GOGL - Golden Ocean: Red Hot Iron Ore Demand Spurs Dry Bulk Recovery

2023-11-24 09:00:00 ET

Summary

• GOGL has benefited from its low cost break-even rates and recovering TCE rates for Capesize vessels, as the demand for iron ore grows in China.
• With the Baltic Dry Index already bottoming by early 2023 and recovering beyond pre-pandemic levels, the dry bulk industry's prospects may be brighter ahead.
• GOGL is still expected to generate positive profit margins through FY2025, naturally sustaining its robust shareholder returns through share repurchases and variable dividend payouts.
• Combined with the potential improvements in its balance sheet, we maintain our Buy rating.

We previously covered Golden Ocean Group Limited ( GOGL ) in July 2023, discussing its improving prospects attributed to the bottoming Baltic Dry Index by early 2023.

Combined with its fuel-efficient/ younger fleets benefitting from the IMO 2023 Carbon Intensity Rules, we had maintained our Buy rating for income-oriented investors with a deep understanding of the cyclical shipping industry and a tolerance for variable payouts.

In this article, GOGL has further demonstrated great cost optimizations, with the company likely to benefit from the rising spot prices for iron ores and recovering TCE rates.

Dry Bulk Supply

Combined with the dry bulk industry's inherent supply tightness and low order book, we maintain our buy rating on the stock.

The Dry Bulk Investment Thesis Has Improved Drastically, Thanks To The Robust Demand For Iron Ores

For now, GOGL reported a more than decent FQ3'23 earnings call, with total operating revenues of $221.66M ( +3.8% QoQ / -21.4% YoY ) and adj EBITDA of $78.9M (-1.8% QoQ/ -33.2% YoY).

Much of the profitability tailwinds are attributed to its normalized TCE rates for Capesize vessels at $18.17K (-4.7% QoQ/ -19.7% YoY) and Panamax/ Supramax vessels at $15.38K (-1.4% QoQ/ -34.7% YoY), resulting in an overall fleet TCE rates of $17.07K (-3.3% QoQ/ -25.8% YoY).

This is compared to the FY2019 averages of $18.02K (+9% YoY)/ $11.18K (-8.6% YoY)/ $16.77K (+1.45 YoY) and FY2021 peak of $33.33K (+155% YoY)/ $26.82K (+196.3% YoY)/ $27.58K (+104.9% YoY), respectively.

Most importantly, despite the higher inflationary pressures, volatile fuel prices, and elevated interest rate environment, GOGL's cash break-even rate remains stable at approximately $13.5K by FQ3'23, compared to $12.43K in FY2019.

This further contributes to the dry bulker's decent adj EBITDA margins of 35.6% (-2 points QoQ/ -6.3 YoY), compared to 40.8% in FY2019 (-11.1 points YoY).

The sustainable profitability has allowed GOGL to maintain its quarterly dividend payouts of $0.10 with a forward yield of 4.5% and $0.9M worth of share repurchases in the latest quarter.

These developments have been encouraging despite the macro headwinds indeed, especially since the dry bulker continues to guide excellent FQ4'23 TCE rates for Capesize at $23.04K (+26.8% QoQ/ +7.7% QoQ ) and Panamax at $17.27K (+12.2% QoQ/ -9% YoY).

Similarly, promising numbers have been guided for the FQ1'24 quarter, with TCE rates for Capesize at $21.7K (-5.8% QoQ/ +59.3% YoY ) and Panamax at $15.6K (-9.6% QoQ/ -6.1% YoY).

Baltic Dry Index

These numbers imply that GOGL is likely to remain profitable in the near term, thanks to its low cash break-even rate. In the long-term, things appear to be promising as well, as observed with the recovering Baltic Dry Index at $1.79K, up by +238.8% from the February 2023 bottom of $530 and by +32.5% from 2019 averages of $1.35K.

Recovering Iron Ore Spot Prices

Perhaps much of the tailwind is attributed to the new normal for iron ore prices at $129.55/dmtu at the time of writing, much improved compared to the 2019 averages of $87/dmtu.

The same has been reflected in the commodity's contracted rates in China to between $129.55/dmtu in November 2022 and $120.68/dmtu in August 2024, suggesting the dry bulker's bright prospects ahead.

This is because up to 77% of the global Capesize fleets are commonly used for iron ore transports, underlining why GOGL's Capesize TCE rates have been recovering on a QoQ and YoY basis.

Since Capesize comprises 62% of the company's owned fleets with an additional eight chartered Capesize vessels with profit-sharing arrangement, we believe that GOGL is well positioned to take advantage of the recovering spot prices for both the iron ore and Baltic Dry Index over the next few quarters.

In addition, we believe that the dry bulker's contracted future rates are not overly aggressive, with China's port-side iron ore inventory of 112.28M mt (+3.81M MoM/ -20.92M YoY) by November 16, 2023, bound for a restock.

Perhaps this is why commodity analysts already expect the country to import 102.2M mt in November 2023 (+2.8% MoM/ +3.3% YoY ), building upon the 975.84M mt imported YTD (+6.5% YoY).

As a result of the increased volumes and higher TCE rates ahead, we believe that GOGL's balance sheet may gradually improve from the $1.21B of net debt reported in FQ3'23 (+6.1% QoQ/ +30.1% YoY), generated by sustained share retirement to 199.76M (-1.01M QoQ/ -1.33 YoY) and ongoing fleet renewals.

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

GOGL Valuations

For now, GOGL is trading at a somewhat optimistic FWD EV/ EBITDA valuation of 10.91x, compared to its 1Y mean of 7.55x and 2Y pre-pandemic mean of 9.27x, though in line with the sector median of 10.98x.

The Consensus Forward Estimates

Perhaps, this is attributed to the optimistic consensus forward estimates, with GOGL expected to generate positive profit margins moving forward, thanks to the recovering dry bulk market, naturally sustaining its variable dividend payouts through FY2025.

GOGL 5Y Stock Price

For now, GOGL has rallied tremendously by +22.8% (+$1.64) from the November 2023 bottom, to retest its resistance level of $8.80s.

While the recent developments have been highly promising, we also believe that investors may want to monitor the situation for a little longer, since there may be some opportunistic traders looking for a quick profit with some selling pressure likely to occur as the record/ex-dividend date of December 06, 2023, passes.

As a result, while we may rate GOGL as a Buy, investors may want to add according to their dollar cost averages and risk appetite, especially since the stock may be corrected as it has been after the FQ2'23 ex-dividend date.

However, we maintain our cautious optimism that the dry bulker's dividend investment thesis remains intact over the next few quarters, thanks to the promising development in the global commodity market.

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