Feasibility of bulk shipping investment - investment into the supramax segment with time horizon 2023 - 2027

Abstract

This paper strives to give a comprehensive study into the feasibility of investment in the Supramax segment from 2023-2027 and provide a recommendation on whether to enter the segment. This paper is the first of three volumes and is to be read in sequence.

In this paper, the investment potential of the Supramax segment is first investigated from a broad perspective. The holding period returns (HPR) of different asset classes and the market was analysed to determine where the Shipping industry stands. It was found that compared to the market, retail and commodity, shipping stands at third place with an HPR of 6.93% from 2011-2020.

Next, the financial performance of the Supramax segment is analysed. The cost of capital is obtained through the Weighted Average Cost of Capital (WACC) which comprises of cost of debt and equity and, the weightage of debt and equity. These are calculated from the financial statement of 31 dry bulk companies listed on TradeWinds. The WACC is found to be 5.65%.

After, the Return of Equity (ROE) of the Supramax sector represented by the same companies listed on TradeWinds is analysed through DuPont analysis into three different components (Net Profit Margin (NPM), Total Asset Turnover (TAT), and Equity Multiplier (EM)). It shows that NPM has the highest influence on ROE from 2011-2020. The average ROE for the period is -8.37%.

It is concluded that since the ROE is lower than the WACC, value is not created for shareholders. Furthermore, even with a positive HPR for the shipping industry, it is not recommended to invest in the Supramax segment as there are asset classes with higher HPR. If investors do invest, it is recommended that the companies generate more cash to increase NPM which will increase ROE. Building on, volume 2 will aim to find out through market fundamentals if there will be a better investment horizon from 2023-2027. While volume 3 will investigate and conclude through valuation and scenario analysis if we should invest in the Supramax sector.