Increasing Estimates Based on Higher Charter Rates

Favorable Time Charter Contract for the M/V Stephania K

Results below expectations on higher drydocking costs but near-term outlook still bright.

Euroseas signs new vessel charter, we initiate 2025 estimates

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Time charter on Aegean Express feeder ahead of expectations.&nbsp;
Consistent with comments from the recent earnings call, a 36-39 month time charter on the 1,439 TEU Aegean Express Feeder was secured at an average TCE rate of $41.0k/day. The time charter should generate total revenue of $47.0 million and EBITDA of $36.0 million over the first 36 months, or EBITDA of close to $1.0 million per month beginning in early April. This data point is positive considering that the Aegean Express is the oldest and smallest Feeder.&nbsp;
The new time charter complements the recent time charter on the 2,788 TEU Astoria Feeder that was recently secured at an average TCE rate of ~$45.0k/day. The time charter rates of $65.0k/day for the first 12 months, $50.0k/day for the next 12 months and $20.0k/day for the last 12-14 months were above expectations. The time charter should generate TCE revenue of $47 million and EBITDA of $36 million over the first 36 months.
While the Astoria fixture was even better than two other feeder fixtures previously signed, the Aegean Express was more in line with other time charters on two 2,556 TEU feeders, the Corfu and Evridiki G. Those Feeders were locked up on time charters for at least three years at very attractive TCE rates of $40.0k/day. The new Feeder rates were very positive when considering the recent four-year time charter on the Oakland intermediate at a TCE rate of $42.0k/day.
Forward 2022 cover moves closer to 100% from 97% at average TCE rates in the $31.0k/day range.
Positive surprises have been realized on new time charters on the Aegean Express and Astoria Feeders. Earlier this quarter, we were positively surprised on the TCE rate of $65.0k/day on the Astoria versus our estimate of $40.0k/day and the fixture clearly set a positive tone for discussions on the smaller Aegean Express. Due to the smaller size, we had modeled a TCE rate of $32.5k/day, which was overly conservative.
While our assumptions might have looked low in today&#8217;s spot market, there is frequently a trade-off between the TCE rate and the term. Plus, congestion has played a major role in pushing up spot TCE rates and it is difficult to gauge how long it will last. Given the recent successes on the Aegean Express, Astoria, Corfu and Evridiki G, it seems that securing longer term charters that run into at least through 2024 are likely when the vessels listed below are up for renewal. 
Figure 1: Time Charter Profile (2022-4)
 <img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/ESEAcharterprofile.jpg" style="width: 543px;height: 220px" /> 
Source: Company Reports.
With the latest fixtures, 2022 forward cover increased to a very high level of close to 100%, and there is only one remaining opportunity to move TCE rates that are closer to market rates. At an average TCE rate of $31.0k/day, the forward cover represent a solid base of EBITDA of $123.3 million.
There are only a couple of opportunities to move the fleet to TCE rates that are closer to market rates into next year. Only one contract now runs into part of this year; Akinada Bridge for 11 months at $20.0k/day. Two others should work for the entire year under current time charters given options or redelivery dates, so we are assuming that the Keelung works for 12 months (six months at $11.8k/day and six months at $14.5k/day). Joanna stays time chartered for 12 months at $16.8k/day.
The current contract backlog includes 14 fixtures that run through the entire year; Aegean Express at $41.0k/day, Astoria at $65.0k/day, Corfu at $40.0k/day, Evridiki G at $40.0k/day, Antwerp at $18.0k/day, Hydra at $20.0k/day, Kea at $22.5k/day, Busan at $25.0k/day, Diamantis at $27.0k/day, Jonathan P at $28.1k/day, Spetses at $29.5k/day, Oakland at $42.0k/day, and the newly acquired Jonathan P at $28.0k/day and Marcos V at $42.2k/day. Please note that our forecasts incorporate the time charters on the two recent acquisitions, the Jonathan P feeder and the Marcos V intermediate.
Figure 2: 2022-4 Forward Cover
 
