SBLK - Golden Ocean Is Showing Signs Of Recovery

2023-03-28 15:00:57 ET

Summary

• Investors need not look far to obtain hints of dry bulker recovery, given GOGL's higher TCE rates in FQ2'23.
• FQ1'23 may be temporarily painful, due to its lower contracted TCE rates and impact from rising inflationary pressures/ elevated interest rates.
• However, the dry bulker's profitability may potentially improve from H2'23 onwards, attributed to China's growing demand for iron ore and coal.
• As a result, we believe GOGL is still a buy here for its expanded forward dividend yield of 8.42%, compared to its 2021 average yield of 5.26%.

Why GOGL Is Still An Interesting Stock To Add Despite The Fair Valuation

GOGL 2Y P/E Valuations

Golden Ocean Group Limited ( GOGL ) is currently trading at NTM P/E of 8.68x, higher than its 2Y average of 6.48x and its dry bulk peers. It remains to be seen if its premium is warranted, given its lower projected EPS of $1.09 in FY2023/ $0.90 in FY2024 and normalized EPS CAGR of 22.4% between FY2019 and FY2024.

In comparison, Eagle Bulk Shipping ( EGLE ) is expected to record improved FY2024 EPS of $6.42/ normalized EPS CAGR of 35.5%, Star Bulk Carriers ( SBLK ) at $3.89/ 71.8%, and Genco Shipping & Trading Limited ( GNK ) at $3.26/ 44.3% at the same time.

Perhaps some of the optimism is attributed to GOGL's much younger fleet age of 6 years and average fleet rating of B, compared to EGLE at 9.1 years , SBLK at 10.9 years , and GNK at 11 years . This is on top of the global dry bulk average of over 11 years.

The modern fuel-efficient fleet strategy has helped allow GOGL to command a premium freight rate of up to 139% compared to the standard Baltic vessels, attributed to the increasing compliance threshold for IMO 2023 from 2024 onwards. This is on top of the scrubber premiums commanded by 34 ( +47.8% YoY ) of 99 of its vessels as of March 16, 2023.

In addition, the 30Y low order book suggests stable fleet supply, attributed to the lack of shipyard capacity through 2026. Combined with the growing older tonnage of over 21 years ( near scrapping age ) and sustained scrapping of dry bulkers over the past two years, we reckon there are tailwinds for improved TCE rates in the intermediate term.

GOGL had already hinted at the potential recovery of dry bulk demand from FQ2'23 onwards, attributed to the recovery in its TCE rates. It reported 19% of booked Capesize available days at $21.1K and 14% of Panamax at $17.9K, suggesting a notable QoQ expansion by +60.4% and +20.1% from FQ1'23 booking of $13.15K and $14.9K, respectively.

5Y Baltic Dry Index

It is also important to highlight that its FQ2'23 TCE rates are nearer to its FQ4'22 levels and much improved than its FQ2'19 levels of $11.62K, mirroring the Baltic Dry Index thus far. However, the number is naturally moderated from FQ2'22 levels of $29.43K and FQ2'21 of $24.92K, as highlighted by Ulrik Andersen, CEO of GOGL:

We are not out of the woods yet ... but we are starting to see signs of recovery of the dry markets in the second half of the year is realistic. ( Seeking Alpha )

The recovery in GOGL's FQ2'23 TCE rates was likely attributed to the promising recovery in the Chinese property market, given the surge in new home sales by +15% YoY to $66.5B in February 2023. This might also be significantly aided by the increasing bauxite export from West Africa and growing coal demand from China , since Capesize transported up to 60% of bauxite and 77% of iron ores globally.

With the International Monetary Fund projecting a decent global GDP growth of up to 2.9% (+0.2 points from previous estimate), dry bulk demand might pick up sooner than expected, boosted by China's GDP target of 5% in 2023. The Fed also recently implied an earlier policy firming at a projected terminal rate of 5.25% , compared to the previous estimate of up to 6% .

Therefore, assuming a similar cadence in TCE rates for H2'23, we believe we may see GOGL record improved FY2023 revenues of $850M and EPS of $1.20, with a potential dividend payout of up to $0.86 based on its FY2022 payout ratio of 70%.

In the meantime, GOGL has been hit by the rising inflationary pressures , with its OpEx ex-dry dock costs expanding by +1.5% QoQ and G&A costs by +4.1% QoQ in the latest quarter, with things likely to rise ahead. The elevated interest rate environment had also contributed to its higher interest expenses by +22.2% QoQ, given the floating rate in its long-term debts of $1.02B in the latest quarter.

These factors triggered its higher guidance of cash breakeven rate of $14.3K for Capesize/ Newcastlemax fleet and $10.5K for Kamsarmax/ Panamax fleet for FY2023, compared to $12.8K and $8.6K in FY2022, respectively.

These may pose further headwinds to GOGL's profitability in FQ1'23, due to the relatively lower contracted rates then. Therefore, investors may need to temper their expectations for the upcoming quarter's earnings and dividends, in our view.

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

GOGL 1Y Stock Price

Nonetheless, with the GOGL stock trading around what we think is somewhat fair value, near to its 50/ 100/ 200 day-moving averages, we reckon income investors may still add here. Based on its annualized FQ4'22 dividends , we may be looking at an excellent forward yield of 8.42%, compared to its 2021 average yield of 5.26% and 2019 yield of 6.56%.

In the meantime, we must highlight that the macroeconomic outlook remains uncertain, with China's iron-ore demand likely to kick in only in H2'23, if not Q4'23, due to the longer lead time for its property market recovery. Investors may also need to calibrate their expectations given the normalizing global supply chain, with hyper-pandemic era TCE rates/ dividends unlikely to occur again.

As a result, the GOGL stock is likely only suitable for those who understand the cyclical nature of commodities and the resultant fluctuations in dry bulk freights rates and variable dividends.

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