Does NAV Matter Yes but no, No but yes

One of the metrics I see frequently when investing in shipping stocks is the Net Asset Value (“NAV”) of the company. This past week, Greg Lewis of BTIG published an interesting thought piece on their use by tanker companies. Frequently shipping companies use NAV when evaluating capital allocation.  NAV is a lot easier to use than other traditional metrics employed in other industries such as EBITDA for forward years. Given the volatility of rates, I would be overjoyed if someone could predict with certainty VLCC rates in September 2020, let alone 2021 and 2022. In this environment, I find Net Asset Value very useful in my investment process.

The challenge is for shipping companies when allocating capital when NAVs are below 1. Usually NAVs are low because the outlook for shipping is unclear and charter rates are unprofitable.  Currently, spot tanker rates, are awful, and the majority of publicly listed tanker companies have NAVs below 1.  One company stands out – Euronav (“EURN”) in having the ability to buy back their stock when it is cheap and accretive.   Others can’t, because they are constrained by their debts. 

The other issue is that stocks don’t go up in the short term merely because they are cheap.  I’m long certain tanker stocks and convertible bonds because I am patient and believe the outlook over the next two years will be positive for investors.  There are a host of reasons, but most importantly, I expect all but the largest companies to find new capital very expensive and regulations more intense.  In any event, ordering new ships is difficult when the engine choice is unclear.  The environmental crowd doesn’t like diesel and doesn’t view LNG with particular fondness. There is little incentive to order new ships with a 30-year life for $90 million if they will be outdated in five or seven years.  NAV is useful when considering risk-reward, but it is not something that causes stocks to rise or fall alone.