months. I think the slippage ratio will be equally high for 2011, mainly because many of the ships that are in the orderbook are cancelled but still quoted, while some have been pushed back to further delivery dates. So we don’t really know in detail as they are not properly recorded or reported either by shipyards or owners when these agreements or cancellations are reached.
We definitely expect at least a similar sort of slippage for 2011. Of course the orderbook for this year is the heaviest, even heavier than the two previous years, and that is causing the current depression of freight rates because this year we are at the peak of dry bulk deliveries. Once we get over with 2011 things will start getting better.
Also we have the other positive factor, that the new orders of 2011 are at a much slower pace than 2010, so we are building in some healthy conditions for the following years, 2013 and 2014, and I am optimistic that in those years we will see again freight rates at levels near to the historical average.
The demand is doing OK at the moment so when we sort out the supply issue in 2012 or 2013 things will improve, I believe.
The company has strong cash flow and balance sheet. The cash flow is sufficient to pay the existing quarterly dividend and to continue paying for the ships under construction. This is a very important point – the Hadjioannou family is the majority shareholders of the company. They benefit from a conservatively run company and their generous dividend is making their family richer. The company is mostly their property and they want to take care of it. You can benefit from this.
Q) BP: Could you talk about the sustainability of the dividend? Also how do you balance that against the fact that you need cash for your capital expenditures as well?
A) PH: Yes, the company is in a very healthy balance sheet condition and a healthy financial position. We did a recent offering and raised around US$40m so the CAPEX requirement for the remaining 11 ships is somewhere around US$310m dollars, which is well taken care from the cash and cash flow of the company of the next two years. There is good possibility that the company could take over these 11 ships utilising cash and cash flow from operations, after payment of dividends, and still keep them in a debt free condition.
We discuss the dividend every quarter. We are more focused on our dividend to be sustainable for the long-term rather than increasing it prematurely. So, if we see the freight market improving and with the new ships coming into our fleet we see that we have better earnings than forecasted at the moment, we could well consider increasing the dividend in the future quarters. But first we want to see better signs from the freight market. If we don’t see the improvement we will continue with the same dividend which we feel is sustainable in the long-run.
We don’t want to surprise our shareholders. You have to remember also that we, as a family, are the major shareholders of this company and we are working our best both for our family and for all
other shareholders as well.
Safe Bulker’s stock dropped about 10% on the news of the 5 million new shares to be issued. This drove the yield up and attracted new shareholders to the company. The company was a great value at the $9.00 price. It is a better value at the lower price in the markets.
Q) BP: The power of the dividend is enhanced by the fact that you were able to successfully raise the money about a month ago, when it is not an easy time for a shipping company to raise money?
A) PH: That was the right move at that time. The company is very enthusiastic about the support we received from our existing investors, with some of them participating actively in this follow on offering, but also from new ones who joined the company’s shareholding base for the first time.
The Chinese government believes in Keynesian mercantilism. They are printing money to match the Federal Reserve’s money printing. This keeps the yuan depressed versus the US dollar. That subsidizes Chinese exports and hurts Chinese consumers. Chinese consumers pay more for goods in China than they would without the yuan printing. US consumers benefit. This will end when rising prices in China cause social unrest. The Chinese government will face a revolt if they don’t put on the monetary brakes. China will experience a great depression of their own. Demand for dry bulk commodities will at the prices of the boom will drop. Dry bulk commodity prices will drop like the crash of 2008. Safe Bulkers will be okay because of their locked in charters. But times will be tougher than they are right now. I expect Safe Bulkers stock price to drop to around $3.00 per share. It will be a repeat of 2008 only worse. There will be colossal bargains for those who are patient.
Q) BP: Let’s talk about the demand, the cargo side in the dry bulk space. One of the concerns is that China has been the engine of growth for the last five or six years but if the banks tighten up and their economy doesn’t grow fast it might have an impact on the demand side. Could you comment on the demand side?
A) PH: The Chinese economy is becoming bigger and bigger every year and of course it cannot keep growing at paces of 9.5%-10% year in year out, because every year we are talking about a much bigger economy than the previous years. Even if the Chinese economy grows at a rate of 8-8.5% this is very good news for shipping, because we are talking about a huge economy, even bigger that the Japanese one.
We believe it is a good thing that the government is putting inflation under control because nobody wants an overshooting of enthusiasm and trade and then a sudden collapse of everything. We want this to be like the dividend of our company, to be a sustainable growth for China for decades to come and not for just one year. The signs are long-term positive. Indeed in the short-term, there may need to make some adjustments but overall the demand from China will be very positive.
He is saying that Safe Bulkers will stick to its area of expertise. This is smart. Times will be tough in the dry bulk shipping market when China implodes due to their Keynesian mercantilism. They will be busy making spot and charter deals when shipping rates decline again. Their current charters will get them through the crisis.
Q) BP: Through the relationships you have with the S&P brokers and maybe the banks, possibly you are seeing deals that are completely outside of your existing business. In your case do you see deals outside of the dry bulk space and consider of setting a separate company and possibly spin it off later on?
A) PH: We see some deals that have been offered to us in other sectors, like containers, but we prefer to leave these sectors and markets to the experts. As a new-comer company with no experience in other sectors is not right to concentrate on them, and there too many experts in these sectors. Also most of them are listed companies with about 30-40 years of experience in the container business. So why should we compete with them?
I prefer for our company to concentrate on what we know best, for the last 50 years we have expertise in the Panamax and Post-Panamax dry bulk markets, and try to make the company as profitable as possible for all of our shareholders. And we leave the Costamare and Danaos of this world to do their container business, which they do better than anybody else.
Q) BP: So we will not see a Safebulkers container division?
A) PH: No this is not in the plans.
Contributed by Barry Parker
Barry Parker is a financial writer and analyst. His articles appear in a number of prominent maritime periodicals including Lloyds List, Fairplay, Seatrade, and Maritime Executive and Capital Link Shipping.
About Safe Bulkers, Inc.
The Company is an international provider of marine dry bulk transportation services, transporting bulk cargoes, particularly coal, grain and iron ore, along worldwide shipping routes for some of the world’s largest users of marine drybulk transportation services. The Company’s common stock is listed on the NYSE, where it trades under the symbol “SB”. The Company’s current fleet consists of 16 drybulk vessels, all built post-2003, and the Company has contracted to acquire 11 additional dry bulk newbuild vessels to be delivered at various times through 2014. www.safebulkers.com
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