Sunday, 12 November 2017

RLOG: Improved Financials And Insider Buying From A Local Bank Executive Foretells Positive Future Events?

Last week was absolute chaos for shipping companies. Starting with Diana Containerships Inc. (DCIX), which rose 348% on November 3 after a reverse split and continuing with DryShips Inc. (DRYS), Top Ships Inc. (TOPS), Globus Maritime Limited (GLBS), Euroseas Ltd. (ESEA) and Seanergy Maritime Holdings Corp. (SHIP), these shipping companies, particularly the ones with the smaller floats, had a wild up and down week. Another shipper that was no exception to this was Rand Logistics, Inc. (RLOG). RLOG rose 313% out of the blue on November 7. Even after a significant pullback, it still closed at $0.71, nearly doubling in price on the week. This pullback may be an opportune time to buy in anticipation of another spike. Unlike most shippers, Friday was a green day for RLOG  as it rose 10%.

RLOG has a $13.2 million market cap and like all other shippers mentioned above trades at a deep discount to its book value and at a very low revenue multiple. Also like many of the other shippers, it has a highly leveraged balance sheet, slow or negative revenue growth and positive operating profits but negative net income because of the interest expense on the debt. RLOG differentiates itself from the Greek shippers in that its operations are in the Great Lakes area of North America and, more importantly, it does not have the history of multiple reverse splits and death spiral dilution that has plagued the shareholders of TOPS, DRYS and DCIX.

Prior to last week, RLOG's stock price has been reflective of a hard 2017 so far. The three month period ended June saw:

  • Freight and related revenue generated from Company-operated vessels (which excludes fuel and other surcharges) decreased $2.8 million, or 8.5%, to $30.3 million compared to $33.1 million during the prior year period.
  • Adjusted EBITDA, before lender fees, decreased $1.0 million to $10.2 million, from $11.2 million during the prior year period. A reconciliation of operating income to Adjusted EBITDA is attached to this release.
  • Overall loss to shareholders increased to $5.6 million from $3 million.
  • Total tons hauled by the Company during the three month period ended June 30, 2017 decreased by 9.4% compared to the three month period ended June 30, 2016
But there were also bright spots mentioned in the outlook:

"Our results for the first quarter were consistent with our expectations," commented Ed Levy, President and Chief Executive Officer of Rand. "Our Canadian flagged vessels experienced a 15.8% quarter over quarter increase in Sailing Days. Compared to the same quarter last year, in local currency, our Canadian fleet experienced a 17% increase in vessel margin primarily due to the increase in Sailing Days. Vessel margin per day increased by approximately 1%. In US dollars, vessel margin per day from our Canadian flagged vessels decreased by 3%. We experienced a 15.6% decrease in US flagged vessel Sailing Days on a comparable quarter basis, which along with increased vessel delays resulted in a decline in vessel margin. As previously disclosed, planned vessel life extension projects completed after April 1, 2017 on certain of our US flagged self-unloading vessels resulted in a delayed start to the sailing season. These vessel projects are expected to extend the useful life of the fleet. We were pleased with our operating performance once the entire fleet was deployed. Specifically, May and June 2017 EBITDA, before one-time financing charges, increased by approximately 9% versus the same period last year."

Mr. Levy continued, “Demand for our services is improved versus this time last year, and our contractual revenue backlog for the remainder of the sailing season is strong. We expect to sail 14 of our 15 vessels for the remainder of the season. Based on our improved scheduling technology, we have been able to add approximately 18% of additional spot business, boosting our percent of time in revenue loaded condition. We are also encouraged by the nearly 5.4% increase in the value of the Canadian dollar versus the US dollar since the start of our fiscal year. Each $0.01 increase in the value of the Canadian dollar versus the US dollar results in an approximately $275,000 increase in our US dollar reported EBITDA.”

Canadian operations have increased strongly, U.S operations appear to be back on track, May and June saw an EBITDA increase of 9% and the Canadian dollar was strong over the summer of 2017, increasing EBITDA which is reported in US Dollars.  

The main driver of the 8.5% decrease in revenue was the 9.4% decrease in tonnage shipped for the quarter. The company has given a hint that tonnage shipped has increased in August with the following news release on October 6:

Rand Logistics, Inc. (NASDAQ: RLOG) (“Rand”), a leading provider of bulk freight shipping services throughout the Great Lakes Region, announced the Company will be donating in excess of $132,000 to children’s charities designated by its customers as a result of its second annual Marine Miracle Month Program, an increase of more than 5% over last year’s program results.

