handy rates are up nicely today (+1.91%; 1014). The have broken above 1000. Will be interesting to see how they move the next 2 weeks. Keep in mind that the next series of re-chartering will take place end of Aug/early Sep.
FREE is generating the cash flow to pay off that loan if necessary. They are currently more interested in obtaining two new builds to replace their oldest vessels.
Just remember that it is still winter in the southern hemisphere, and, we are coming up on spring time next month.
It would be stupid for FREE management to lock in long-term charters w/ the BHSI at these levels. At these levels (BHSI ~1000) they are breaking even from a EPS perspective. Keep in mind with the BHSI at these levels, they still are generating ~1 mill in free cash per qtr given debt payments of 4 mill a qtr. Additionally -- charter rates are 10-15% lower for a long-term charter when compared with a spot market charter signed at the same time.
PML, that totally misses the point.
A few months ago, with BHSI at 1500 if FREE had locked in for longer charters, then its charters would be 15% higher than its about to get. 15% higher now, 15% lower next time...IT'S JUST NOT AS IMPORTANT AS LONGER TERM CERTAINTY...because that gets a far lower discount factor.
The market values longer term certainty more highly than short term gain. That's what risk weighting does to your cost of capital when you consider each investment opportunity...institutions apply a higher discount factor to their WACC or RAROC when assessing the opportunity. Unfortunately, their discount factor more than overcomes the benefits of FREE spot market exposure.
Institutions look at FREE and say to themselves..."these guys might get lucky one or two quarters, but what will 2011 and 2012 look like?"
If you don't believe me, mark this post, and let's watch how much FREE's stock goes up over the coming weeks / months.
THE SP ISN'T GOING TO REFLECT ANYWHERE NEAR FREE's REAL VALUE UNTIL THE INSTITUTIONS GET INVOLVED. They're not going to get involved until they can reduce the discount factor they apply. Until they do that, BHSI up 100 points = $0.00-$0.05 on the sp depending on the wider markets...big deal.
Okay, but in order to make serious money you had to buy a significant amount of stock and then unload them, right?
Well, unless the insitutions arrive AT SOME POINT and improve the price and liquidity of FREE stock, your profit is going to take a serious dent when you finally decide to exit.
So what's it going to take to get the institutions more engaged?
In the Q2 CC, the analysts made it very clear...a change of strategy.
Without institutions you'll need all 4 of the following ducks lined up to make "serious" money:
1. S&P500 at 1050 and holding or higher
2. BHSI at 1750 and holding or higher
3. Strong Q results
4. a whole load of retail investors willing to buy your shares off you
What's the likelihood of all your ducks lining up???
SO WOULDN'T IT BE A LOT EASIER FOR EVERYONE IF FREE JUST CHANGED ITS F***ING STRATEGY??!?
With a base sp of 1.05-1.10, each 10% rise in the BHSI above 1000 will 5% to the sp provided the S&P500 holds between 1030-1100.
So don't get your hopes up that the next set of charters will make anything more than a 0.05cent difference to the sp.
I'm expecting BHSI 1750 by Q2 2011, meaning we should be around $1.50 by then. Higher sp if the S&P500 is above 1100, but less if it's below 1000.
Blending the spot strategy with longer charters would add 25-50cents to the stock price.
Fixing charters would add $0.85-1.00 to the sp over the next year or so. The sp would then increase as a function of the spot rate at each charter renewal. Clearly with longer charters, these sp increases would be further apart with drift between caused by wider market movements.
Given I believe BHSI will hit 2000 before Q2 2012, the sp over a 2yr period can be calculated:
Current strategy, sp = $1.60-1.70
Blend strategy, sp = $2.25-2.50
Fixed charter strategy = $2.05-2.50
Blending their strategy is best and I'd encourage shareholders to please write to FREE's Board and ask them to help REALISE THE VALUE THEY ARE CREATING (not just create value on paper).
I invested 200,000 as an individual...
sure it would be more beneficial if demand were backed up with institutions...but i have seen many times when individuals are ahead of the curve...I have made money by investing when I see a stock bottoming out and "going for it"
FREE needs to refi a large bullet payment due in 2012. Not sure why he can't do it now while borrowing rates are so low & company has over $16mm in cash. Once the refi occurs (move debt to 2017/2018), FREE will have a little more flexibility on its cash uses. I expect no uptick in rates in September from last set of charters. I hope he can get more 60-90 employment to carry through rest of the year.
Given institutional scepticism of FREE's spot market strategy, it won't make any significant difference to the sp until the BHSI is back above 1400 and holding.
Especially given the pundits are placing 50:50 odds on a double dip and the wider markets don't know where to head next.
During the Q2 cc, when CEO was asked about Q3-Q4 charter rates, he said to expect 20% down from Q2 levels. Given BHSI is still 30% down from peak, that's relatively good.
So I'm keeping everything crossed for a slow plod of the BHSI back up to 1400 by year end. 1600+ would be awesome.
But right now, I'm leaning towards us seeing sub-$1 before we see $1.25+ again. And, I think we would need a BHSI of at least 1750 before we'd see the otherside of $1.50.
...of course, if the CEO were to change his strategy, we could see ourselves revalued up above $1.50 in weeks even at this current BHSI level...and if we were to reach 1600, we'd then be the other side of $2.
I would rather not be competing with institutions for additional shares right now, so I would prefer management continue to implement its strategy in the spot market for now. When the handy size rates move up some more, then perhaps the longer term charters would be a good addition to stabilize the cash flows.