GNK - Genco Shipping: 12% Yield Low Debt Lower Breakeven Oversold

2023-03-26 09:15:00 ET

Summary

• Genco Shipping pays a variable quarterly dividend - its forward yield is 12.85%, and its trailing yield is over 16%.
• Management has paid off 62% of the debt load since 2021, making GNK one of the few companies with lower interest expenses in a rising rate environment.
• It looks very oversold and also looks undervalued on a forward P/E basis.

Looking for low-debt, high-yield dividend stocks?

You may want to check out Genco Shipping & Trading Limited ( GNK ), a drybulk shipowner. Genco's management has adopted a new value strategy over the past ~year, focusing on three elements - dividends, deleveraging, and growth.

The deleveraging move has cut down GNK's debt by 62%, subsequently reducing its daily vessel breakeven rate by 33%, giving it one of the lowest breakeven rates in its industry.

Company Profile:

Genco Shipping & Trading Limited is an international ship owning company. It transports iron ore, coal, grain, steel products and other drybulk cargoes along worldwide shipping routes. Its wholly owned modern fleet of dry cargo vessels consists of 27 Capesize, and 17 Ultramax/Supramax vessels that provide an essential link in international trade. (GNK site)

While most of GNK's fleet is on the spot market, they do have nine vessels which have charters at higher rates:

Earnings:

Time Charter Equivalent - TCE - rates fell again in Q4 '22, with GNK's fleet earning an average of $19.3K/day, vs. $23.6K/day in Q3 '22, and $35.2K/day in Q4 '21. However, GNK's Q4 '22 low breakeven rate of ~$7.3K/day provided a strong buffer.

Q4 2021 was the peak in TCE rates, which made for a very tough comp in Q4 '22, with double-digit declines in revenue, net income, EPS, and EBITDA.

A bright spot was a 9.6% decline in interest expense, a rarity these days, due to lower debt levels.

For full-year 2022, revenue was flattish, while net income and diluted EPS both rose ~13%. EBITDA was down ~10%, while interest expense improved by ~41%, due to debt paydowns. The share count was flat.

Industry Tailwinds:

The global dry bulk fleet has a record low orderbook, which, coupled with potential scrapping of older vessels, will limit fleet growth in the coming years.

Higher environmental regulations are resulting in longer times in drydocking for installation of energy saving devices, and this also may lead to increased scrapping of older vessels.

On the demand side, China's reopening and India's continued growth offer support to the drybulk trade, as does the recovery of Brazil's iron ore exports.

It's estimated that 8% of the global drybulk fleet is over 20-years-old, which implies potential scrapping. Meanwhile, there's only 5.7% in new vessels ordered for 2023-2024, and 1.2% for 2025, which should be supportive of rates.

Dividends:

GNK has declared five quarterly dividends, for a total of $3.24/share, based on management's new value strategy since Q4 2021:

Under management's new value system, dividends are calculated based upon cash flow distributable as dividends. Operating expenses, debt repayments, drydocking/upgrades, and a reserve are all deducted from net revenue, leaving an amount to be distributed as dividends.

In Q4 '22, distributable cash flow was $21.61M, which resulted in a $.50/share dividend. Management estimates that GNK's average TCE rate in Q1 '23 will be ~$14.2K, which is 26% lower than the Q4 '22 rate. With operating expenses up ~$.06/share, then the next dividend would be ~$.30/share.

GNK's recent dividend of $.50 works out to a forward yield of 12.85%, BUT, since its dividends are variable, that figure won't hold. This dividend was paid on 3/17/23. GNK's trailing yield is 16.51%.

The EPS/dividend payout ratio improved to 74.6% in Q4 '22, vs. 82% in Q3 '22, and averaged 69.65% in 2022:

Profitability and Leverage:

With Net Income and EBITDA running lower in Q4 '22, GNK's trailing Q4 2022 ROA, ROE, and EBITDA margin were all lower than Q1 '22 figures. Debt leverage continued to decline, while interest coverage improved, thanks to management continuing to voluntarily pay down debt in 2022. GNK's debt leverage remains much lower than the Marine Shipping industry averages.

Debt and Liquidity:

Another key part of management's value strategy is debt deleveraging - they paid down paid down $75 million of debt in 2022, and have paid down $278M of debt, 62% of their debt load, since January 2021. Great timing - while other companies are struggling with higher interest expenses from rising rates, GNK's interest expenses have continued to decline, even in this rising rate period.

As of 12/31/22, GNK had total liquidity of $277M, consisting of $58.14M of cash and ~$219M of revolver availability. GNK has no quarterly debt paydown obligations until 2026, but management has continued to pay down $8.75M per quarter.

Performance:

GNK has lagged its industry and the S&P 500 by a wide margin over the past month, falling ~21%. While it's still positive so far in 2023, its ~total one-year return has fallen from 7.67% in early December '22, to -16.82%.

At $15.57, GNK looks very oversold on its long-term stochastic chart:

Analysts' Targets:

Analysts' lowest price target for GNK has risen 33% since early December, from $15.00 to $20.00, with the average price target ~stable at $23.93. At its 3/24/23 intraday price of $15.57, GNK is 22% below the lowest price target, and ~40% below the average price target.

Valuations:

GNK looks undervalued on a forward P/E basis, with a 5.94X figure, vs. the industry average of 19.78X. Its P/Sales, P/Book, and EV/EBITDA are all a bit higher than industry averages, while its trailing yield is twice as high.

Parting Thoughts:

Looking ahead to Q2 '23, GNK has higher drydocking and upgrade costs than in Q1 '23, so it may need an uptick in TCE rates in Q2 to keep its dividend from going lower.

However, management has an ace up its sleeve: "We maintain flexibility to reduce the quarterly reserve to pay dividends subject to the development of freight rates for the remainder of the first quarter and our assessment of our liquidity and forward outlook. The company remains very well capitalized and we are beginning to see freight rates improve off of early year lows supporting our thesis of a drybulk market recovery." (Q4 call )

We like GNK's prospects for the long term - management has made the right moves. We rate GNK stock a long-term buy, but you may want to just nibble, until rates get another boost.

All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.

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