Philly Shipyard has a problem. The company has run out of ships to build. Once it completes its current order for Matson, there are no more orders.
Philly Shipyard is (no surprise) located in Philadelphia. Anybody who’s traveled I-95 through the city may have noticed the company’s facilities to the east.
The shipyard has a storied history, with ocean-going vessels built there starting in 1871. The US Navy was a major customer through most of the 20th century. Unfortunately for the shipyard, the end of the Cold War saw a sharp decline in the need for new vessels and none were built after 1970. The shipyard officially closed in 1991 with the property reverting to the city’s ownership. A long campaign by several stakeholders saw the shipyard gain new life, leased long-term to Norwegian conglomerate Kværner in 2000. Philly Shipyard delivered its first new vessel in over 30 years in 2003. Kværner was subsequently taken over by Aker, which listed a minority stake in Philly Shipyard independently on the Oslo stock exchange in 2007.
The following decade was good for Philly Shipyard. A busy order book allowed the company to report consistent profits and pay large occasional dividends. Philly Shipyard’s customers were domestic shipping companies needing vessels for Jones Act operations in American waters. But shipbuilding is a deeply cyclical industry, and the downswing is here. Facing an indeterminate period of inactivity, Philly Shipyard has instituted layoffs and prepared equipment for long-term storage.
All is not hopeless for Philly Shipyard. The company is in discussions with an undisclosed shipper to construct two new tankers, and is bidding on the contract for the US Maritime Administration’s National Security Multi-Mission Vessels. If the company is successful in winning these bids, better times are ahead. If not, the construction bays will sit idle.
Against this backdrop, it is unsurprising that Philly Shipyard’s shares have fallen to their lowest level in years. At NOK 31, shares are down 85% since cresting at over NOK 200 in 2014. The company now trades at a substantial discount to net current assets.
While its shares trade in NOK, Philly Shipyard reports in US Dollars. At September 30, Philly Shipyard had net current assets of $72.1 million. (In this figure I include restricted cash, which is only restricted as collateral against outstanding debt, and cash to be received from the nearly-complete liquidation of a subsidiary.) Book value is $119.2 million. Philly Shipyard’s market capitalization is NOK 390 million/$45 million. Shares trade at a 38% discount to my adjusted net current asset value, and only 38% of book value, virtually all of which is tangible.
This isn’t quite the complete picture. Philly Shipyard can be expected to operate at a loss and burn cash until it can secure new ship orders. The company is limited in how deeply it can cut employment by provisions in the long-term lease with the city. However, if the shipbuilding cycle bottoms at any point in the next few years and if Philly Shipyard can keep itself afloat until then, shareholders could be richly rewarded when profits return. For context, Philly Shipyard paid dividends totaling three times its current market capitalization between 2014 and 2017. When times are good for Philly Shipyard, they are very good. The question for investors is when and if good times will come around again.
Alluvial Capital Management, LLC does not hold shares of Philly Shipyard ASA. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at email@example.com.
Alluvial Capital Management, LLC manages a value investing partnership, Alluvial Fund, LP. If you are a qualified investor and would like more information, please contact us at firstname.lastname@example.org or visit alluvial.capital.