Right now, one sector that looks particularly attractive from a value perspective is the global shipping sector. Over the past two years, global shipping rates have pushed to new highs as supply chain disruptions coupled with a surge in demand for goods and a lack of capacity across the industry have combined to form the perfect storm.
The Baltic Dry Index, which provides a gauge of the cost of moving goods worldwide by sea, rose above 5,100 in June. The last time it traded above this level was in 2008. For some comparison, at the end of 2015, the index was below 300.
Globus Maritime Limited (NASDAQ:GLBS) is one company that has benefited from this trend. The company has undergone a transformation this year, which should help it take maximum advantage of the rising profitability of maritime shipping.
Value and growth
Globus Maritime operates nine dry bulk carriers of different sizes on short-term time charters, mainly in the spot market. This means earnings are closely linked to global shipping rates, which can be both a good and a bad thing. If global shipping rates suddenly fall, the company's earnings will follow suit. This is a highly cyclical stock.
Still, it has benefited from the significant increase in global shipping rates over the past year. For the nine months to the end of September 2020, the Greek-headquartered shipping group reported total revenues of $7.8 million. For the same period in 2021, revenues totaled $24.8 million. Adjusted earnings before interest, tax, depreciation and amortization (Ebitda) came in at $12.2 million in the nine months to the end of September 2021, compared to a loss of $2.2 million for the same period last year.
Management has been taking advantage of the buoyant shipping environment to reinforce the company's balance sheet and expand the fleet. Over the past year, the company has taken delivery of three new Kamsarmax dry bulk vessels, now the largest in its fleet.
Refinancing efforts have also significantly reduced the company's annual interest expense and financing costs. In the third quarter of 2020, interest expense and financing costs totaled $940,000 on an annualized basis. As of the third quarter of 2021, annualized costs related to these activities totaled just $417,000.
Considering the company's progress over the past year, it is interesting to see that the stock is still trading at a significant discount to the book value of its assets. Based on asset values reported at the end of the third quarter, Globus's book value per share is $6.80, compared to the current share price of $2.26. The enterprise-value-to-Ebitda ratio is 1.8 on a trailing 12-month basis.
There are several other points to consider here apart from the stock's valuation. The company is currently benefiting from a unique operating environment, and it is difficult to tell if this will persist. The Baltic Dry Index has already fallen back to around 2,000, suggesting the rates booked in the third quarter were just a one-off. With all of the company's fleet on a short-term charter arrangement, it is far more sensitive to falling rates than other operators.
However, it is becoming clear that the global dry bulk shipping industry is massively under-supplied. Operators are ordering new vessels, but it will take years for these vessels to come to market. In the meantime, it seems likely the lack of supply and additional demand will support higher rates.
It also seems likely that the lack of supply will support higher second-hand ship costs. This is particularly important when analyzing a company like Globus using book value. The company may report a book value based on its estimate of asset values, but if no buyers are willing to pay that price, the book value is not worth the paper it is written on. Considering the state of the market, I think investors can rely on the company's book value.
All in all, I think Globus Maritime may present an interesting opportunity for value investors searching for a deeply discounted recovery play.
This article first appeared on GuruFocus.