Deutsche Bank wants you to forget everything you think you know about how to value a public shipping company.

Measuring trading price against net asset value (NAV)? Forget about it. Not only is it not working; it is retarding shipping’s progress in the public markets.

“Toxic,” insisted Deutsche Bank.

But pegging a company’s worth based on long-term cash flows returned to shareholders? That’s the way forward.

Spend money on “high-risk, high-reward” stocks? Why? Deutsche Bank can show you that companies with better risk-management practices deliver more rewards over the long term.

All of this is in the pages of a fairly wonkish 30-page treatise published on Monday by analysts Amit Mehrotra and Chris Robertson.

“The key to long-term equity value creation in shipping is not embedded in NAV, but rather sustainable cash flow attributable to equity holders,” they argue.

“A hyper-focus on NAV drives behaviours that are counter-productive to long-term performance, as it incentivises large investments, funded disproportionately with debt, at one specific point in the cycle.”

If the argument at first blush seems revolutionary, it’s probably worth noting that for one who has been around ship finance long enough, it sounds familiar.

The Deutsche Bank duo are not the first to rebel against NAV as a proper measure in favour of cash flow or earnings multiples. It’s happened since at least the early 2000s.

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And each time after a period of sound and fury, the benchmark metric inevitably returns to NAV, often because there are no cash flows to multiply in a wickedly cyclical industry.

“It’s something I’ve talked, written, railed about,” Evercore ISI’s Jonathan Chappell, the dean of shipping analysts, told Streetwise.

“I remember back in 2003 trying to find the right valuation metric and pushed for 15 years to have investors look at enterprise value to Ebitda, and price to cash flow.”

Chappell still uses enterprise value to Ebitda as his primary tool, supported by price to NAV.

“So I agree with the premise, but I also think it’s unlikely that there is widespread acceptance of another cash flow-based metric. NAV is too ingrained and you can put varying multiples on NAV at different parts of the cycle to support cash flow metrics,” he said.

Still, there is more to the Deutsche Bank argument: This isn’t shipping past; things are different now.

Public shipowners have become larger in their fleets and market capitalisations, to the point where institutional investors can consider taking a significant stake.

Evercore ISI analyst Jonathan Chappell says ’NAV is too ingrained’ to change. Photo: Capital Link

In the container ship arena, liner operator Zim and Seaspan Corp parent Atlas Corp have market capitalisations approaching $4bn. In crude tankers, Euronav and Frontline are in the $3bn range, and will be bigger if their proposed merger goes through.

In clean products, Scorpio Tankers has a market cap in the $2.5bn sphere, while in the dry trade, Star Bulk Carriers is at roughly $2bn.

Aside from scale, there is data supporting the notion that well-managed companies such as Euronav and Star Bulk deliver over time, despite — or rather because of — their strong risk-management practices.

The Deutsche report shows Euronav and Star have outperformed the S&P 500 by 114% and 109% over the past five years, representing the best total returns among the 25 companies surveyed.

Long investors prize consistency

This can give confidence to “long-only” institutional investors comforted by such consistency and lower risk, if shipping can shake the focus on short-term price swings much loved by hedge fund traders.

“Shipping companies that are structured to weather weak markets tend to produce the best-compounded returns over time. Companies structured to make the most money in the shortest amount of time tend to struggle in the long run,” Mehrotra and Robertson concluded.

As an example of the latter, Deutsche cites Scorpio Tankers, shipping’s top equity stock price performer in 2022 with a gain near 220% but a 56% laggard to the S&P over the five years.

It is perhaps just a coincidence that Scorpio has been a long-time target of Mehrotra’s criticism on governance and capital stewardship, a dispute he insists is not personal.

Still, Mehrotra is the only shipping analyst to maintain a “sell” rating on the stock — all others are at “buy” — and he used the 22nd page of the report to quietly upgrade Scorpio’s price target from the $10.50 he set last autumn to $34. Scorpio traded about $42 at the time of writing.

“The company’s normalised cash flow framework does not support any cash flow to equity value,” the analysts explained.

More shipping finance news

New York-listed Scorpio Tankers is already shipping’s best-performing stock of 2022, with a 220% increase year to date, but US analysts think it still has some room to run after an update on its finances and freight fixtures. Click here to read.

A two-year expansion plan has seen Singapore-based maritime financial advisory and investment firm Transport Capital grow a global network of offices and branch into new lines of business such as shipbroking and venture capital. Click here to read.

Shares of International Seaways were on the march on Tuesday following the US long holiday weekend as a prominent analyst hailed interest in the New York tanker owner from John Fredriksen. Click here to read.