GOGL - Eagle Bulk Shipping: The Tailwinds For Recovery Remain Excellent

Summary

• EGLE may further ride immense tailwinds for TCE rate recovery moving forward, buoyed by China's reopening cadence and growth in demand for coal/grains by 2023.
• The company also persisted in its strategic vessel renewal and growth program since 2017, divesting older Supramaxes while acquiring modern Ultramaxes.
• The management's focus on mid-sized dry bulk fleets may also contribute to its improved TCE rates ahead against its peers such as GOGL, SBLK, and GNK.
• Therefore, we remain optimistic about its forward execution.

Investment Thesis

The tailwinds for Eagle Bulk Shipping Inc.'s ( EGLE ) recovery appear robust, since the management previously reported that approximately 65% of its cargo was comprised of infrastructure-related commodities such as steel, cement, scrap, and nickel ore. The balance was split evenly between coal at 20% and grain at 15%.

These numbers matter, since the fast and furious China reopening cadence may trigger an eventual recovery in TCE rates by H2'23. Even during its previous Zero Covid Policy, the country imported over a third of the annual dry bulk volume, while accounting for over 43.07% of the global iron-ore demand at 1.12B tonnes.

Despite the previous pessimism regarding the country's property default crisis in 2021, market watchers had reported massive growth in new-home sales at an average of 20% YoY over the first three days of the 2023 calendar year. Notably, big cities recorded even more impressive numbers at 80% YoY growth for Beijing, 74% for Shanghai, and 131.5% for Guangzhou.

Assuming a similar cadence moving forward, we may see China's property market recover moderately, with more developers ramping up construction by H2'23, significantly aided by aggressive developer discounts and government policies .

In the meantime, demand for coal should remain robust, as the EU increased its reliance on the solid fossil fuel for energy, due to the elevated gas/oil prices thus far. Despite the drastic moderation of -30.7% from the peak crude oil WTI prices of $118.50, the spot numbers of $82.05 at the time of writing still suggested a notable 36.7% increase from pre-pandemic levels of $60.

The EGLE management also projects that coal demand may grow by over 2% in 2023. This comes with the added benefit of increased ton-miles from further territories , such as the USA, Colombia, South Africa, Australia, and Indonesia, as the EU moves away from Russian coal.

Furthermore, the management also expects grain transport to grow by 4.3% in 2023, as Black Sea exports normalize and soybean production grows in the US and Brazil. This may further build upon the growth of the minor bulk shipments of 3.2% YoY in Q3'22.

In addition, Golden Ocean Group Limited ( GOGL ) similarly suggested that up to 75% of the global dry bulk fleet are non-compliant with IMO 2023 and, therefore, may require slower steaming to limit carbon emissions. These may further tighten the supply side of dry bulkers, potentially triggering improved TCE rates ahead, significantly aided by the 30Y record low order book, with deliveries only slated to start from 2024 onwards.

Therefore, it appears that EGLE's decision to stick with Supramax and Ultramax vessels between 50K to 65K deadweight tonnage [DWT] was highly prudent. According to management reports, their mid-sized fleet was much easier to dock at various ports globally, triggering higher returns for the company thus far.

Maybe this is why EGLE's FQ4'22 TCE rates had remained stellar with 70% owned days fixed at $25K, compared to FQ3'22 levels of $28.09K with 99.7% of fleet utilization rate, FQ4'21 levels of $29.4K at 99.9%, and FQ4'19 levels of $11.29K at 99%.

These numbers outperformed its peers indeed, such as GOGL's Panamax/ Ultramax rates of $23.56K in FQ3'22, Star Bulk Carriers Corp's ( SBLK ) Ultramax/ Supramax at $26.15K, Genco Shipping & Trading Limited's ( GNK ) Ultramax/Supramax at $25.89K at the same time.

So, Is EGLE Stock A Buy , Sell, or Hold?

EGLE 1Y Stock Price

While EGLE had recorded an excellent 29.6% recovery from the October 2022 bottom, it remains to be seen if the stock may break free from the previous November resistance levels of the mid $50s. For now, market analysts are bullishly projecting a $68.33 price target , suggesting an excellent 27.9% upside potential from current levels.

Since the EGLE management has proved highly competent thus far, we are not surprised by the optimism. By the latest quarter, it reported lower long-term debts of $296.63M, indicating an excellent reduction of -38.8% from FQ2'20 levels of $484.86M. At the same time, the company paid out $107.34M of dividends over the last twelve months, while similarly repurchasing $3.4M of shares, reducing its diluted shares outstanding to 16.2M.

Concurrently, EGLE has also persisted on its strategic vessel renewal and growth program since 2017, divesting 21 older Supramaxes at an average age of 18 years, while acquiring modern Ultramaxes at an average age of 8 years. This naturally triggered the company's improved fleet makeup, with 54 fleets at an average age of 9.5 years by January 2023, compared with the average dry bulk fleets globally at 11.4 years by mid-2022.

Notably, 89% were already scrubber fitted to reduce carbon emissions per DWT basis, improving the company's fuel spreads while similarly expanding its profitability ahead.

In addition, EGLE outlined a dividend allocation plan equating up to 30% of its net income . As such, based on the market consensus' projected net income of $105.13M in 2023 and $94.36M in 2024, we may be looking at annual dividends of $1.94 and $1.74, respectively, compared to 2022 levels of $274.02M and $8.05. These numbers suggest decent yields of up to 3.63% and 3.25% respectively, but against its TTM yield of 15.07%.

While long-term shareholders may be well-used to the cyclical shipping stocks, new investors may be puzzled by the varying dividend payouts. This is due to the fluctuating TCE rates tied to global macroeconomics, dry bulk demand, and Baltic Exchange Dry Index spot rates, amongst others. Therefore, this helps explain why EGLE's TCE rates have wildly fluctuated as discussed above.

As a result, existing investors need not fear a 'dividend cut' from the moderated TCE rates in our view, especially when the management has been very clear about its capital allocation strategy thus far.

Therefore, we are rating EGLE as a Buy. Naturally, the stock is only suitable for those with higher risk tolerance, since the industry remains highly cyclical with the macroeconomics unlikely to recover in the intermediate term. On the other hand, the company may outperform its peers, once market sentiments lift and dry bulk demand recovers speculatively by H2'23.

For further details see: