Capital Link 2nd Annual Shipping Conference, Part Four: Star Bulk Carriers Corp. (SBLK)

Let’s take a look at the small cap dry bulk shipper Star Bulk Carriers Corp. (NASDAQ: SBLK), which owns 10 drybulk carriers. One way to view investments is to look at the people who run the company. Star Bulk’s management team has over 100 years combined experience in commercial, technical and ship management. The people who run the dry bulk shipping companies provide great color.

I had the pleasure to meet its founder, President and CEO recently at the Capital Link Conference.

Mr. Akis Tsirigakis is experienced in ship management, ship ownership, ship-building. He had formerly served on the board of directors of DryShips Inc. His complete bio is on the Star Bulk website. I was very impressed with this guy. He sometimes took a different tack than the other shipping CEO’s in the panel discussions. He seems like a guy not afraid to speak his mind. For example, in one exchange he indicated that the FFA market can be used to predict future pricing, to which many of the other CEO’s took exception.

Until recently, the Co-chairman of the SBLK Board was Nobu Su. Nobu Su basically set up SBLK. He is chief executive of family-owned Taiwan Maritime Transport (TMT), one of the largest dry bulk shippers globally. TMT sold the original 8 ships to SBLK. TMT Co. was paid $120.7 million in stock of Star Bulk and $224.5 million in cash. TMT and its affiliates own 27.3% of Star Bulk’s stock. The other officers and directors own 22.1%, with only 50.6% in the hands of the public.

Nobu Su has been in the news lately. In February in an interview with Bloomberg, Su stated: “Sell dry and buy tankers.” “If you look at steel industry profitability, it has gone down. I think this is a historical moment.”

TMT made more than $1 billion buying coal and iron ore- freight derivatives in 2006, TradeWinds reported that year, citing unidentified people familiar with the matter. The company reversed that bet last year, according to the Financial Times. Su declined to comment on the company’s derivatives trading.

The Financial Times had reported that Mr. Su started chartering his vessels at substantially below market rates to drive down the BDI. Over two months, the BDI and, with it daily charter rates, dropped precipitously. The BDI fell from over 11000 to about 5400 in just about two months. On January 23, the Financial Times broke the story. The same day, Su resigned as Co-chairman of Star Bulk Carriers due to “too heavy workload.” George Economou, the CEO of Dryships Inc (NASDAQ: DRYS) commented that one man had “shaped” the market.

The other directors and officers are similarly experienced. So looking at the people behind Star Bulk, you find a breadth and depth of experience.

Let’s look at the financials. The first thing to understand about SBLK are the outstanding warrants. There are 46 million shares outstanding and 15.5 million outstanding warrants that are convertible to common stock by a payment of $7/warrant. So you must figure in the dilution from the warrants in any analysis, as well as the additional capital generated by the warrants.

The warrants trade under the symbol SBLKW. I was very concerned about these warrants initially, because they can be very dilutive, but I was happy to learn that these warrants bother Akis as well. His main priority is to buy them back. While he has tried to do so in the past without much success, he believes that the new dividend should bring the warrants in. And yes, this is a dividend paying company. It should pay out $1.42/share this year, giving it a yield of over 10% at current price of $11.39/share. This will amount to a payout of 53% of this years cash flow, and if it continues the payout next year it will be paying out 55.3% of its 2009 earnings. This is much better than Diana Shipping Inc (NYSE: DSX), which I calculate will payout 100% of its earnings next year unless it cuts its dividend.

Some other ratios for SBLK: EV/2008 EBITDA 5.5; SBLK with full dilution from warrants 2009 PE 7.3 on earnings of $1.55/share.

Current market value of its vessels is $820 million, versus cost of the vessels at $573 million. It has an under-levered balance sheet with $350 million of “dry powder” for future accretive acquisitions.

It has 93% contracted coverage for 2008 and recently announced additional fixtures through 2010. It is trading at less than asset value, even fully diluted.

With its dividend strategy, long term growth horizons, current cheap price, and the high level of expertise of management, the current price of SBLK provides a low conservative entry point, especially for shareholders who like a rich dividend.