Aker Philadelphia Shipyard (AKPS.OL): cheap with a catalyst

A little bird pointed me in the direction of Aker Philadelphia Shipyard, a company headquartered in Norway, but operating in the US. As recently as 2011 the future of the Aker Philadelphia Shipyard was uncertain, but thanks to taxpayer money and investments from its Norwegian parent the company was saved. They took a gamble though, and constructed two product tankers without having a customer lined up. This is now paying off: both ships have been sold on attractive terms, and as of today Aker Philadelphia has 108 million in cash, 20 million in restricted cash and just 8.3 million in interest-bearing debt. To make things even more interesting they have a profit sharing agreement for the two sold vessels that is anticipated to bring in more than $35 million per vessel. Compared to a $46 million market cap this certainly sounds like a steal! Some quick stats first:

Last price (Apr 8, 2013): 26.20 NOK
Shares outstanding: 10,165,305
Market Cap: NOK 266M ($46.4M)
Free float: 28.8% ($13.4M)
P/B (mrq*): 0.44x
P/NCAV (mrq*): 2.15x
* Adjusted for vessel sale in January

Current and future financial condition

Aker Philadelphia released it’s annual report a few weeks ago, but since the delivery of the second vessel was completed on 31 January 2013 we have to make a few adjustments to the financial statements to get a view of the current position. They have received $81 million in cash for the delivery of the vessel in the current quarter. This was partly used to repay debt, and since they had not yet recognized any revenue we also have to account for taxes. The adjusted balance sheet should looks like this:

Aker Philadelphia Shipyard pro-forma balance sheet

As is visible Aker Philadelphia is in an excellent financial condition at the moment with a strong cash position and almost no debt. The biggest liability are customer advances related to the current project they are working on: two aframax oil tankers for ExxonMobil. This is a liability that should partly disappear with time when work on the two tankers is completed, but you certainly cannot ignore it. If a customer prepays $100 dollar on an item that you can manufacture for $90 you can only keep $10 in the end. We can estimate how much profit AKPS expects to make based on the revenue and expenses recognized to date, and the size of the remaining backlog. I estimate that they will generate a bit more than $25 million in gross profit based on the current order backlog:

Aker Philadelphia Shipyard expected gross profit 2013&2014

Based on the expected gross profit and the reported SG&A and depreciation expenses from last year we can make a guess on how the income statement of Aker Philadelphia is going to look like the next two years. Note that this is a conservative estimate since the first vessel should be delivered on April 30th, 2014 while I have included two full years in expenses.

Aker Philadelphia Shipyard 2013&2014 pro-forma income statement

We should assume that at the end of 2014 the customer advances liability will be gone together with an equal amount of cash: what the company will get in return is the $25.4 million in unrecognized gross profit and $5.1 million in net income. At the same time the restricted cash should become unrestricted after the successful delivery of the vessels. This should result in the following balance sheet in two years time:

Aker Philadelphia Shipyard 2014 pro-forma balance sheet

If Aker Philadelphia would at that point in time pay all liabilities, liquidate receivables and pay net taxes you would be looking at a company with no liabilities and two assets: $57.1 million in cash, and $53.3 million in PP&E. Obviously I hope (and expect!) that the company is going to find new orders and continue to be in business after 2014, but I think this gives a good idea that at current prices ($46 million market cap) there is value even if Aker Philadelphia Shipyard would simply liquidate after completing their current order book.

Profit sharing agreement

As already mentioned in the introduction of this write-up there is more value than just the operating business. The company sold two product tankers to Crowley for $90 million in cash and a profit sharing agreement. When the sale was announced in Augustus last year Aker Philadelphia wrote the following in the press release:

Based on current market conditions, AKPS anticipates receiving a nominal amount in excess of USD 35 million per vessel through the variable component. This amount has the potential to be significantly higher if market conditions continue to improve. The variable component is payable on an annual basis over the life of the vessel and will adjust upwards or downwards based on actual charter rates and other factors. There is no cap on the amount of the annual payment.

