ROCKVILLE, Md., Jan. 29, 2015 /PRNewswire/ -- Hillson Financial Management, Inc. (together with its affiliates, "Hillson"), a shareholder since 2005 of StealthGas, Inc., today announced that it has delivered a letter to Michael G. Jolliffee, Chairman of the Board of Directors of StealthGas.
The full text of the letter follows:
January 23, 2015
Mr. Michael G. Jolliffee, Chairman of the Board of Directors
331 Kifissias Avenue
Dear Mr. Jolliffee:
Thank you for your letter, dated December 14, 2015 responding to our November 28, 2014 letter in which we expressed our dissatisfaction with the company's performance and some of the Management and Board actions which we feel caused and/or exacerbated the poor results. While we appreciate the response, we feel that certain statements in your letter, combined with the situation at hand, called for further communication and action.
First, in your letter you state that the Board is "committed to delivering value to our shareholders". You also suggested that the decline in StealthGas stock was due to market forces and that our stock's decline was "in line" with prices across the oil and gas industries. You went on to say that it was inappropriate to compare our stock to broad stock indices such as the Russell 2000. Although we take issue with the notion that the standard practice of using market benchmarks, is somehow not relevant in our case, we will set that aside for the time being and focus on the public comparables.
While it is true that stock price declines were widespread in the sector as oil prices were dropping recently, your statement ignores the multi-year chronic underperformance of our stock before this latest downturn began and the fact that our recent plunge was much worse than our comps. StealthGas was down 38.1% in 2014, dead last amongst our publicly traded peers. But this was simply a continuation of the long term trend. Since the 2005 IPO, our stock has lost nearly 60% of its value. One cannot reasonably argue that this is "in line". The stocks in our comp universe have more than doubled on average during this time period while Golar, for example, has more than tripled! As for our 60% decline? Last place once again.
There is no way to put a positive spin on the performance of our stock since the IPO. It has been horrible on an absolute basis, relative to our public comps, and to the broader small cap universe as well. How can you claim that the Board is "committed to delivering value to our shareholders" when it has presided over such an extended period of value destruction? Furthermore, how can you expect shareholders to continue to tolerate such underperformance without significant changes?
You also made the point that the interests of CEO Harry Vafias and his family are "firmly aligned with the interests of all shareholders" by virtue of the fact that they collectively own over 12.5% of the outstanding shares. While it is true that Mr. Vafias and his family are indeed significant shareholders, your assertion that their interests are "firmly aligned" with other stockholders is dubious at best since it completely ignores a very clear and significant conflict of interest.
As you well know, the Vafias Group controls Stealth Maritime Corp. and Brave Maritime Corp., both of which provide a variety of services to StealthGas including vessel management, executive services, brokerage services, vessel sale and purchase services, and direct charter agreements. StealthGas even leases office space from the Vafias Group. As a result, there is a complex web of related party arrangements that raise serious questions not only about the validity of your claim, but also the magnitude of these conflicts, the way in which they have been managed by the Board, and the impact they have had on the company and its shareholders.
We have studied the impact of these various related party transactions, and the results are shocking. Overall, we found that StealthGas has incurred $76.6 million in related party expenses from the 2005 IPO through 2013. Considering our current market capitalization of less than $260 million, this represents a staggering transfer of wealth from the shareholders to the Vafias Group. Worse, while shareholders have been suffering, payments to the various Vafias entities have risen from $4.4 million in 2005 to $12.4 million in 2013, with additional increases to come as the fleet expands. The sheer size of these payments and their trajectory demonstrate not only the very serious nature of the conflict of interest, but also the significant incentive that Mr. Vafias has to maintain and grow the fleet, regardless of the impact on Shareholders.
Our analysis of the impact of these expenses has also produced some telling numbers. For example, we found that StealthGas incurs more related party expenses than ALL of its publicly traded LPG peers. In 2013, related party expenses were 10.2% of revenue. Related party expenses for our public competitors ranged from as low as zero to as high as 6.0% which was still 41.1% lower than at StealthGas. As a result, many of our competitors enjoy significantly higher operating margins.
