I made an U-turn today and sold Aker Philadelphia Shipyard after initiating the position exactly a month ago. In this period the price of the stock has gone up more than 35% while I realized that I significantly overestimated the value of the company.
The biggest source of error is the accounting of the variable revenue from the profit sharing agreement. When you see $3.3 million in revenue in Q1 2013 from the profit sharing agreement it makes sense, at first sight, to assume that this is their part of the income generated with the ships in that quarter. Rule #1 in accrual accounting is that revenue should be recognized in the period it was generated. But from the perspective of Aker Philadelphia Shipyard this wasn’t revenue that they earned during the quarter, this was revenue that they earned while building and selling the ships. So what they recognize is the net present value all future revenue that can be reliable estimated. Note 11 in the Q3 2012 report confirms this clearly:
The company has recognized $3.3 million in variable revenue for each vessel, and expects more than $35 million in revenue over the life of each vessel (estimated to be more than 25 years). If you assume $1.35 million in revenue per year and a 10% discount rate the NPV of a 3 year charter agreement would be $3.3 million and the total revenue over a 25 year period would be $34 million. The length of the charter agreement could of course be slightly different, or they could have used a different discount rate, but this seems close enough.
If the first 3 years of revenue from the profit sharing agreement is already recognized the NPV of the remaining amount is far less than I originally estimated. If you assume $1.35 million in revenue per year per ship from year 4 till year 25 the NPV of this cash flow is just $10 million (assuming a 10% discount rate and a 35% tax rate).
I think my estimate of the value of the operating business was also a bit on the high side (see the discussion here in the comments), so an updated rough approximation of the value of the sum-of-the-parts would be:
- $46 million (cash + current project)
- $26 million ($3.7 million in income from operating business with a 7x multiple)
- $13 million ($10 million NPV of future profit sharing + $3 million from last quarter)
This would give us a value of $86 million versus a market cap of roughly $62 million. This is still a ~27% discount to intrinsic value, but this would not pass my hurdle for new investments so I’ve sold. In addition I already have exposure to the shipbuilding industry through Conrad, and I also have various other names in the industry on my watchlist that are probably cheaper.
No position in Aker Philadelphia Shipyard anymore