Based on the variable income recognized in the last four months of 2012, and the remarks of the CEO in the latest annual report, it seems that market conditions have indeed improved and that Aker Philadelphia can expect a significant amount of variable compensation. From the latest annual report:

Time will do the “talking” as to the true value of the profit sharing element, but given recent market developments and our view of market fundamentals, we are confident that this transaction will provide good value to AKPS for many years to come (beyond our build cost).

In the last 4 months of the year AKPS earned $3.3 million pre-tax on the profit sharing agreement. Extrapolate that to two ships and a full year and you get $20 million pre-tax, or $13 million net. That’s a huge recurring revenue stream that’s going to provide value for years to come. I don’t know a whole lot about shipping, but it’s probably a safe bet that the average tanker can remain in service for decades. If you would assume $13 million in cash per year for a period of 10 year the NPV of this ‘hidden asset’ is a whopping $76 million.

This is maybe a bit optimistic since the company expected “more than 35 million” per vessel, and $10 million per vessel for 10 years in a row would obviously be a lot more. But at the same time the company also disclosed that it could be significantly higher if market conditions improve. So lets take something in between and go for $5 million in pretax income per vessel for a 10 year period with a 10% discount rate. This would give us a $38 million net present value for the profit sharing agreement.

Valuation

The valuation puzzle has three pieces: the run-off value of the current order book, the value of potential new business and the profit sharing agreement. I would say that the run-off value is roughly $46 million (the cash in 2014 discounted two years at 10%).

If future projects would be expected to be as profitable as the current project we would be looking at roughly $6 million in net income a year ($29 million gross, minus $14 million SG&A, minus $3.6 million depreciation, 35% tax rate and divided over two years). Throw a 7x multiple on that (as a messy way to account for the fact that this is about earnings after 2014) and we are looking at a $42 million net present value. PPE is expected to be at $53 million in 2014 if there is no capex, so guess this is a very convoluted way of saying that the assets on Aker Philadelphia books are indeed worth roughly book value.

It’s hard to make a good forecast for the earnings from the profit sharing agreement since we don’t have a whole lot to go on, but the $38 million calculated above seems like a decent estimate that’s not overly optimistic.

Combine the three numbers and we get an intrinsic value of $126 million. This would imply that the company is worth almost three times it’s current market value, and instead of a big discount to book value it should trade at a ~20% premium. Since the profit sharing agreement isn’t on the books I don’t think this is crazy.

Insiders

Aker Philadelphia Shipyard is owned for 71.20% by the Converto Capital Fund that specializes in maritime companies. The assets in the fund are owned by Aker ASA, a Norwegian company with billionaire Kjell Inge Rokke as major shareholder and chairman of the board. And guess who the CEO is of Aker Philadelphia? Kristian Rokke, the 29 year old son. He has been working at AKPS since 2007, and assumed the role of CEO early 2011.

I’m not completely thrilled with the ownership situation and the CEO. Kristian Rokke can’t be very experienced and it’s not his own net worth that is tied up in the company: don’t think incentives are perfectly aligned here. On the other hand he seems to have done an excellent job the past years, he’s probably motivated to prove himself, and his dad and/or Aker can support him if needed. Aker Philadelphia got for example for the recently completed vessels a loan at 3-month LIBOR+3.80% from Aker that was secured by a second lien on those vessels. That sounds like a good deal to me. They also got a performance guarantee from Aker on a $80 million construction loan that carried a 1% lower interest rate.

One thing that is fairly obvious is that the CEO is thinking that the company is undervalued, or at least was undervalued when the latest annual report was released. Unfortunately for me the share price has been going up recently. A quote from the letter from the CEO that was published in the latest annual report:

Against the recommendation of counsel, I will mention that our market capitalization still trails significantly behind our book equity.

At year-end, we had a book equity of $98.4 million, but a market capitalization of only $24 million ($36 million on March 15, 2013). A significant portion of our balance sheet is comprised of cash, with only $8.3 million in interest bearing debt after the delivery of the Florida.

You don’t need to read between the lines to figure out what he is thinking.

