Giant overweight

One of Wall Street’s most respected shipping analysts has taken up coverage of transformed owner Star Bulk with a favourable view on the stock.

Jonathan Chappell of Evercore Partners has placed an overweight rating on the Petros Pappas and Oaktree-backed company that he says has gone from a “midget to a giant” in little more than a year.

Chappell says a recovery in the dry cargo market should bring robust returns for Star Bulk, which he believes is an undervalued stock.

In placing a $16 per share target price on Star, Chappell explains the company has been transformed in just 14 months from a micro-cap firm with an ageing fleet to one owning 69 bulkers.  

“Timed well with our forecast for a meaningful recovery in dry bulk spot rates over the next 18 months, we believe this fleet expansion will result in substantial earnings per share and cash flow growth at Star Bulk well into 2016,” Chappell wrote in his introductory report.

He believes a profit of $12.2m in 2014 will jump to $110.3m in 2015 and $227.4m in 2016 as rates rise and the fleet grows.

Despite his positive stance, the analyst says the company still has some overhangs to scale.

Pappas, Oaktree and a third investor Monarch Alternative Capital control 81% of the stock, with the funds expected to cash out some of their chips at some stage to meet their own investment targets.

In addition, further equity issues will likely be required to address a $165m funding gap in Star's newbuilding programme, he says.