In June 2017, Rand announced the Company will donate $0.05 for every ton of cargo carried by its fleet during the month of August 2017 to nonprofit organizations with a primary focus on the health and wellbeing of children. For the program’s second year, Rand is providing its customers the opportunity to select the children’s charity of their choice and is making the donations in each participating customer’s honor. The donation amount is based upon the total tons each customer shipped during the month of August.

“We are thrilled and inspired by the continued interest and positive response that our customers, employees, and community partners have shown towards the initiative, enabling us to exceed last year’s program results. The donations based on cargo carried in August have been augmented with additional donations from individuals, a silent auction and other activities that help support our goals,” stated Aaron Degodny, Rand’s Chief Commercial Officer. “With approximately 30 participating customers again this year, Marine Miracle Month has created a vehicle for Rand to give back to the many communities in which we operate and expand the reach of our corporate social responsibility efforts, while strengthening partnerships with our valued customers.”

Degodny continued, “Rand introduced the Marine Miracle Month program in 2016, and we are proud to have contributed nearly $260,000 to date toward organizations across the Great Lakes. We look forward to continuing Marine Miracle Month as an annual event for Rand, our customers and the organizations and children in the communities that it positively impacts.”

Reading between the lines of this innocent sounding fluff piece about a $132,000 donation, we can see that tonnage has increased by more than 5% for August 2017 over August 2016. The $0.05 per ton of cargo carried donation number was unchanged from the 2016 program. So the more than 5% increase in donations directly corresponds to a more than 5% increase in tonnage shipped. Assuming that July and September were about as strong, Q2 ended September should be a big quarter. Last year RLOG reported $2.6 million in net income in Q2.

Lots of people may have gotten smart to the fact that Q2 tends to be the strongest quarter for the company and bid up the stock in anticipation that the quarterly results were imminent, adding fuel to the fire that was sparked by DCIX. Last year RLOG reported Q2 on November 10 but it looks like the results will come this week instead. An entry in the $0.70's is much better than chasing the stock above $1.50 like people did last week. We believe that it may return to that level if the financial results are indeed as strong as we think they are, giving an opportunity for readers to double their money. We think it is better to buy low and gamble on a move after earnings then to chase at above $1.50 once again. So keep a close eye on it on Monday morning.

But there may be much more to this than simply expecting good Q2 results. There has been fairly substantial insider buying from Brent D. Baird of First Carolina Investors Inc. and M&T Bank Corporation (MTB). Unlike Kalani on DRYS and TOPS which just abuse the capital markets by dumping to retail investors at ever lower prices, the buying from Baird has been REAL insider buying from a REAL investor. 

On March 27, 2017, Baird filed that he owned 1 million shares of  RLOG, 5.37% of the company's entire float. Just five months later on August 24, 2017, he filed that he owned 2.9 million shares, or 15.85% of the float. It looks like these purchases are part of his own personal investing rather than as a representative of the fund or bank he works with. During that time period between March 27 and August 24, there were a few times where the stock suddenly experienced a surge in volume, but then died down over the next several days. July 14th and 17th in particular. Were those the days that Baird was buying the 1.9 million more shares? Has he bought more since August 24? Was he responsible for the madness seen last Tuesday? If so, we can only guess as to how much more he bought until we see an updated filing. 

Understand why this is so important. Baird sits on the Board of Directors of M&T Bank, a bank in Buffalo which is located right on Lake Erie of the Great Lakes. Baird and MTB are right in RLOG's backyard. RLOG management has made mention several times about restructuring its debt. I don't think we need to put two and two together for our readers, they can take a pretty good guess at what we think is going on there. When The Bon-Ton Stores, Inc. (BONT) announced an amendment to its credit facility on October 24, the stock price quadrupled in two days before the company announced that it is de-listing and going onto OTC, killing the momentum. If you look at BONT and RLOG, both companies are in similar shape with their financials even though they are in very different industries. So an announcement for RLOG that is similar in tone as it was for BONT could likely see a similar reaction on the share price.

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Disclosure: We are long RLOG

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