Risks

  • Aker Philadelphia is very exposed to a single project and a single customer. If they screw up the current project the financial implications could be disastrous for the company, and if they don’t secure new orders/customers they will probably have to gamble again on building ships for their own account.
  • Just like Conrad Industries Aker Philadelphia is protected from competition from outside the US by the Jones Act. While the act has been in existence since 1920 it might be repealed at some point in the future.
  • The company has a 99-year lease on the shipyard that has as a requirement that it maintains a workforce consisting of at least 200 full-time employees.

Conclusion

We have to do a little bit of puzzling to figure out what Aker Philadelphia current financial position is, but I think it’s not that hard to understand that it’s really cheap. I also expect that this should become even more obvious when the cash from the profit sharing agreements will come rolling in. I’m usually skeptical when I see people presenting an investment case with a big focus on potential catalysts, but that’s because you usually see some bullshit based on how attractive the company is as an acquisition candidate or some other speculative event. The cash, and the resulting earnings, from the profit sharing agreements should be a legitimate catalyst this year :).

While Aker Philadelphia is very cheap it’s not a company without risks. Things can go wrong on big construction projects, and since the company is currently betting it all on a single project – the two aframax tankers – I don’t think AKPS is a sure thing. But since it’s very cheap a lot can go wrong before you start losing money on this investment.

Rating: On a scale from one to five I’m going to give this idea three stars. I’m going to size the position a bit below what I would do in a vacuum since I already have a position in Conrad Industries, and I don’t want to make a too concentrated bet on one very specific industry.

Disclosure

Author is long Aker Philadelphia Shipyard

31 thoughts on “Aker Philadelphia Shipyard (AKPS.OL): cheap with a catalyst

  1. Don

    How did you get the figure of 108 million in cash?
    Where did you find that “they have received $81 million in cash for the delivery of the vessel in the current quarter”?

    Reply
    1. Alpha Vulture Post author

      They sold the vessel for $90 million while they already got a $9 million prepayment. See press releases and latest annual. See also the result of the sale of the previous vessel on the financials.

      Reply
  2. Nate Tobik

    I’m wondering if the same birdie told me about the company as well. I own shares too, I really like this company a lot.

    I noticed they’re up 32% this morning, any idea on what?

    Reply
    1. Alpha Vulture Post author

      Same (twitter) bird 🙂

      No idea why they are up so much today. No news afaik, but there is massive buying volume. Sucks because I wanted to buy some more…

      Reply
  3. Pingback: Quick glance: AKPS and EVBS - Investing Sidekick

  4. Twitterbird

    Shares are up a lot, I don’t like catalysts either, but in this case, you just can’t avoid them given that they are so obvious. I guess the confirmation of the new orders would be positive. I wonder if American Shipping (also up 77% today), its former mother is the one ordering the ships. They would have to sign a deal with a better margin/pre-payment profile though. The run-off deals after the spin-off were very poor, but I guess that was due to the previous structure of the company.

    Thx for the writeup, excellent stuff.

    ping back of investing sidekick is interesting, but I just don’t think he’s done his homework.

    Reply
    1. Alpha Vulture Post author

      Thank you for the idea :). Think Aker Philadelphia should be in a good spot to negotiate a decent deal for new orders since it appears that demand for US Jones vessels, especially oil related, is quite high. But we’ll see what happens.

      Reply
  5. Anonymous

    Hi Alpha Vulture,

    Interesting write-up… I was wondering whether or not the PPE should be written down to 0 or not in the balance sheet. In the annual report I found this:

    “APSI currently operates its shipyard under a 99-year lease with PSDC, a government- sponsored non-profit corporation” – the PSDC gave the loan in the previous year when Aker was in financial dire straits.”

    Reply
    1. Alpha Vulture Post author

      I’m not sure why you want to write it down to zero. Why wouldn’t it have any value? It’s currently used to generate profits so it must be worth something. They pay $1/year for the lease by the way, but biggest requirement is that they need to maintain a workforce of 200 full time employees.

