Pyxis Tankers: Plenty Of Share Price Appreciation Potential - Buy

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Pyxis Tankers reported solid Q1/2024 results without major surprises and provided a constructive outlook for Q2.The company continued to buy back common shares and increased its share repurchase ...

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In addition, Pyxis Tankers decided to redeem a portion of its Preferred Shares.Foray into dry bulk shipping continues with the acquisition of another Kamsarmax vessel from entities affiliated with the company's CEO and Chairman.Pyxis Tankers continues to trade at a large discount to estimated net asset value, which is likely attributable to the company's cautious approach to shareholder capital returns.Assigning a very conservative 50% discount to projected year-end NAV would result in a $7 price target, or roughly 40% upside from current levels. Consequently, I am reiterating my \"Buy\" rating on the company's common shares.   Bjoern Wylezich/iStock Editorial via Getty Images Note: I have covered Pyxis Tankers Inc. (NASDAQ:PXS), (NASDAQ:PXSAP), (PXSAW) previously, so investors should view this as an update to my earlier articles on the company. Last month, small, Greece-based product tanker and dry bulk carrier operator Pyxis Tankers or \"Pyxis\" reported solid Q1/2024 results without major surprises: Company Press Releases The company generated $4.2 million in cash from operations and ended the quarter with unrestricted cash of $46.8 million, down from $54.5 million at the end of last year due to the recent acquisition of the Kamsarmax dry bulk carrier Konkar Asteri. On February 15, 2024, we took delivery, from an unaffiliated third party, of an 82,013 dwt dry-bulk vessel built in 2015 at Jiangsu New Yangzi Shipbuilding. The $26.625 million purchase (MOA agreed in November 2023) of the eco-efficient Kamsarmax, fitted with a ballast water treatment system and scrubber, was funded by a combination of secured bank debt of $14.5 million and cash on hand. The five year amortizing bank loan is priced at Term SOFR +2.35% and is secured by, among other things, the vessel. The vessel has been named the “Konkar Asteri” and commenced commercial operations on February 29, 2024. Not surprisingly, total funded debt of $73.8 million was up by $12.8 million sequentially. During the quarter, Pyxis repurchased 44,557 common shares at an average price of $4.42 per share. Subsequent to quarter-end, the company bought back an additional 39,223 common shares at an average price of $4.66. So far, the company has utilized $1.6 million of its $2.0 million share repurchase program for the buyback of 415,371 shares. Last month, Pyxis Tankers increased the repurchase program by $1.0 million and decided to redeem a portion of the company's outstanding Series A 7.75% Convertible Preferred Shares (PSXAP): On May 16, 2024, our BOD approved (i) an incremental $1.0 million in common share repurchase authority under the Company’s the common share re-purchase program for the 12-month period ending May 16, 2025 and (ii) the Company’s redemption of 100,000 of the outstanding Preferred Shares with an aggregate liquidation preference of $2.5 million, plus accrued dividends, on June 20, 2024. Upon redemption, the 100,000 PXSAP shares will be cancelled by the Company and cash dividends in respect of these shares will no longer be payable. After this partial redemption, there will be 303,631 PXSAP shares outstanding, which are convertible into 1,354,204 common shares, if fully converted, a reduction of 446,429 fully-diluted common shares. While certainly a move in the right direction, the company should have considered redeeming all outstanding preferred stock for approximately $10.1 million in order to avoid potential near-term dilution and save $0.8 million in annual dividend payments. In addition, Pyxis decided to expand its dry bulk carrier fleet with the acquisition of another Kamsarmax vessel (emphasis added by author):  On May 16th, the BOD also approved the investment in a joint venture agreement to purchase an 82,000 dwt dry-bulk vessel built in 2015 at Jiangsu New Yangzi Shipbuilding. The eco-efficient Kamsarmax, fitted with a ballast water treatment system, has a purchase price of $30.0 million which is expected to be funded by a combination of bank debt, cash and the issuance of restricted common stock. Our Chairman & CEO, Mr. Valentis, as one of the sellers of the Vessel, has agreed to receive $1.5 million of restricted shares of the Company as part of his portion of the purchase consideration. The Vessel owning subsidiary, which