Moreover, there appears to be a trend in the industry to improve corporate governance and move away from these related party arrangements. For example, Dorian LPG recently transitioned all commercial and technical management to a wholly-owned subsidiary and stopped paying management fees as of July 1, 2014. GasLog also conducts all ship management and construction supervision services in-house, while Navigator performs its own commercial management functions and outsources technical fleet management to independent third parties.
Given the lack of a dividend, Management's penchant for repeatedly diluting shareholders, and the governance issues outlined above, it is not surprising that we have significantly underperformed and trade at substantial discounts to our peers on every metric ranging from EV/EBITDA, to P/E, to Book Value. The discount to Book Value at which we trade is perhaps the most striking, since most of our comps trade at a premium to Book, and our stock would need to triple in order to bring us up to a similar valuation to most of them.
In order to move constructively forward in a way that should truly deliver value to the shareholders, we suggest that the Board take the following actions to increase shareholder value:
First, we recommend that the company commence a self-tender offer. Our target price would be $8/share, and we believe the company could purchase as many as ten million shares at that price. Such a move would reverse much of the dilution from the series of highly dilutive offerings last year. In fact, we would argue that purchases at any price below book value would be accretive and additive to shareholder value. In the event that the tender offer is under-subscribed, the company could authorize the remaining funds to be available for open market purchases.
Second, once the tender offer is concluded, we would urge that the quarterly dividend be immediately reinstated. Although the dividend was suspended in 2008, the Vafias entities have continued to receive a steadily rising flow of income while shareholders have gotten nothing. It is time for the Board to put the Shareholders first and restore the dividend payments that were an integral part of the argument for going public in the first place. Given that most of our competitors pay healthy dividends, we are at a disadvantage because we do not, and this also contributes to our poor performance and undervaluation.
Third, we find it highly disconcerting that on December 24th, less than a month after our first letter to you, the Board approved a "poison pill" provision. This simply serves to protect and entrench the current regime and is yet another example of the Board acting in a way that hurts shareholders rather than working to enhance shareholder value. We urge the Board to immediately rescind this anti-shareholder plan or, at a minimum, raise the trigger from the unreasonably low 10% threshold.
Finally, we believe that the undeniable conflicts caused by the myriad of related party transactions with the Vafias Group have had a very detrimental effect on shareholder value and that they must be stopped. We urge the Board to immediately move to end these related party arrangements and bring these functions and services in-house where they can be managed in a way that benefits the company and its shareholders, not insiders and their affiliates. This would vastly improve corporate governance, bring StealthGas more in-line with its competitors, improve profitability, and be highly beneficial to long term shareholder value.
As I mentioned in my previous letter, we believe that nearly a decade is more than enough time to measure the success or failure of a Board, Management, and strategy. The simple fact is that on every level, StealthGas's tenure as a public company has been a bust for everyone but the insiders. It is time for the Board to move quickly and decisively to make sure that the future for Shareholders does not mirror the past. The status quo is simply unacceptable.
I have outlined a number of steps above that we believe would be very favorably received by investors and have a positive and lasting impact on shareholder value. However, as I stated previously, if you are not willing or able to take these corrective actions, then we believe that there must be a change in leadership in order to insure that the conflicts are adequately addressed, shareholder interests are given the priority they deserve, and, ultimately, value is maximized and not destroyed as it has been in the past. Alternatively, we believe that the company could be sold at a substantial premium to the current market price and that there are multiple parties that would be interested in such a transaction. While we hope that you will move quickly to take action along the lines of what we have outlined above, we reserve the right to consider all options available to us as shareholders to work towards protecting and enhancing our investment in StealthGas.
If you would like to discuss these matters further, I can be reached at (301) 340-0003 or [email protected].
Daniel H. Abramowitz
About Hillson Financial Management, Inc.
Hillson Financial Management, Inc. ("Hillson") is a Registered Investment Advisory firm specializing in small and microcap value stocks, high yield debt, and private equity investments. Hillson was founded in 1990 by Daniel H. Abramowitz who is the current President and sole owner of the firm.
Daniel Abramowitz, (301) 340-0003
SOURCE Hillson Financial Management