      Reply
  6. Jim

    Hi AV,
    Thanks for the interesting write-up. I’ve begun looking into Aker despite the jump in the price and was wondering if you could clarify where you get the figures for the paragraph below. In trying to reverse-engineer what you did I came to an impasse.

    If future projects would be expected to be as profitable as the current project we would be looking at roughly $6 million in net income a year ($29 million gross, minus $14 million SG&A, minus $3.6 million depreciation, 35% tax rate and divided over two years). Throw a 7x multiple on that (as a messy way to account for the fact that this is about earnings after 2014) and we are looking at a $42 million net present value. PPE is expected to be at $53 million in 2014 if there is no capex, so guess this is a very convoluted way of saying that the assets on Aker Philadelphia books are indeed worth roughly book value.

    Where does the $6m in net income come from up there? Using the figures in the paragraph, $29m in gross profit minus $14m in SG&A and $3.6m in depreciation equates to $11.4m in EBIT. Taxing the EBIT at 35%, you get $7.4m in net income. Over two years that would be $3.7m, versus the $6m in the paragraph.

    Also, where does the “$29m gross” figure come from? Earlier in the post you had a figure of $25m in gross profit based on the backlog, not $29m. Using $25m and doing the math my way leaves you with $7.4m in EBIT and $4.8m in net income over two years, or $2.4m per year. A 7x multiple on this is $16.8m, which is a far cry from the $42m arrived at above.

    Have I missed something?

    Thanks again for the post and for your blog in general, which I love.

    Reply
    1. Alpha Vulture Post author

      Hi JIm,

      Not sure how I managed to get the $6m income number! You are obviously correct that it should be $3.7 million/year based on the assumptions (the estimated profitability of the current backlog).

      I can explain why I used a $29 million gross figure though. That is based on the whole aframax project, including the part that is already completed. I think that’s a slightly more realistic approach since I used 2 years in SG&A expenses, and that is already way more than the estimated time that’s needed to complete the project. They want to deliver the first vessel after 1.5 years (start in Oktober 2012, delivery April 2014) so you could make an estimate based on 10.5M in SG&A and a 1.5 year timeframe. That would result in 8M/year income.

      So reviewing the estimate in a bit more detail: guess the 6M estimate isn’t that bad, might actually be a bit conservative. But obviously a lot of uncertainty wrt the profitability of future projects.

      Reply
  7. Jim

    Thanks AV.

    I follow you now on the $29m.

    But, per the 2012 annual report, it looks like construction on the first aframax tanker commenced on March 7, 2012 (see page 15). I couldn’t find mention of an October start in the annual report. If delivery is schedule for April 2014, that is indeed two years, so I think your initial use of 2 years of costs is correct. The 2nd vessel didn’t start construction until December of 2012, but it looks like expected delivery for that tanker may be at the end of 2014, or also about two years after construction begins.

    So, basing figures on the whole aframax project, including the completed part, I’d use the $29m in gross profit, but offset it with the full two years of costs, and stick with the resulting figure of $3.7m in annual net income.

    To triangulate this estimate, I decided to take another cut at future income by looking at the historical results. Aker provides full-year financials going back to 2006, so I took a look at results from then through 2012.

    Over those seven years, average pre-tax income was $5.3m (I ignore an $11m goodwill write-down in 2009). Taxes have been all over the map, but if we assume a 35% tax rate going forward, that $5.3m in EBT would translate to $3.5m per year of net income – not far off from the $3.7m estimate we now come to using your initial assumptions above.

    Note that my $3.5m figure includes interest costs on Aker’s debt, while our other estimates don’t do this, reflecting a current (and expected future) net cash position. Ignore interest costs, though, and the figure only rises to $4m/yr, so interest isn’t the source of most of the difference.

    Overall, it looks like $3.5-4m/yr in net income is a good estimate for Aker’s average profitability.

    Question for the group: At that level of profitability, is Aker earning its cost of capital?

