Vessel valuations and share prices of US-listed bulker owners have been heading in separate directions since June, but the worst of the stock sell-off probably is over. That is the take from Jefferies lead shipping analyst Randy Giveans, who said the robust earnings about to be revealed by public owners Genco Shipping & Trading, Eagle Bulk Shipping and Safe Bulkers will be just one factor supporting the equities. Bulker names under Jefferies’ coverage are trading at 70% to 75% of their net asset value [NAV], down from a peak of between 100% and 110% at the end of June, the analyst noted.

Investors have left the sector on worries over weakening forward curves and headlines about restrictions on Chinese steel production tied to lower demand for iron ore, he said. “The stocks are more driven by sentiment and near-term rates. With asset values there is a sentiment component, but there’s not the same trading liquidity,” Giveans said. Indeed, capesize values have appreciated 64% for a five-year-old unit since January, and 84.6% for a 10-year-old. The gains are 59% for five-year-old panamaxes and 78% for supramaxes of the same age. “When you read some bearish headlines on Chinese steel production and iron ore demand, you’re not going to rush out and sell a five-year-old capesize, but you will rush out and sell a dry bulk stock. That’s why there’s been a disconnect between values and the equities,” Giveans said.

Much has changed in the past few weeks. Even in the first week of October, the dry bulk stocks were trading between 90% and 100% of the companies’ NAVs, Jefferies figures show. Are the current weak trading levels something of a floor, then? Giveans would not go that far. “There is no floor, unfortunately, and if investors get concerned about China or a slowing global economic outlook, well, history has shown us the stocks can disconnect entirely from earnings and the market,” he said. “So while there’s no firm floor in shipping ever, when you have seen the price-to-NAV ratio reach these levels historically, the next move is usually higher. The risk is certainly to the upside here.” Giveans spoke before dry rates plunged further on Wednesday, with the Baltic Dry Index falling below 3,000 for the first time since June.

Still, he made two key points. There are built-in factors that will keep bulker valuations from collapsing, and even if they do weaken, public company NAVs are being supported by the cash from earnings being piled on balance sheets. Secondhand valuations remain supported by newbuilding prices, which remain elevated on high steel prices. A scarcity of newbuilding slots, which are being dominated by containerships and LNG carriers, is also contributing, he said. Even as steel prices come off the boil, any decline in production by China threatens to push them upward again, Giveans argued. “That newbuilding price is going to keep your resales on young vessels supported — you’re not going to have a 40% disconnect between the newbuild price and a five-year-old bulker,” he said. “At the same time, the price floor is being pushed up by scrap values. So I would not say it’s inevitable that asset values fall over the next few months or even the next few quarters.” But even if that does happen, weaker vessel valuations stand to be offset in NAV terms by cash piling up on public owners’ balance sheets, Giveans argued.

“An important component of NAV is free cash flow. It’s been very robust in the third quarter as you are about to start hearing from one dry bulk owner after another as they report earnings this week,” he said. “Even with the volatility that we’re experiencing, I expect fourth-quarter rate guidance to be very strong and earnings that are as good if not better than the third quarter.” Giveans expects the wild ride in hire rates will transition to a period of stability in coming weeks. He also projected that news from major bulker owners — with Genco, Eagle Bulk and Safe Bulkers all reporting in the days ahead — will have a calming influence on investor jitters.