Atlantska plovidba: Lesson learned in 2002 saves business in 2008

Compared to the previous cycle of low freight rates, the business of the Dubrovnik shipping company shows a drastic turnaround. Investments are being made in tourism and aviation, the fleet is being rejuvenated, and profits are being earned through ship trading.

 Written by: Amir Kulenović
[email protected]
Photo: Mateo Rilović and
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Just under two weeks ago, analysts from Erste Bank published a report in which they set a target price for Atlantska plovidba shares at 2,786 kuna. This analysis was completed at a time when the price of Atlantska shares was 1,930 kuna, and the BDI index for dry bulk was over 4,900 points compared to this week’s around 3,000. Considering the unprecedented catastrophic events in the financial markets of the USA and Europe and the associated decline in stock prices of global as well as domestic shipping companies, it is certain that Erste’s analysis, if conducted today, would be considerably more cautious. It is ungrateful at this moment for any company to make long-term forecasts and predictions, but it can be said for the Dubrovnik shipping company that it should not fear at least the near future. Atlantska plovidba is a company that, taught by bad experiences from the past (it nearly collapsed during the previous bad period due to large losses), conducts its business policy more wisely and proactively than all our shipping companies. The fleet is being renewed, cash is being managed wisely, and debt levels are being monitored, and it is also very important that Atlantska is the only domestic shipping company trying to reorganize its business through diversification. In addition to the shipping business, the company holds majority stakes in the Lapad and Grand hotels, and its airline Dubrovnik Airline shows impressive growth rates compared to the sluggish national carrier.

Third quarter without decline

However, the fact is that this shipping company currently generates the highest profit in its core activity, which has been experiencing a boom in recent years. Freight rates for shipping companies transporting dry cargo are referenced to the BDI index, which reached its all-time high values in November last year and again in the middle of this year. In the last few weeks, the BDI has lost almost two-thirds of its value, but this fact will not have such negative effects on companies that employ a good portion of their vessels on long-term contracts rather than on the spot market. Among such companies is Atlantska, whose management states that the ratio between these two types of contracts is approximately equal, so the impact of the index’s decline will not be felt in the third quarter. Greater challenges in reaching previous profit levels can only be expected next year if the negative situation in the market continues in the future. Atlantska is also very actively rejuvenating its fleet. Just three years ago, the average age of the ships was 15 years, and today that average is much lower, with considerable profits achieved during the rejuvenation. Namely, the company ordered new ships at much lower prices while disposing of old ones during periods of high freight rates, which also affected the value of the ships it sold.

Thus, in the last quarter, it reported a profit almost three hundred percent higher than that in the same period last year, due to high freight rates and the sale of one ship, and similar effects can be expected in the third quarter, as the sale of another ship will be recorded then. Furthermore, three ships from the Atlantska fleet were sold in 2005, and they were immediately leased back from the buyers with the option to repurchase the same vessels at the price from 2005 this year and next year. Since the price at that time was much lower than today, it can be said that an excellent deal was made. Through this and other fleet rejuvenation operations, the company’s management has shown that it learned the lesson from 2002 when it was on its knees and did not think of such a form of generating income, but believed that the crisis could be overcome by pure freight income. Today, it seems that things are completely different. – We should reach one million tons of capacity for the first time in history by the end of next year, but we cannot say that this is some kind of strategic plan because our plan is to have 20-25 ships, and their total capacity will depend on the size of the ships within that number – says Ante Jerković, the CEO of Atlantska, about the company’s strategic plans.

Fleet rejuvenation

The company has a total of ten ships ordered, mostly from shipyards in China, which should rejuvenate the fleet, and the delivery pace is such that most should set sail by the end of next year, while four ships are to be delivered in 2011 and 2012, for which, analysts agree, stagnation in freight rates in the sector is forecasted. By then, the company will have a rejuvenated fleet that aligns with its long-term strategy, which will have lower costs than the current one and thus be able to achieve higher profit margins. However, in line with the changed business philosophy, Jerković and other board members are now not hesitant about some ad-hoc moments in business and take advantage of favorable opportunities when they arise. Recently, they took an order from another shipping company for a capesize vessel, which they have not had in their fleet until now. – Capesize ships are from the so-called industrial shipping where the shipowner is more long-term tied either to the exporter or to the importer of bulk cargo (ore, coal), whereby both contracting parties can count on stability in employment without special exposure to market whims.

