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What is She Worth?

For unknown reasons we received a few years ago an airline industry newsletter and the cover story was “Valuation of airplanes". Now, there are many similarities between shipping and the airline industry so we read this article with interest. One methodology to set the value was: “The plane is worth X dollars because I say so!" Hardly a scientific way of set a value, but it may be more trustworthy than recent initiatives to set values in a scientific manner.


Estimating the value of a ship is often based on recent sales being concluded; or discounted cash-flows; replacement cost and to a certain degree - gut feeling (the “Because I say so" methodology). For bulk carriers, the market is - usually - determined by a rather even flow of sales being concluded. Thereby, ‘last done’ provides us with guidance of which prices have been achieved in the open market. Combined with this, we also take into account market sentiment, the amount of interest and willingness to buy vessels which are currently being marketed for sale. However, the above can sometimes be insufficient, and on occasion be misrepresentative of the earnings one can reasonably assume to be achievable. Time charter earnings for bulk carriers correlate to a high degree with the willingness to pay for a vessel, so therefore we also look to present value calculations of a potential investment. Furthermore, at least for modern vessels, the price/earnings ratio should also be aligned with the estimated replacement cost. The opportunity cost of contracting a newbuilding is highly relevant. We have of course seen (last year, for example) that second hand tonnage have been valued at almost twice the cost of a newbuilding contract; this has been possible due to the extreme short-term earnings available in the spot/time charter market. Lastly, when we are asked to assess the value of a ship which has a time charter contract attached, we estimate how much higher/lower the given contract is compared to the present market, and then we simply calculate the present value of said premium/discount. This value is then added to the estimated value of the ship on a charter free basis.

 

Now, during the past year we have seen the introduction of a rather technical methodology to make value assessments of ships. A model that takes into account abnormal situations when there are few, if any, references; market rates are extremely low (or high…) and, as is the case now, great challenges in employing vessels. This model, “the Hamburg Ship Evaluation Standard", takes into account historic earnings of various ship types as well as historic (and reasonable?) interest rates and returns to capital. To a certain degree we can agree to a view that a short-term anomaly in the marketplace should not make a major impact on the valuation of an asset. However, we are of the opinion that such models provide a poor basis for valuations. In principle the model says that, with the exception of the first year, the future is going to be exactly as the past. We think it is fair to say that fortunes have been lost on this basis. We have tested the model for a Capesize resale (with prompt, charter-free delivery) and we have used the model as described in the Hansa International Maritime Journal (4/2009), albeit with one modification: We have set the future scrap value to zero.

 

In today’s market environment and based on the methodology described in the beginning of this article we would say that such a vessel has a value of about 65 million USD today. However, using the Hamburg model we arrive at about 156 million USD!! But it gets interesting when we take the same analysis back a little further; say to the second quarter 2008. If you recall, the freight market was sky high and second hand deals for 6-8 year old Capesize vessels indicated resale prices of about 170 million USD. Using the above mentioned model for this period results in a valuation of 174.5 million USD. Not a bad approximation! However, at the time, an investor could write down his investment by about 50 million USD during the first year through fixing a 12 months time charter. Today, the market situation is completely different but the history forming the basis for the model is pretty much the same as one year ago and the result is bizarre. Even if we use 12 month time charter rates instead of the BDI numbers we arrive at an extremely high value. A model that is based on history repeating itself - a history that includes the best period in modern shipping history is doomed to be misleading. Although our methodology may have its flaws, it is better than the “Because I say so" model. And far better than the Hamburg model.

 

Happy Eisbeinessen!

 

Sverre B Svenning

 

31st of October



04.01.2010 Printfriendly version

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