    Reply
    1. Alpha Vulture Post author

      I based the construction start on this press release. Looking at the order back log it also doesn’t really seem that they started in April, at least not at full speed. They had completed 13% of the project at the end of 2012. More than what you would expect based on a October start, but less than what you would expect based on a April start. Guess they were for a large part still busy with the two product tankers last year. You can probably create a more detailed picture if you look at the quarterly order backlog #’s.

      About interest costs: their current customer is prepaying, so they can work with zero/negative working capital. If they would sign a contract without a prepayment profile like this they would presumably negotiate a higher expected gross margin.

      At 3.5-4M/yr in income Id say that PPE would require a write-down, but no matter how you exactly slice and dice it: IV is still going to be a lot higher than the current market cap 🙂

      Reply
  8. Jim

    I have a feeling production progress isn’t linear across the build period.

    They mention having started construction on the first tanker in the 1Q 12 report. In the 2Q 12 report, they say 2% of the project was complete as of June 30th. By September 30th the project was 6% complete. And we know it was about 14% complete by the end of 2012.

    Production clearly started before June, and started off slowly (likely because they were still working on the other two ships) and then accelerated.

    Overall, since using a two-year completion period suggests an annual profit rate that’s roughly the same as the historical average from the 2006-2012 results, I think it makes sense to go with that. So I’m going to assume $4m/yr in future profits.

    This ignores interest costs. I saw your comment on prepayments. Related to that, are you sure that Aker can earn its future profits (that $4m/yr) without requiring the investment of any additional capital?

    Your valuation adds three buckets: (1) Aker’s cash, (2) the NPV of future projects, and (3) the NPV of the profit-sharing agreements. In order to not be double-counting when you sum items 1 and 2, you have to assume that the future projects can produce their expected $4m/yr of cashflow without requiring Aker to use any of its cash, or take on new debt. Is this plausible?

    SeaDrill is prepaying, but do we know that their prepayments will cover the entire construction costs of vessels 019 and 020?

    Historically, Aker has received some customer prepayments and still required a lot of construction financing in order to produce its profits. The amount of financing needed has come down over the years (compare gross debt in 2006-2009 with 2010-2012 and the reductoin is dramatic), but even in the last three years, Aker’s gross debt balance has averaged over $50m. This is while Aker held over $35m in gross cash on its books too.

    This raises some questions in my mind. If Aker needed over $50m in debt to produce the profits it earned in the past three years, despite receiving some customer prepayments, then why wouldn’t it need a similar amount of money to produce profits going forward? And if the $35m in cash on Aker’s books in these years was truly excess, why did it sit there on the balance sheet earning almost nothing? Is capital allocation bad? Or was that cash necessary for business operations?

    In short, it seems possible that counting Aker’s “runoff value” by taking the NPV of the cash in 2014 and also valuing Aker’s future projects by capitalizing $4m/yr in earnings at 7x may be double counting. If Aker liquidates and you get the cash, then there won’t be any future earnings. Conversely, if Aker remains operating and produces those future earnings, it may need to use the 2014 cash balance in order to do so.

    Does this make sense? Do you think I’m missing somethng?

    Lastly, I turned up this interesting tidbit relating to the value of the profit-sharing agreement (from the notes to the 2012 annual report):

    On 20 September 2012, AKPS purchased the variable component of the purchase price (profit sharing interests) from the sale of Hulls 017 and 018 from Shipholding 17 and Shipholding 18. The purchase price, which was based on third party appraisals of each profit share interest, was paid in cash of USD 5.0 million to both Shipholding 17 and Shipholding 18 and demand promissory notes (notes) of USD 3.06 million and USD 2.92 million to Shipholding 17 and Shipholding 18, respectively. The notes are payable on demand. The interest rate on the notes is 4.25% per annum and can be prepaid at any time without penalty or premium in whole or in part. AKPS believes that the transaction was accounted for in accordance with arms length principles.

    It looks like Aker’s inter-company accounting valued the agreements at $8m per ship, or $16m in total, in late September.

    Reply
    1. Alpha Vulture Post author

      Overall, since using a two-year completion period suggests an annual profit rate that’s roughly the same as the historical average from the 2006-2012 results, I think it makes sense to go with that. So I’m going to assume $4m/yr in future profits.

