Book value

Pangea Logistics Solutions: A Case of Trading Below Book Value (NASDAQ: PANL)

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Investment thesis

Pangea Logistics Solutions Ltd. (NASDAQ:PANL) has posted excellent returns over the past year and year-to-date, outperforming the market and just behind EuroDry (EDRY) among its peers. The stock has increased in response to the general boom in the shipping industry and the company’s record year of outstanding financial performance.

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Data by YCharts

However, despite the upside, the stock is still trading at a discount to its book value and significantly below industry medians and historical averages, signifying huge upside potential. Additionally, the company recently increased its quarterly dividend for the second time in the year by 50% for the June payout.

The market remains strong with rate hikes across all regions, but it may have reached a point past its peak. Being a small cap company, a bear market can weigh heavily on the stock and the volatility may not be suitable for conservative investors, but for me the upside of the stock outweighs the risk.

Company presentation

Pangea is a shipping company that provides logistics and dry bulk transportation services, including cargo loading and unloading, vessel chartering, voyage planning and technical vessel management. Almost all of its revenue is generated from COA, voyage charters and time charters.

On average, it operated around 55 vessels daily in 2021, including 24 wholly-owned or part-owned vessels through joint ventures, and transported around 27 million tonnes of cargo, comprising various dry bulk cargoes including grain. , coal, iron ore, pig iron, hot briquetted iron, bauxite, alumina, cement clinker, dolomite and limestone.

Its fleet includes 8 Supramax, 3 Ultramax, 4 Post Panamax, 10 Panamax and 1 Barge, with a total capacity of 1,563,869 DWT. Its vessels are chartered on a short-term basis to be operated under our contractual activities.

Expected Financial Performance Vs. Market Sentiment

At MRQ, Pangea’s net income and diluted EPS more than tripled year-on-year to $20.2 million and $0.45 from $5.9 million and $0.13 in 2021. This growth is mainly attributable to strong revenue growth caused by a 60% increase in Pangea’s TCE rates from $16,524 per day in 2021 to $26,472 per day at MRQ, a 17% premium on market rates for its long-term COAs.

PANL TCE rate vs TCE market rate

Pangea Investor Presentation

In the first quarter of 2022, the company took advantage of the market and continued its trend of beating market expectations, recording EPS of $0.35 compared to the consensus estimate of $0.20. Current quarter EPS was expected to be around $0.36, but was updated following strong MRQ earnings and raised to $0.60.

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Data by YCharts

Potential investors should be aware that the company’s profit margins are considerably lower than those of the competition. This is mainly due to its business model which relies heavily on the COA, shielding its earnings from high volatility, but in the process, hampering its ability to take advantage of the bullish spot market. This makes the company a safer long-term bet for investors, but also limits exposure to exceptional growth for risk-tolerant investors.

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Data by YCharts

Unlike the macro environment, which is suffering from recession fears and slowing growth expectations, dry bulk fundamentals are currently thriving due to their idiosyncratic nature. Despite a 9% drop in Chinese dry bulk imports, the average Baltic Dry Index has risen nearly 36% since the start of the year. This counter-intuitive rise is likely due to increased coal imports from Europe amid the Russian-Ukrainian conflict, cushioning the blow to the Chinese economy.

Baltic Dry Index

Trade economy

Breakwave report reiterates bullish sentiment,

If the dry bulk market manages to “fill” this imbalance until Chinese stimulus efforts materialize, pushing back commodity import demand, then an otherwise severe down cycle would have been averted to the benefit of owners. dry bulk…Although the high level of volatility in 2021 may slow down, the dry bulk sector remains in a bullish cycle driven by relatively weak supply growth, strong demand for bulk commodities and persistent infrastructure bottlenecks and supply chain constraints that affect the entire shipping universe. We anticipate government actions with respect to energy security combined with geopolitical developments to stimulate dry bulk cargo flows, and thus indirectly determine the trajectory of freight rates.

Movement of Dry Bulk Shipping Rates

Breakwave Advisors

This is reinforced by management’s remark that “the booked second quarter time charter equivalent indicates a rate of $29,400 per day”.

TCE Perspectives

Pangea Investor Presentation

Based on the above and management’s comment that the current quarter is seasonally the strongest, it is reasonable to believe that the company is likely to achieve its objectives and that the estimates are not too optimistic.

This will likely result in share price growth and accrue higher total returns, as the company has already increased its dividends, expecting strong earnings growth.

Evaluation

Besides the fact that the company is grossly undervalued by conventional relative valuation measures, it holds almost 30% of its market capitalization in cash and cash equivalents at $69.9 million. The company has ridiculously low valuation metrics and is currently trading more than 10% below its book value per share of $5.78. If we were to assume a market correction that would bring the PANL metrics to the industry medians, we would get a price close to $19.

However, this should by no means be taken as a realistic price, given the company’s small market capitalization, which makes the stock vulnerable to high volatility and uncertainty surrounding the market. Pangea has a 12-month Wallstreet price target of $7.50, holding over 44% upside.

PANL valuation

Looking for Alpha

Additionally, the company declared a quarterly cash dividend of $0.075 per share, to be paid in June, bringing its forward yield to a healthy 5.78%. The dividend is well covered with an earnings yield of over 20% and is sustainable with a payout ratio of less than 10% and a cash flow payout ratio of 13.4%.

Conclusion

Pangea has an excellent management team that is focused on long-term value creation with a focus on its COA-based business model. Its ability to generate TCE rates higher than those of the market testifies to its strong operational presence which builds customer loyalty.

With a low valuation, sustainable dividends and promising growth prospects, the company seems to tick all the boxes for value, income and growth investing.