GNK - Genco: Full Steam Ahead - Dividend Yield Of 7.55% In 2023

2023-05-10 10:00:42 ET

Summary

• Genco remains a stellar cyclical dry bulk stock to own in a well-diversified portfolio, especially given the projected forward dividend yield of 7.55% in 2023.
• Combined with the sustained balance sheet improvement and recovering FQ2'23 TCE rates, the company may still report exemplary profit margins ahead, aided by the operating efficiency thus far.
• H2'23 may also bring forth China's increased iron ore imports, due to the low inventory levels, triggering expanded dry bulk voyage and improved TCE rates.
• Combined with the fact that the stock is trading well below its 50/ 100/ 200-day moving averages, we are upgrading our rating on GNK as a Buy here.

The Dry Bulk Investment Thesis Remains Robust

In our opinion, Genco Shipping & Trading Limited ( GNK ) has posted an exemplary FQ1'23 earnings call, contrary to Mr. Market's pessimism. It records voyage revenues of $94.39M ( -25.6% QoQ / -30.6% YoY ) and GAAP EPS of $0.06 (-91% QoQ/ -93.8% YoY) at an average TCE rate of $13.94K (-27.8% QoQ/ -42.1% YoY).

Its TCE rates remain improved, with Capesize rates of $15.92K and the Ultramax/Supramax average rates of $12.44K in the latest quarter, compared to the average spot rates of $14.50K and $12.56K between January and March 2023, based on data from the Alibra Shipping Limited .

GNK's fleet utilization is improving as well, at an average of 96.6% (-0.7 points QoQ/ +2.2 YoY). This naturally increases its operating efficiency with moderating daily vessel operating expenses of $6.16K (+19.3% QoQ/ -9.8% YoY) in FQ1'23, against the historical expenses of $6.83K in FQ1'22 ( +18.5% QoQ / +39.9% YoY), significantly aided by the moderating fuel prices by -20% QoQ.

Particularly, part of our optimism is derived from its FQ2'23 TCE rates of $16.67K (+19.5% QoQ/ -42% YoY ) for 68% of its owned fleet available days, with Capesize rates of $19.67K (+23.5% QoQ/ -27.22% YoY) and Ultramax/Supramax average rates of $14.34K (+15.2% QoQ/ -51.5% YoY).

These numbers are naturally improved against the April 2023 Capesize spot rates of $18.5K, though underperforming from the Ultramax/Supramax average rates of $16.25K. Since GNK owns 27 of the latter, we may see a notable impact on its top and bottom lines, though likely only for a short term, since most of its contract deployments are weighted towards short-term fixtures .

In addition, the dry-bulker continues to optimize its cash flow breakeven rate to $9.4K for FQ2'23 (-1% QoQ/ +15.4% YoY/ -21% from FQ2'21 levels ), despite the rising inflationary pressures. This is on top of the voluntary deleveraging of its balance sheet to $156.59M by the latest quarter (-5% QoQ/ -17.5% YoY), despite none maturing through August 2026.

GNK Dividend Policy & Author's FQ2'23 Projections

Based on GNK's dividend policy and the improved FQ2'23 TCE rates, we may also see a moderate increase in its payout to $0.18 by the next quarter (+20% QoQ/ -0.64% YoY). This is assuming that the dry bulk rebound witnessed in March/ April/ May 2023 is sustained.

While Star Bulk Carriers Corp (NASDAQ: SBLK ) and Golden Ocean Group (NASDAQ: GOGL ) have yet to report their Q1'23 earnings, the same cadence has been reported by Eagle Bulk Shipping (NYSE: EGLE ), with an exemplary FQ2'23 TCE rate of $16.03K (+24.1% QoQ/ -46.9% YoY ). This is on top of GOGL's Q2'23 Capesize rate of $21.1K (+60.4% QoQ) and Panamax rate of $17.9K (+20.1% QoQ) reported in the previous earnings call.

Based on the market's latest 1Y Capesize charter rates of $18.75K and Ultramax/Supramax rates of $16.62K on May 03, 2023, we may see GNK's rates improve through H2'23 as well, significantly aided by the lower drydocking schedule through 2023.

This may potentially lift its average H2'23 rates to $17.44K, expanding its quarterly top-line to $67M, cash flow distribution to $10M, and consequently, dividends per share to $0.23, if not more.

Therefore, investors who add GNK here may be looking at an expanded forward dividend yield of 7.55% in 2023, against its 2021 average of 1.29%, 2022 average of 9.5%, and sector median of 1.63%, naturally aided by the depressed stock prices.

Given the relatively tighter supply through 2024 triggering the improved TCE rates compared to its 2019 averages of $10.22K , we suppose the dry bulker may still sustain its profit margins over the next few quarters. Combined with the 24Y low order book , this cadence may allow a consistent dividend payout and strategic deleveraging moving forward.

In the long term (likely by 2027), once GNK retires most of its debts through the strategic $35M in annual principal repayments, we may see an increase in the cash flow returned to shareholders, either through share repurchase programs or dividend payouts. Otherwise, the dry bulker may also renew its aging fleet at an average of 15.2 years then, further supporting its growth while complying with the IMO 2023.

Meanwhile, the dry bulker may also benefit from China's iron ore restocking over the next few months, with the country's inventory already declining to 127.38K Tonnes by May 04, 2023, the lowest it has been YTD. While the country may be capping its steel production to 2022 levels, the global dry bulk demand may be well-balanced by Brazil's and Australia's peak iron ore export in H2'23, with China still likely to consume up to 1.08B Tonnes for the year .

GNK 1Y Stock Price

For now, GNK has already breached its previous April 2023 support and likely found a new bottom at the recent May 2023 levels of $13.10. Combined with the fact that it is trading well below its 50/ 100/ 200-day moving averages, we are upgrading our rating on the stock as a Buy here. Do not miss this dip.

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