We upgrade our recommendation on Excel Maritime Carriers Ltd. (EXM) to Neutral based on its current valuation, which plummeted 71.4% last year. This was primarily attributable to the gloomy prospects of the drybulk shipping industry. This sector is facing serious challenges since the spot vessel rates collapsed significantly.
We believe the sole reason for this dismal condition is the sheer increase of newbuild ships under operation that resulted in intense price competition. Excel Maritime operates under highly competitive drybulk shipping industry. The company’s main competitors are Diana Shipping Inc. (DSX), Genco Shipping & Trading Ltd. (GNK), and DryShips Inc. (DRYS).
The spot rates of drybulk vessels have fallen to such a low level that even surging commodity prices in the Asian markets failed to offset the loss of the vessel owners. However, this low level of valuation may provide a cushion for further downslide of the stock price. Excel Maritime reported mixed financial results for the first quarter of 2012. Although net income was far below the Zacks Consensus Estimate, voyage revenue beats it handsomely.
Excel Maritime has improved and consolidated the time charter contracts for its fleets.The company recently announced that it has secured under time charter employment of 67% of its operating days for 2012 for all the vessels in its fleet. Within these fleets, which ensure a time charter contract, 27% have an upside potential through profit sharing arrangements or index-linked structures and hedge against downside price risk through floor protection. Importantly, 100% of Excel Maritime’s capesize vessels are also under period charter agreement for 2012.
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