GOGL - Golden Ocean Group: Industry Leader Trading At Discounted Valuation - Buy

2023-09-17 08:53:35 ET

Summary

• Leading dry bulk shipper Golden Ocean Group reported sequentially improved Q2 results and maintained its quarterly dividend at $0.10 per share.
• Record-low port congestion has put some renewed pressure on charter rates in August. Consequently, Q3 results are likely to be down from Q2 levels.
• However, the company should be able to remain profitable and generate sufficient cash flow to keep the dividend at current levels.
• On the conference call, management remained upbeat on the company's near- and long-term prospects.
• Investors with a similarly upbeat view on the dry bulk shipping markets should consider an investment in the company's shares at a rare discount to net asset value.

----Note:

I have covered Golden Ocean Group Limited ( GOGL ) previously, so investors should view this as an update to my earlier article on the company.

Two weeks ago, leading dry bulk shipper Golden Ocean Group or "Golden Ocean" reported sequentially improved second quarter results, with the company returning to profitability following a seasonally weak first quarter.

Introducing Golden Ocean

The company commands a modern fleet of 97 dry bulk carriers with an average age of 6.9 years, industry-leading cash breakeven rates and clear focus on the larger vessel classes (Capesize and Panamax).

Golden Ocean is controlled by Norwegian-born shipping magnate John Fredriksen who beneficially owns almost 40% of outstanding common shares.

The company is dual-listed in Oslo and New York and, with a market capitalization of $1.54 billion, among the most valuable dry bulk shipping companies in the world.

Dividend Focus

Besides keeping a relatively young fleet profile, management's ongoing focus has been on returning capital to shareholders, with an aggregate $4.35 in cash dividends per common share paid since the beginning of 2021.

Q2 Earnings Discussion

Golden Ocean's average daily time charter equivalent ("TCE") rate of $17,664 was up by almost 20% on quarter-over-quarter basis while outperforming benchmark indices by a wide margin despite less than half of the existing fleet being outfitted with exhaust gas cleaning systems or "scrubbers".

On a segment basis, average daily TCE rates were as follows:

• Capesize Segment: $19,100
• Panamax Segment: $15,600

Golden Ocean reported Adjusted EBITDA of $80.4 million and generated $45.5 million in cash from operating activities.

The company declared a quarterly cash dividend of $0.10 which is payable on September 19 to shareholders of record on September 11, 2023.

Please note that the company does not have a stated dividend policy, with distributions mostly dependent on available cash and market conditions.

In addition, Golden Ocean repurchased 0.92 million shares at an average price of $7.54 per share.

Near-Term Outlook

Unfortunately, dry bulk charter market conditions have been pressured by record-low port congestion levels, which have resulted in an effective increase of available supply.

As a result, the company's preliminary average daily TCE rates for Q3 are down from the second quarter:

However, the Baltic Dry Bulk Index ("BDI") has rallied by almost 30% since the company's Q2 report, mostly due to an outsized move in the Baltic Capesize Index ("BCI").

As a result, I would expect the company's final Q3 TCE rates to show some improvement from the preliminary numbers provided in the slide above.

That said, with 79% of Capesize days and a whopping 98% of Panamax days already having been fixed at the end of last month, any improvement is likely to be limited.

Considering the rather weak third quarter forecast, I would expect the company to keep the dividend at $0.10 per share.

Despite the weaker-than-anticipated charter rate environment, management remained optimistic on the industry's near- and long-term outlook:

Golden Ocean has continued to deliver solid performance against a very volatile macroeconomic backdrop. Despite headline risks related to inflation and interest rates, dry bulk demand remains fundamentally strong, driven by shifting trade routes, the need to secure the energy supply chain, and the increased significance of emerging trades, including the West African Bauxite trade. The forecast for fleet supply growth also remains favorable with the orderbook near historical lows. Combined, these factors support our optimistic near and long-term outlook, while closely monitoring the developments in the Chinese economy. Golden Ocean has one of the world’s youngest and most fuel-efficient fleets and very low cash breakeven levels. This allows the Company to remain profitable when markets are weaker and produce outsized cash flows when markets are strong. It is also a key enabler of our capital allocation policy, which has allowed the company to consistently distribute dividends to its shareholders and also repurchase shares under its repurchase program.

On the conference call , management was particularly upbeat on increasing iron ore and bauxite shipment volumes to China for the remainder of the year and beyond.

Valuation

Valuation-wise, shares are currently trading at an estimated 17% discount to net asset value ("NAV") which has historically been on the high side for a leading industry name with strong focus on shareholder value like Golden Ocean.

In sum, there's a lot to like about Golden Ocean Group:

• industry-leading scale
• modern fleet with low cash flow break even rates
• strong focus on shareholder value
• generous dividend policy
• lack of corporate governance issues

Consequently, investors with an upbeat view on the dry bulk shipping markets should consider an investment in the company's shares at a rare discount to net asset value.

Bottom Line

Golden Ocean Group reported sequentially improved second quarter results while keeping its quarterly dividend at $0.10 per share.

While market conditions have been challenging for the majority of the current quarter, I would expect the company to remain profitable and leave the distribution unchanged.

Given the company's industry leading scale and strong focus on shareholder value, investors with an upbeat view on the dry bulk shipping markets should consider an investment in the company's shares at a rare discount to net asset value.

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