will be controlled by the Company through its 60% ownership is expected to enter into a new $16.5 million secured five-year amortizing term loan. The Vessel will remain the “Konkar Venture” and continue under management with Konkar Shipping Agencies. We expect the bank loan to be priced at a rate of SOFR plus 2.15% will be provided by one of our existing lenders. The balance of the purchase price, Vessel working capital, transaction fees and other closing costs will be funded in total cash of $13.2 million of which the Company will invest $7.3 million. As a further sign of commitment to the Company, Mr. Valentis has agreed to reinvest $5.9 million in cash for the 40% minority interest in the new joint venture. It is anticipated that the acquisition of the “Konkar Venture”, which is subject to customary closing conditions, will be completed in June, 2024.  While the issuance of new common shares to the CEO at a large discount to net asset value (\"NAV\") is somewhat disappointing, dilutive impact will be rather limited. Following the close of this latest acquisition, the company's fleet will increase to six vessels with an estimated aggregate value of almost $180 million: Company Press Releases Please note that the fleet value estimate has been adjusted for the partial ownership of the dry bulk carriers Konkar Venture and Konkar Ormi. Pyxis Tankers still trades at a large discount to estimated net asset value (\"NAV\") per share which I would attribute to a number of issues like the company's small scale, limited trading volume, corporate governance concerns, the recent expansion into dry bulk shipping and particularly the lack of dividend payments. While certainly valid concerns, they do not justify a more than 60% discount to NAV, at least not in my opinion.   Company Press Releases / Value Investor's Edge In contrast to many of its nano-cap peers like Castor Maritime (CTRM), Imperial Petroleum (IMPP), Performance Shipping (PSHG), Globus Maritime (GLBS), Top Ships (TOPS), United Maritime (USEA) and C3is (CISS), Pyxis Tankers has abstained from pursuing growth at the expense of common shareholders. However, considering the solid near-term outlook for both the product tanker and dry bulk shipping market, the company should take a more generous approach to shareholder capital returns going forward. For example, initiating a quarterly cash dividend of $0.15 per share would utilize only a small fraction of Pyxis Tankers' operating cash flow, but the annualized dividend yield of 12% would almost certainly attract a large number of new investors to the common shares. In the absence of a common stock dividend, income-oriented investors should consider a potential investment in the company's Series A 7.75% Convertible Preferred Shares, which currently trade around their liquidation value of $25 per share. With additional near-term redemptions unlikely and common shares trading just 11% below the $5.60 conversion price, investors would be enjoying a 7.75% annualized dividend yield with the potential for future capital gains. Looking ahead to the second quarter, the company has fixed the majority of its fleet at decent rates, which should result in another solid quarterly report in late July: Company Presentation Risk Factors With the company's financial results entirely dependent on product tanker and dry bulk charter rates, investors will be required to monitor developments in these markets on an ongoing basis. However, industry dynamics are likely to remain favorable in the near- to medium term. Bottom Line Pyxis Tankers reported solid first quarter results and continued its foray into dry bulk shipping with the acquisition of a Kamsarmax vessel from entities affiliated with the company's CEO and Chairman. In addition, the company will redeem a portion of its Series A 7.75% Convertible Preferred Shares for an aggregate $2.5 million, thus reducing potential future dilution and dividend payment obligations. With the near-term outlook for both the product tanker and dry bulk shipping market remaining constructive, solid cash generation should result in net asset value per share increasing even further. Assuming stable secondhand vessel values, I would expect the company's NAV per share to increase to approximately $14 by year-end. Assigning a very conservative 50% discount to projected year-end NAV would result in a $7 price target or roughly 40% upside from current levels. Consequently, I am reiterating my \"Buy\" rating on the company's common shares.  Editor's Note: This article covers one or more microcap stocks. 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