Sunday, May 29, 2016

Teekay Tankers Will Be Owned By Creditors for a While

  • TNK stock has been down more ~50% year to date. It trades at less than 3x earnings and this has shareholders calling for buybacks.
  • However, management is paying down debt instead. They have to do because of lower cash flows in 2016 and 2017, as well as demanding debt maturity schedule.

Back in December 2015, Teekay Tankers (TNK) announced a $900 million refinancing, including a term loan and a revolver that are both due in 2021. I thought the deal was bullish for the stock, since it cleared out near term maturities and allows TNK to buy back stocks.

This is not the case. That deal did push out a lot of near term maturities, but a substantial amount remains. In addition, the new term loan actually has an onerous principal payment schedule.

The $525 million term loan matures in 2021 but demands principal amortization of $31.94 million per quarter for the first few quarter and $24.845 million per quarter thereafter. This amounts to $99-106 million of principal payment per year.

What’s more, a sizeable chunk from old loans remains. The annual report has a maturity schedule pro forma for the refinance. Backing out the January 2016 loans, and assuming the debt payment made during 1Q16 was toward near term maturities, the current debt schedule would look like the below.

Teekay Tankers debt

The big question is the $215 million due 2017. To put that in context, TNK only generated $167 million of cash flows from operations for the entire 2015, and that’s with peak tanker rates! So far in 2016 we are already seeing lower tanker rates and lower cash flows.

More headwinds are coming in 2017. Tanker supplies will come on line second half of 2016 and through 2017. So rates in 2017 will likely be lower. In-charters will expire so TNK will be operating with a lower number of vessels.

So forget about TNK paying off the entire $215 million out of cash flow from operations. It will struggle to even pay the ~$106 million term loan scheduled principal in a weaker market. It will certainly have to refinance the rest of 2017 maturities; failure to do so means another round of equity raise, or even bankruptcy.

To entice lenders for the 2017 refinancing, TNK will need to demonstrate credit worthiness and deleverage in the near term. This explains management’s focus on deleveraging, why the company has not repurchased any shares despite the ostensibly low P/E ratio, and why an equity offering is still on the table.

So creditors will get most of the cash flows for now. This is not to say avoid the stock, but investors should recognize the credit situation, and be willing to hang on for a couple years for their big pay day.

Advice for Investors

In this situation, demanding share buybacks is to demand a short term boost in the stock price while risking equity dilution or even bankruptcy down the line.

Instead of pushing for buybacks, big boy activist investors can provide the refinancing themselves. Just to toss some ideas around, with $250 million of 10% senior notes, weighted average cost of debt would still be under 5%.

Even after the 2017 maturity is addressed, TNK will still face a demanding term loan amortization. But by late 2017, it should have shown progress in deleveraging and tanker rates should have stabilized. Management can then refinance the January 2016 loan into another with easier principal payment schedule, and finally release free cash flows to shareholders.

There is also a lesson here. P/E ratios and free cash flow yield (free cash flow divided by market capitalization) are meaningless measures for companies loaded with debt. “Free cash flow” is not really “free” in terms of using it to reward shareholder, especially if there are near term maturities/obligations that can’t be funded from operation.

Friday, May 13, 2016

Beijing Enterprises Holdings - A Stub Trade

I first wrote about Beijing Enterprises Holdings (“BEHL”, 392.HK) last year here when the stock was trading around HKD$60. The stock is now at ~$39 HKD/share, a 36% drop. This is all despite very strong fundamentals. 2015 revenue and EPS were up 25% and 18%, respectively. 2016 results are also expected to be up double digits.

So why did the stock go down? First, it’s just a bad timing for a stock like BEHL. It’s China. It’s energy. Combine the two most hated features in this market and of course you get a lower multiple. The second reason is more concerning. There’s a risk of a tariff cut in the pipelines segment, perhaps coming in second half of 2016.

The stock is now ridiculously cheap. If you hedge out publicly traded subsidiaries Beijing Enterprises Water (371.HK) and China Gas (384.HK), that would leave you with the stub of natural gas segment, Yanjing Beer, and corporate (including waste treatment). This stub is trading at around 5x LTM earnings. Even in if you assume pipeline profits goes to 0, an extreme proposition, the stub is trading at <17x 2015 earnings.

Keep in mind natural gas usage is still set to grow in China over the next decade. LNG supplies coming online will push prices down, encourage adoption, and benefit distributors like BEHL. So I have gradually added to my positions in the past year. I suspect a tariff cut will actually be good for the stock, and that the stock will make a run after the bad news is flushed through.

Select Harvests and the Almond Boom and Bust

SHV is the second largest almond producer in Australia, behind the well diversified Olam. SHV is the only pure play almond stock I know of. The company is vertically integrated - it owns almond orchards, not just processing plants - and sells both domestically as well as export.

Almond prices have crashed over the past few months and SHV’s stock price went the same direction. Earnings will probably be way down this year.

A bullish story for Australian producers emerges once you look past the recent boom and bust of almond prices. Global demand for almonds continues to increase over time, driven by health trends. California supplies the majority of the world’s almonds, but it faces structural difficulties from drought and water shortage. Australia is the second largest producer and is in position to take more market share. Australian producers also have geographic advantage in terms of being closer to key growth markets of India and China.

I think almond prices are probably at or near a trough. The current price of $2.3/lb in California is already near break even. According to this presentation (see slide 43), growers need $2.15/lb to break even and $2.5/lb to insure a minimal profit. Longer term, stabilizing California supplies should put a floor on global prices.

Select Harvest will enjoy a natural production ramp in a few years (think like ~2019) as trees age and reach production sweet spots. Between higher normalized price and higher production, I can see earnings stabilizing.

The risk is California productivity. Yield per acre have consistently went up over the past decade. It is conceivable that Californian farmers can find a way to cut down water usage while keeping up production, so supply may actually not be constrained for years.

To be conservative I assume prices of USD 2.25-2.75/lb and fully ramped production of 19,000 tons. This would correspond to earnings of A$0.2 to 0.5 per share for SHV. The stock had a nice run during my research and it is now at A$5.4-5.5/share. I’m waiting for a pull back toward $5 or below to pull the trigger.