      I think this is a fine estimate, but probably a bit conservative since the project is not two years of full work. Now you include a bit SG&A related to the two product tankers build last year.

      This ignores interest costs. I saw your comment on prepayments. Related to that, are you sure that Aker can earn its future profits (that $4m/yr) without requiring the investment of any additional capital?

      I cannot be sure, but given the fact that they didn’t announce any kind of financing when they started the current project I would say that this implies that they didn’t expect big working capital requirements.

      Your valuation adds three buckets: (1) Aker’s cash, (2) the NPV of future projects, and (3) the NPV of the profit-sharing agreements. In order to not be double-counting when you sum items 1 and 2, you have to assume that the future projects can produce their expected $4m/yr of cashflow without requiring Aker to use any of its cash, or take on new debt. Is this plausible?

      SeaRiver is prepaying, but do we know that their prepayments will cover the entire construction costs of vessels 019 and 020?

      Though to be certain of anything, but based on the latest project it seems that they don’t require a big amount of debt or cash. If they need a short/small bridge loan at the end of the project it wouldn’t impact the generated cashflow in a significant way I’d say.

      This raises some questions in my mind. If Aker needed over $50m in debt to produce the profits it earned in the past three years, despite receiving some customer prepayments, then why wouldn’t it need a similar amount of money to produce profits going forward?

      Remember that the last two vessels were constructed for their own books: they had no customer and no prepayments. So they required a lot of financing for this and they only got a small prepayment at the end when they finally found a customer.

      Does this make sense? Do you think I’m missing somethng?

      Yes, this makes sense. You are asking some good questions. I would say the fact that Aker Philadelphia operated with a net debt balance in the past would indicate that the current net cash balance is not truly needed to run the business, so it is in fact excess cash that theoretically could be distributed. Why they had 50 million in debt and 35 million in cash: don’t know (lots of possibilities), but looking at the net balance provides a better picture imo.

      It looks like Aker’s inter-company accounting valued the agreements at $8m per ship, or $16m in total, in late September.

      Interesting tidbit, but wouldn’t put much value in that. The profit sharing agreement of ship 17 generated 3.3 million in four months last year. No way that something like that is worth 8 million.

      Reply
  9. twitterbird

    I think this is quite positive, from the Seacore annual report. Also postive for Conrad.

    I think this will + impact the variable component.

    In the last months of 2012, the coastwise tanker market took off like a rocket. Time charter rates moved up significantly. I wish I could claim that I anticipated this positive development. I didn’t, but notwithstanding my lack of foresight, we have benefited. All our tankers are chartered at rates considerably better than a year ago, although below the rates they would obtain in the spot market if they were available for hire today. I believe the crude oil movement that is driving demand for Jones Act tankers will continue for some time, but this benevolent situation will not last forever. Appendix VII lays out a profile of the domestic tank vessel fleet

    Reply
    1. Alpha Vulture Post author

      Sounds good, and I think it could be quite significant for Aker Philadelphia. The profit sharing agreement should be leveraged to shipping rates since the incremental revenue from higher rates should flow directly to the bottom line. Any idea how much leverage the profit sharing agreement has w.r.t. shipping rates?

      Reply
  10. twitterbird

    No clue. It doesn’t seem like there’s a cap though. The sale for the 018/019 hulls was also done when the pricing environment was much more subdued. It seems to have really picked up over the last months if you look at Kirby, Conrad and Seacore.

    Reply
  11. twitterbird

    this is from the AMSC quarterly report, the former mother company.

    Outlook
    Trade fundamentals that impact the U.S. Jones
    Act product fleet continue to improve. Positive
    developments include full fleet employment,
    with no firm newbuildings on order, and
    increasing time charter rates compared to a
    year ago. As reported by trade specialists,
    factors responsible for trade growth include
    increased products output from refineries on the
    Gulf Coast, reduced imports, resurgent
    chemical-specialties shipments and the
    emergence of oceangoing shale oil shipments.
    Industry expectations are that the positive
    trends will continue. While spot rates have
    recently increased significantly especially as a
    result of shale crude shipments, it should be
    noted that OSG has none of AMSC’s vessels
    employed in the spot market.
    To date, no profits have been generated under
    our profit share agreement with OSG. However,
    with increasing time charter rates, prospects for
    profit share are improving. See note 12 for a
    profit sharing update as of year-end 2012.

