(By Balaseshan) Deutsche Bank analyst Justin Yagerman downgraded rating on shares of DryShips Inc. (NASDAQ:DRYS) to "Hold" from "Buy" due to expected net asset value discount and weak shipping markets. The brokerage lowered its price target to $2.50 from $7.
Yagerman downgrades DRYS given what he believes will be a continued discount to its current charter-free net-asset-value (NAV). He expects weak dry bulk and tanker rates to persists, and sees further asset value downside on DRYS' shipping fleet, despite the substantial value of its stake in Ocean Rig UDW Inc. (NASDAQ:ORIG).
The analyst said an unfunded orderbook, related party transactions and speculation on new investments outside of DRYS' current sector exposures also weigh on share price and investor sentiment.
With exposure to dry bulk, crude tankers and offshore drilling, DRYS operates a diversified fleet. However, the dry bulk and the crude tanker sectors face low-and-falling asset values, spot earnings below cash break-evens and a fleet oversupply that is likely to persist into 2013 and potentially beyond.
Yagerman said DRYS' offshore drilling vessels are held in its 62.5% owned subsidiary, Ocean Rig. ORIG is a pure-play ultra-deepwater company with a delivered fleet of two semisubmersibles and four drillships.
The analyst said the deepwater drilling sector has seen improving contract rates, asset values and market fundamentals in stark contrast with the dry bulk and shipping markets. DRYS has raised the equity it believes will be required to fund its remaining shipping capex, however, it still needs to raise over $330 million in debt financing.
Yagerman said this is not the first time the company has been faced with a financing gap that was cured in the 11th hour, and he believes DRYS will ultimately be able to raise the financing. However, the weakened state of the lending market could make it more difficult or expensive this time around.
The analyst introduced his 2012 loss per share estimate of $0.11 and his 2013 EPS estimate of $0.12. He is lowering price target to $2.50/share which is based on about 0.80 times DRYS' charter-free NAV of $3.06/share.
DRYS is trading down 2.74% at $2.13 on Thursday.