We have enjoyed a strong year in the shipping industry during 2021, but momentum in most of the stocks has slowed since June. As investors grow concerned about the supply chain snarl, slowing economic growth, and the risk of credit contagion in China, valuation multiples have pulled back for many of the stocks we follow at Value Investor’s Edge.
Amidst the broader market volatility, it is easy to forget how cheap most of these companies are and it is easy to lose sight of the surging free cash flows and significant earnings and net asset value improvements. As the Q3-21 earnings season commences, I am looking forward to reviewing strong results across the segments, dry bulk and containerships in particular, and updating our models with the latest fleet fixture data.
Two themes will likely dominate this earnings season: the dry bulk cashflow surge (with corresponding shareholder return programs) and rapidly improving EBITDA backlogs for containership firms.
Dry Bulk Cash Surge + Dividends
Although the dry bulk rates have been more volatile the past month, particularly for the Capesize segment, the cash flows from Q3-21 have been enormous and we expect to see even stronger results from Q4. This quarter is a pivotal moment for many of these firms as they finally reach deleveraging targets and begin to pivot to higher levels of shareholder return.
The evidence is clear across the entire industry: Diana Shipping (DSX) is paying a special dividend for the first time in over a decade, Eagle Bulk (EGLE) recently announced a new shareholder returns program, Genco Shipping (GNK) is on the cusp of announcing a huge payout, Golden Ocean (GOGL) has been accelerating their dividend payouts, Grindrod Shipping (GRIN) has announced a new dividend policy, and Star Bulk Carriers (SBLK) is also paying a generous variable dividend, likely to be more than $1/sh for this quarter alone!
We haven’t seen dividends like this in the shipping industry for well over a decade and Q3 is likely to be just the start of this trend. Almost all of the dry bulk firms now have low to moderate leverage and some of the firms, such as Genco Shipping (GNK) and Eagle Bulk (EGLE) have less than 25% net debt-to-assets, which almost qualifies as ‘wildly conservative.’
Unfortunately, despite these enormous returns and prevalent discounts to net asset value, the stocks have traded poorly since June 2021. Management teams have the potential to create enormous value for shareholders by embarking on substantial share repurchase programs. Will they follow through?
Containership Backlogs Ramping Up
The other most interesting sector to follow during Q3-21 earnings is the containership lessors. All of these firms have done a remarkable job rolling their fleet onto strong charters over the past years and most of them have also rapidly delevered their balance sheets into conservative postures. Despite all of this improvement, the enterprise values of many of these firms have barely increased since early-2021. Yes, the market capitalizations have improved, but in some cases the net debt levels have reduced even faster (i.e. the company is getting cheaper even though the stock price has moved higher).
One of the most remarkable cases of this valuation disconnect is in Costamare (CMRE), where the fleet profile has been completely transformed over the past year, revenue backlog has surged, net debt has been reduced, and the company has acquired a formidable dry bulk fleet of 37 vessels, yet the company’s enterprise value is flattish YTD and the company still trades well below 2013-2015 levels despite sitting in a remarkably stronger position. Another firm with baffling valuations despite enormous progress is Global Ship Lease (GSL). We estimate GSL has a net asset valuation of over $60/sh, yet it trades at just $23/sh, even as the EBITDA backlog continues to soar and it already surpasses GSL’s entire market cap.
I am looking forward to earnings results from all of these containership firms and will be looking for continued improvements in EBITDA backlogs, prudent balance sheet management, and escalating shareholder returns. Similar to dry bulk, the entire containership space trades at massive discounts to NAV. Will we finally see a pivot to more repurchases?
Disclosure: J Mintzmyer has long position in numerous shipping firms, including CMRE, EGLE, GNK, GSL, and SBLK.