Entering this size of ships (significantly larger tonnage, but the same number of crew members) also means fewer difficulties with the increasingly pronounced problem of a shortage of maritime personnel, so this could also mean a gradual transition to a new business strategy – says Jerković about the new ship, not ruling out a change in business strategy towards capesize vessels. Regarding the diversification of business through tourism and aviation, Atlantska, and this is also agreed upon by Erste’s analysis, say that they do not expect an increase in profits from these activities in this quarter. Despite the fact that the third quarter is the peak season for tourism in Dubrovnik, and the charter flights offered by their company are most in demand during the summer season, several facts that did not work in its favor have impacted the business of that part of the company. – I do not believe that the end of the tourist season and the results of the hotels and the airline will significantly reflect on the results for two reasons.

One is the underperformance of the tourist season compared to last year, and the other relates to the problems of airlines due to the enormous rise in fuel prices as well as a smaller volume of passenger movement. In such conditions, we will be satisfied if non-shipping activities achieve at least a small profit, or do not operate at a loss – says Jerković about the prospects for profit in the third quarter. Regarding the continuation of business diversification, Jerković says that their intention is to complete the renovation of the Grand Hotel on Lopud and the completion of the second phase of the renovation of the Lapad Hotel, as well as the construction of a marina in Gruž Bay to round off the investment cycle in tourism.

Clear and understandable reports

– The expansion or reduction of activities in air transport will depend on general tourism trends in the world, which in light of the global financial crisis are not very optimistic – they say at Atlantska about the second segment of diversification. According to data from July, the company has a total of 7,750 shareholders and a relatively high degree of free float compared to other Croatian stocks. Among the ten largest shareholders, four are from five board members, which certainly sends a positive signal to others that the management believes in its own moves. The company also maintains a considerable level of transparency towards the investment public, which is rarely seen in Croatian companies. Financial reports are clearly understandable and submitted on time, and their Atlant Bulletin is a prime example of a newsletter for employees, but also for any shareholder.

Preparing for a crisis scenario

However, the fact is that this stock has experienced almost a 50% drop compared to the beginning of the year. This figure is not the largest either sectorally or within the entire domestic market, but, analysts from Erste agree, the business itself does not indicate a basis for such a drop. Atlantska is, at least in this case, a hostage to global movements in capital markets. As a possibility in such market conditions, the management has also expressed readiness to, should the opportunity arise, buy back some of its shares and offer them to employees at the acquisition price in yet another employee stock ownership program. However, since their treasury is almost full, such chances of defending the price in the market are currently quite small. – A crisis will come again, and for such a scenario, we are preparing primarily with a newer and more modern fleet that guarantees greater competitiveness in the market, as well as significantly lower maintenance costs. It is extremely important to enter such a period with a larger amount of cash on hand because for all shipping companies, illiquidity is the most detrimental factor in the fight for survival during a crisis – says Jerković. Judging by the previous moves, it seems that they have learned something and that they will be much better prepared and more cautious when the crisis occurs.

Analysts differ on the recovery of the sector

Investment advisor at Abacus broker Dalibor Balgač believes that opportunities for the sector could improve (provided that the entire global market does not collapse under the pressure of the banking crisis in the USA) in the coming months.
– Factories in China that were closed due to pollution during the Olympic Games should start operating again after October 6 when the week of religious holidays, the so-called golden week, ends in that country. Since the Chinese are not lowering the GDP growth rate below ten percent, demand in that country will remain high – thinks Balgač.
Since China consumes almost 80% of iron ore, the primary commodity transported by the dry bulk sector, this fact is extremely important for raising the level of the BDI index. This is not agreed upon by analyst Nada Harambašić from Raiffeisen Consulting, who believes that the opportunities in the shipping sector for the last quarter of this year are not optimistic. – However, the demand for steel (lower than expected) in China, the slowdown of the economy in the USA, and general global economic conditions could lead to further declines in freight rates. Steel mills and construction companies in China have not increased their demand for steel even after the suspension of work during the Olympic Games – believes Harambašić. Jerković partially agrees with her, stating that what is happening in the market is not a reflection of the aforementioned forecasts as we are witnessing quite a sharp decline. – Everyone is again looking for answers in China, but now we are faced with a new problem that will affect the global market, which is the announcement of a recession in the USA. In any case, the moment is indeed ungrateful for any forecasts, and more can be said in a month or two – believes Jerković.