UK Edition
The idea of buying a specialist shipping investment trust is likely to feel counter-intuitive to many of our readers at a time when recession is looming.
The market expects shipping to be hit by falling demand, as a result of soaring inflation and a potential global downturn, which helps to explain why Taylor Maritime Investments trades on a 17pc discount.
However, we believe this discount looks far too wide because the market is overestimating the economic sensitivity associated with smaller “handysize” and “supramax” dry bulk carrier ships, which Taylor Maritime acquires and charters. It also ignores a number of positive dynamics associated with this sub-sector.
Since Taylor Maritime’s IPO in May last year through to the end of March of this year, it has achieved astonishing net asset value (NAV) growth of 81pc. Its share price hasn’t kept up, but it has provided investors with healthy returns of 44pc from May of last year.
Demand for the agricultural, food and infrastructure-related goods that these vessels transport has remained strong, but importantly there are supply constraints in the handysize sector. There are not enough of these types of ships to meet demand and this has caused charter rates to rise.
In July, the average charter rate across Taylor Maritime’s fleet stood at $19,200 (£16,300) per day, up from $15,600 per day at the end of June last year.
“Ultimately, if charter rates stay at these levels, you will make your money back over a five-year period just by clipping the income that these individual ships provide,” says Matthew Parkinson, an assistant fund manager at Waverton Investment Management.
The average yield generated by the ships in the portfolio equated to 26pc over the year to the end of March, which is extraordinary.
What’s more, the supply-demand imbalance in the dry bulk segment is likely to be in place for at least two more years, which should support charter rates. The order book for new ships stands at a historic low and incoming emissions targets are expected to cut capacity, as ships will be expected to sail at a slower pace.
Parkinson notes that supply is likely to fall because the handysize fleet is ageing, with ships tending to be scrapped once they reach 25 years and beyond. Meanwhile, bigger container ships have been the main focus for shipyards in recent years as they have been more profitable to build.
This supply-demand imbalance has fed through to the valuations of Japanese second-hand vessels, which is Taylor Maritime’s main area of focus. The management team has wisely made hay while the sun shines, selling some ships at elevated valuations and recycling the money into vessels that are more attractively valued.
Earlier this year, the trust built a 26.6pc stake in Grindrod Shipping, a US-listed shipping business, at an average price of $17.64 per share. Today, its share price stands at $20.27, following a record second quarter and the management team believes the business still looks undervalued.
Although Taylor Maritime’s portfolio yields more than 20pc, the trust’s headline dividend yield stands at 5.8pc – a level that Peter Spiller, who holds the fund in his Capital Gearing Trust, believes is prudent. It also means there is scope to pay out more special dividends, with the most recent payment in May this year.
“They are wise to keep the dividend reasonably modest and well covered, given they are operating in a cyclical market,” he says. “This means they will be able to sustain it if times get tougher.”
Investors can buy into the trust via the dollar or sterling share class. This will come down to personal choice and expectations for sterling versus the dollar, given the underlying assets are dollar-denominated.
Although the market is anticipating a decline in Taylor Maritime’s NAV, caused by a potential economic downturn, we don’t believe this will be the case. Historically, handysize bulk carrier ships have been a resilient area of the market – and we see no reason for this to change.
Given that Taylor Maritime trades on a 17pc discount and is supported by positive dynamics, it could well be time to consider dipping your toe into the water.
Questor says: buy
Ticker: TMI
Share price at close: $1.44
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