    Reply
    1. Alpha Vulture Post author

      I actually just sold my AKPS position today because I believe that we have significantly overestimated the value of the profit sharing agreement. The revenue that they have recognized so far is the NPV of the expected income from the charter agreements, not just revenue from the current period. See note 11 in the Q3 2012 report.

      I estimate that the life of the charter agreements is roughly three years, so I expect that we aren’t going to see any significant income from the profit sharing agreement the next few years and that we don’t benefit from higher shipping rates in the short term.

      Reply
  12. twitterbird

    hmm interesting. They recognized USD3.3m in Q113 for hull 018, which then is the variable income for the first charter of hull018.

    Looking back to crowley it seems that they indeed time chartered ships for a period of 3-7 years. If you assume 35mln per vessel, divide that by the average lifespan of 25 years, you’d get 1.4mio of profit per ship per year. Given the 3.3mio recognized in Q113 this would be 2.4 years. Its an NPV tho, so the average duration is longer. I’d also estimate its a bit less than 3 years. Is this how arrived at the 3 year number?

    This would lower my estimated value, although I also took a massive discount to the value of the variable payments. I’ll take a look later.

    Regards,

    Twitter

    Reply
  13. BFR

    I think you’re missing a larger point here – they are only two shipyards in the US capable of building Jones Act product tankers. There is the potential for a very large order of ships – similar to when the yard did the $1bn deal with OSG in 2005. Assuming someone stepped in and ordered a bunch of ships, there could be massive value to AKPS. If we assume a similar order that the company received in 2005 (i.e., 10 ships for $1bn), there could be massive upside in the stock. I’ll throw out $25mm of undiscounted value per vessel ordered – 10 ships would be $250mm undiscounted which is ~NOK150/share of incremental value potential. Could it be more or less than $25mm? Yes – considering that the profit on the Crowley ships is in excess of that number. A large ship order doesn’t seem that unreasonable given that the market is vastly undersupplied and the undersupply will only worsen as US unconventional oil production increases.

    Reply
    1. Alpha Vulture Post author

      The 2005 order didn’t do the company a lot of good: it was on the brink of bankruptcy a few years ago. Sure AKPS could have massive upside if they suddenly become a very profitable business, but there isn’t really an indication that that is going to happen imo. Profit margins on the aframax tankers that they are building now are for example also pretty thin.

      Reply
  14. BFR

    Have you looked at where spot rates have gone for Jones Tankers lately? The shipowners are minting money. They will pay big dollars for new ships.

    Reply
  15. BFR

    If you factor in the cash on the balance sheet net of debt and customer deposit liability and add in a modest assumption of profit sharing from Crowley, the implied enterprise value is close to zero. I think the downside here is incredibly limited. How much is the shipyard worth? I have no idea, but I can easily paint reasonable scenarios where it’s worth $100mm, $200mm, $300mm or more, which implies massive upside in the stock.

    Reply
  16. ESPN

    Thank you for a very good analysis back in April Alpha V! I invested and have followed the company since then.

    Many triggering events have occurred since that analysis. AKPS is now trading at 168 NOK per share. Do you want to take a new look at AKPS to analyse what the fair value of the company should be? I have done a quick and very simple calculation, which valued the company at around 2,5 billion NOK (around 240 NOK per share). I would not be surprised if Converto (Aker) is prepping for a sale of AKPS, as they have communicated that they plan to sell most of their daughter companies, that do not belong to their core business, within the next couple of years (several daughter companies have already been sold during the last 6 months).

    Reply
    1. Alpha Vulture Post author

      The selling of this position must have been my biggest mistakes last year, results wise at least… not sure what the current fair value is, but there obviously have been a lot of positive developments.

      Reply

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