GOGL - Golden Ocean Group Stock Is A Solid Buy For The Long Term

2023-06-07 06:11:42 ET

Summary

• Golden Ocean Group may still have long-term growth potential despite the slower-than-expected impact of China's reopening on the dry bulk carrier industry.
• The company's financials remain strong, and a recent UBS survey shows CFOs in China are optimistic about business conditions and capital expenditure in H2 2023.
• GOGL's focus on fleet renewal and commitment to dividends make it a favorable investment for long-term investors, with the potential for a 57% increase in share price over the next 2 years.

I wrote about Golden Ocean Group Ltd. ( GOGL ) stock for the 1st and only time on December 17, 2022, during a period when there was extensive media coverage about the rapid opening of the Chinese economy and the positive sentiment surrounding it. At the time I thought that the market's downward expectations for high-yield dry bulkers had to be adjusted as the reopening of China positively impacts the industry. However, as it turned out after some time, the opening of China didn't bring the expected response to the demand for commodities, and dry bulk carriers like GOGL didn't get a tasteful tailwind - the cycle continued to reverse:

China's strong official data showing 9% annualized GDP growth in Q1 2023 was overshadowed by a notable slowdown in April and concerns about key sectors like property and exports - the main areas of interest for dry bulkers. This has raised doubts about the sustainability of the recovery and affected market sentiment.

However, I think GOGL still has some growth potential in the longer term, as the financials look strong and the macro data for next year suggest an upward trend. Let me explain.

Golden Group's Recovery Prospects

During the Q1 FY23, Golden Ocean recorded an adjusted EBITDA of $55 million, resulting in a net loss of $9 million or -$0.04 per share. Average net TCE rates for Capesizes were $13,600 per day, and for Panamaxes were $16,600 per day, both surpassing benchmark indices, according to the words of CEO Ulrik Andersen during the latest earnings call [the fuel-efficient fleet and fixed-paying contracts contributed to these earnings]. Because of higher OPEX [ship operating, charter hire expenses, an impairment loss of vessels], the EBIT of ~$9 million was 88% lower YoY - hence the sharp EPS fall:

Turning to the cash flow statement, we see that the company experienced a decrease in cash of $14.9 million, positive cash flow from operations of $76.5 million [-38% YoY], and net refinancing proceeds of approximately $15 million. The balance sheet shows cash and cash equivalents of $123.2 million [ restricted cash inclusive], debt and finance lease liabilities totaling $1.3 billion [+6.2% YoY], and book equity of $1.9 billion [-2.6% YoY]. Despite the negative trends that we see in various forms of financial reporting, the situation is far from critical. Debt to equity hasn't increased very much, and there is still sufficient liquidity on the balance sheet:

The CEO explained that in the market developments of Q1, the Cape market faced pressure due to seasonal and economic slowdowns but started to recover as the Chinese economy responded to stimulus efforts, leading to increased demand for iron ore and coal. Golden Ocean achieved premium earnings, with Capes making close to $14,000 per day. The Panamax segment experienced typical Q1 seasonality, with rates under pressure until post-Chinese New Year activity.

The outlook for the global economy remains uncertain, but the highly positive supply situation, low fleet growth in the market, and the commencement of IMO 2023 regulations support a sustainable and healthy earnings outlook. Short-term prospects for Capesizes are more promising, given their high correlation with China, and GOGL is trying to focus on this side.

Here I want to share with you the results of a recent UBS survey [May 31, 2023 - proprietary source] that looks at the potential dynamics of the Chinese economy. UBS held a survey among China CFOs [between March and April 2023] and found improving business conditions in H1 2023, with CFOs optimistic about orders, revenue, and net profits as China reopens. Around 63% of respondents plan to increase capital expenditure in H2 2023 , focusing on equipment/machinery and R&D, particularly in sectors like healthcare, tech & hardware, consumer electronics, utilities, and semiconductors. But CFOs from the real estate sector are also going to spend quite much as I see it:

CFOs reported relaxed credit conditions and lower costs in H1, but anticipate a slight rise in credit costs, social security contributions, and environmental spending in H2. The intention to shift supply chains out of China has eased, while concerns about US-China relations persist. In general, these CFOs' expectations seem to me to be favorable for the continuation of China's reopening. Yes, it may not happen as quickly as expected, but we probably haven't seen the full impact yet and, accordingly, the role it plays for dry bulk carriers.

Looking ahead, GOGL's rate guidance for Q2 shows secured rates of $20,000 per day for Cape days and $14,600 per day for Panamax days.

The company took delivery of the first of 10 Kamsarmaxes new buildings, acquired six new Kamsarmax vessels, and entered into an agreement to sell its two oldest Capesize vessels. Fleet renewal appears to be a long-term benefit, as the imbalance between supply and demand will remain for years to come.

Dividends remain a top priority for the company's capital allocation. GOGL announced a dividend of $0.10 per share for Q1, reflecting confidence in the market.

Although analysts have sharply lowered their EPS forecasts for the coming quarters in the recent 3 months, the market doesn't expect the company to make a loss in the next three years.

That is why the company's dividend policy is favorable for long-term investors - the forwarding dividend yield of 5.24% appears to be stable while having some upside potential through the end of FY 2024.

The implied FY25 P/E of just 4.46x is too low, in my view, given the expected utilization growth and limited vessel supply - the upcoming improvement in market conditions should give above-average multiples, not contraction. So at the projected $1.72 per share in earnings in FY25, GOGL should trade at ~$12 per share in 2 years, which is ~57% higher compared to the latest closing price. And that's not including dividends along the way.

Concluding Thoughts

I'm aware that my buy recommendation involves several risks that need to be considered. First, GOGL's earnings will be under pressure as long as dry bulk freight rates remain as low as they're now, further inflating the debt balance and hurting earnings per share. Second, the general economic slowdown is taking its toll, and if it continues, Golden Ocean could lose even more of its market value in the coming months. Third, as the dividend yield adjusts to the changing financials, some income-seeking investors may dump their shares on the market, leading to oversupply in the stock as illiquid as GOGL.

Despite these risks, I believe that the GOGL share is a good investment in the long term - provided that the currently sharply lowered EPS forecasts come true, the share has enormous upside potential at a relatively moderate P/E ratio of 7x, not counting the forwarding dividends.

So I reiterate my previous Buy rating for GOGL.

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