Deutsche Bank has slashed 10 of the 16 New York-listed shipowners under its coverage, perhaps cementing a new reality for companies who fail to achieve market capitalisations over $500m.
Little or no research coverage.
The announcement on Friday from lead shipping analyst Amit Mehrotra confirms a TradeWinds report from last Monday that the cuts were coming for owners below that market cap and failing to trade at least $5m to $10m in share value per day.
Listed shipowners' already-challenged share values have been further weakened in the past weeks by fallout from the coronavirus pandemic. An analysis by investment bank Jefferies showed they were down 42% on average in the first quarter.
Deutsche Bank kicked out household names such as Scorpio Bulkers, Eagle Bulk Shipping, Genco Shipping & Trading, Diana Shipping, Navios Partners and GasLog.
Left standing were what might be consider a leader or two in each operating sector: Euronav and Frontline in crude tankers; Golar LNG and Teekay LNG in gas; Scorpio Tankers in clean products; and Star Bulk Carriers in dry bulk.
Mehrotra tells TradeWinds that it is all about size and investability.
"I'm writing research for the world's largest institutional investors, not some retired school teacher in Wisconsin," Mehrotra told TradeWinds, alluding to the tendency for smaller stocks to be held largely by retail investors.
"The reality is a lot of these smaller caps have very poor trading liquidity. Many funds insist on a turnover of at least $20m in shares a day. A lot of them have very robust risk-management departments, and some of this is about risk.
"If they have a $20m investment in a company, they don't want to take four days to clear their position and make up 100% of the liquidity in that stock each day, while at the same time they drive the stock price down just by exiting."
Mehrotra said he has informed executives of most of the companies over the past several days and has been pleasantly surprised by their understanding and acceptance of Deutsche Bank's stance.
One such executive is Scorpio Group president Robert Bugbee, who sees his public tanker company stay under coverage while its bulker sister gets chopped.
"For the Scorpio Group, it’s bittersweet," Bugbee tells TradeWinds. "We’re naturally disappointed that Amit will drop coverage of Scorpio Bulkers, but we do understand the decision.
"In general, we support the theme of larger-cap, bigger shipping companies as the way forward for the future. Although we may have had our disagreements with Amit, we’ve always respected him and his tenacity and criticism as we believe, on balance, it's made us better."
Other companies getting the boot include Dynagas, GasLog Partners, Golar LNG Partners and Navios Acquisition.
The cuts come as Deutsche Bank has expanded the coverage under Mehrotra's lead to oil field services and building products, after an earlier expansion into rails and trucking.
The average market capialisation under his coverage has been $18bn, but this has been dragged down by the smaller shipping names. After dropping them, the new average increases 44% to $26bn.
Deutsche Bank also used the size rationale in dropping five shipowners from coverage last December. They were Ardmore Shipping, Capital Product Partners, Teekay Corp, Teekay Tankers and Seaspan Corp.
Six investment banks dropped shipping coverage either partly or entirely during 2019 on lack of deal flow and investor interest. They included major names like Morgan Stanley and JP Morgan, together with Credit Suisse, UBS, Seaport Global and the Maxim Group.
Earlier this week, veteran Evercore ISI analyst Jonathan Chappell made his first departure from shipping, taking up coverage of a handful of railway companies. He also cited their larger market capitalisations as a prime reason.
