With almost every company announcement these days making a reference to higher shipping costs, it’s high time we took a look at the trillion-pound ocean freight market for a stock idea.

One name which jumps out straight away and is differentiated from the crowd is investment trust Taylor Maritime (TMI), which came to the market in May.

Taylor Maritime is only the second listed closed-end vehicle investing in shipping after Tufton Oceanic (SHIP), and has a smaller market capitalization ($330 million versus $390 million) even though by the end of this year it will have a similar-sized fleet (25 vessels versus 26).

The big difference between them is Tufton has a very diversified fleet made up of container ships and bulk carriers on one hand and tankers on the other.

FOCUSED APPROACH

Taylor Maritime instead has a very focused fleet, owning 23 ‘handysize’ dry bulk carriers, which are typically 130 to 150 metres long with a deadweight of between 24,000 tonnes and 35,000 tonnes, and 2 ‘supramax’ bulk carriers which is the next size up, between 150 and 200 meters long, with a deadweight of between 50,000 and 60,000 tonnes.

Dry bulk carriers are used for loose goods which can’t be transported in a container, for example rice or cement or iron ore, and they often carry a mixture of cargoes in their separate holds. Deadweight tonnage refers to the total weight the ship can carry in terms of load, fuel and ballast water.

With their shallow draft of just 10 metres, handysize carriers can deliver a wide range of cargoes to almost any port in the world, making them one of the most popular types of dry bulk carriers for shippers.

Supramax carriers have become increasingly in demand in recent years due to their ability to take larger cargoes and their on-board loading equipment which makes it quicker to transfer loads to and from the quayside.

Both types of ship can unload part of their cargo at one port and load the empty hold with another cargo, repeating the process several times before they reach their final destination.

POSITIVE OUTLOOK

Taylor Maritime charters its fleet out to shipping companies, and the outlook for the dry bulk sector is particularly good at the moment with spot rates increasing and the value of ships also rising due to lack of supply.

Historically, the shipping market has been highly cyclical, but chief executive Ed Buttery puts a lot of this down to the nature of the capital which previously backed the sector.

‘In the past, a lot of hedge funds and private equity investors would pile into the market when rates were low looking for a 40% IRR (internal rate of return) and move on when something else caught their eye’, says Buttery.

These investors would typically load the shipping firms up with debt, suck out as much cash as possible and exit leaving management struggling with interest payments. ‘They were basically agnostic about business, it was a trade for them’, he adds.

One of the main reasons for floating Taylor Maritime as a closed-end fund was to raise permanent capital from long-term shareholders, with no debt financing, while at the same time appealing to UK investors looking for income with a target yield of 7% or $0.07 per share on the $1.00 issue price.

YIELD ATTRACTIONS

As well as an attractive yield (currently 5.5%), the trust offers exposure to real assets which are appreciating due the lack of new capacity and is run by a strongly-aligned management team which has over $30 million of its own money invested alongside shareholders.

The latest net asset value of $1.398 represents an uplift of 24% during the third quarter and 43% since IPO, helped by a $68 million increase in the valuation of its current fleet. It also means the trust is trading at a discount of over 6% to NAV, making this a good entry point.

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