 <img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/ESEA2022-4coverFeb242022.jpg" style="width: 509px;height: 470px" /> 
Source: Company Reports and Noble Capital Markets estimates.
2023 forward cover moves to 73% from 69% at average TCE rates of $32.9k/day, up from $32.2k/day.
While we have not published a 2023 EBITDA estimate, the additional time charter on the Aegean Express runs well into 2025 and the forward cover moved up into the 77% range from 69%, including the two not committed new builds (delivery slated for 1H2023). At an average TCE rate of $32.4k/day, the time charters and forward represent a solid base of EBITDA of $110.8 million.
Only three feeders and one intermediate will be available in 1H2023, in addition to the two new build feeders in 1H2023. The Joanna feeder should be available in early 1Q2023, the Hydra feeder should be available at the end of 2Q2023, the Keelung intermediate should be available at the end of 2Q2023 and the Kea feeder should be available in 3Q2023.
Capex still appears manageable due to high forward cover and strong operating cash flow.
We believe that the second two new builds have similar payment terms as the first two. Added capex approximates $8.6 million in 1Q2022, $4.3 million in 4Q2022, $8.6 million in 1Q2023, $8.6 million in 2Q2023, $4.3 million in 3Q2023, $25.9 million in 4Q2023, and $25.9 million in 1Q2024. As a result, total capex increases into the $34 million range in 2022 and the $98 million range in 2023.
Due to the added capex from the new builds, our YE2022 cash estimate is $80.3 million. It is clear that fleet growth remains the highest priority and additional acquisitions and/or new builds are on the radar screen, but we still believe that stock buy backs and/or dividends are likely in the absence of added new builds/acquisitions.
Based on our current 2022 EBITDA estimate, operating cash flow should approximate $118.1 million, which should more than cover capex of $34.0 million, debt amortization of $29.3 million and negative working capital changes and other expenses of $6.2 million. As a result, we forecast cash will increase by $48.7 million to $80.2 million, and net debt will drop by $72.8 million from $87.1 million to $14.3 million, or close to 0.1x EBITDA.
While we have not published a 2023 EBITDA estimate yet, we believe that operating cash flow of $141.7 million should more than cover expected capex in the $99 million range and the financial position should remain solid with net debt of $14.3 million in 2022 turning into net cash of $22.5 million. At the same time, financial flexibility remains high since the Joanna and Akinada Bridge are unencumbered. While cash should more than cover maturing debt of $30.7 million and final payments due on delivery of the new builds, we expect maturing debt to be refinanced and the delivery payments on the new builds are likely to be debt financed, implying that 60%-70% of the total new build cost would be debt financed.
Maintain Outperform rating and price target of $49.00/share.
Even though the stock mostly rebounded from 4Q2021 weakness, we believe that the risk/reward profile remains very attractive. Our container market outlook stays positive and numerous longer time charters at favorable rates create high forward cash flow visibility over this year and into next. While fleet growth remains the highest priority, &nbsp;dividends and/or stock buy backs are probable this year if acquisitions and/or new builds do not materialize.
Figure 3: Stock Price Performance (June 2018&#8211;Present)
 <img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/ESEApriceperform.jpg" style="width: 466px;height: 281px" /> 
Source: Yahoo Finance.
Given better than expected announced 2021 operating results and positive comments on the container market outlook, it appears that some investors were disappointed that dividends and/or buy backs are not currently the highest priorities, and the stock is down 15% in February. We recognize that upcoming time charters do not represent strong upward catalysts, but we believe that the risk/reward profile remains very attractive. Our container market outlook stays positive and numerous longer time charters at favorable rates create high forward cash flow visibility over this year and into next. 
Recent acquisitions were derisked with long time charters, forward visibility is high and the current valuation supports our positive outlook. Favorable container market fundamentals, new time charters and two acquisitions are very positive. In addition, shareholder-friendly moves, including stock buy backs and/or dividends, are highly probable this year even though 2022 capex moved higher by $13 million when the last two new builds were added.

Euroseas Ltd. (ESEA)

Another Positive Data Point Moves Forward Cover Higher

Fundamental Analysis:

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Increasing Estimates Based on Higher Charter Rates (ESEA)

Favorable Time Charter Contract for the M/V Stephania K (ESEA)

Results below expectations on higher drydocking costs but near-term outlook still bright. (ESEA)

Euroseas signs new vessel charter, we initiate 2025 estimates (ESEA)

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