VesselsValue.com is launching Discounted Cash Flow (DCF) valuations to its existing portfolio of daily, automated valuations for the shipping industry. Adrian Economakis, Strategy Director of VesselsValue.com says:
Discounted Cash Flow vs Market Valuations
Discounted Cash Flow Valuations is the amount a vessel would be expected to earn as a working vehicle, where value is expressed as the sum of the discounted projected annual earnings over the remaining life of the ship plus the discounted residual (scrap) value. This kind of model depends on a large number of inputs, including anticipated charter rates, operating expenses, utilisation rate, commissions, inflation rates and discount rate.
The market value, on the other hand, is essentially what someone would be prepared to pay for a specific vessel. It is represented as a mathematical function of the type, age, size and features of the ship along with the state of the freight market, and a technique called regression is used to calibrate this function in line with recent sale prices.
The differences between these signals provide perhaps the most useful information to market watchers. Times of great divergence between the two signals could indicate buying or selling opportunities for shrewd owners, whereas periods of convergence may be indicative of markets in equilibrium in which asset plays are harder to pull off.
In principle, if the income value is greater than the market value, then the vessel is worth buying; if less, then she should be sold. To put this in context, the DCF values for the bulker market are almost double the market value, providing buy signals if you can cope with the historically low short term charter rates. With tankers, the DCF values are slightly below the market value which may be providing a slight sell signal.
When viewed as information flows, the different approaches to valuing vessels open up new possibilities for deeper analysis and understanding of the interactions between the four shipping markets. Of course, using that information wisely will always require shipping experience and expertise