RIO - Golden Ocean: Still At The Load-Up Zone - Massive Tailwinds Through 2024

Summary

• While the Baltic Dry Index has plunged tragically, we are confident that TCE rates may recover moderately, attributed to the 30Y record low order book and slower steaming in 2023.
• Peak recessionary fears may contribute to lower rates and volume in Q1'23, but numbers may rebound from Q2 onwards once China's economic activity returns.
• Assuming a slowing inflation rate by H1'23, market sentiments may also lift, boosting the recovery of commodity prices.
• GOGL's stellar dividend yield of 13.8% should not be ignored.

We have previously covered Golden Ocean Group Limited ( GOGL ) here as a post-FQ2'22-earnings article in September 2022. The company had previously reported stellar performance, attributed to the elevated TCE rates, which have ballooned by 50% for the Capesize vessels and 47.5% for Panamax vessels, compared to pre-pandemic levels. Many investors were concerned about the normalization of its TCE rates affecting its stellar dividend yields, due to the worsening macroeconomic outlook then.

For this article, we will be focusing on the IMO 2023, triggering moderate tailwinds to the shipping fleets from lower steaming regulations. The 30Y low-order book may also temper some of the recessionary headwinds, due to the limited availability of efficient fleets. Additionally, the rapid reopening cadence in China may boost demand for commodities, especially Iron Ore, prompting the recovery of TCE rates.

The Dry-Bulk Investment Thesis Remains Robust Through 2024

GOGL has been overly beaten with a -51.94% plunge from its peak stock price of $16.46. However, things may be improving moving forward, despite the short-term market volatility.

IMO 2023 Maritime Decarbonization

Firstly, the International Maritime Organization [IMO] has introduced decarbonization regulations that will take effect from 2023 onwards to improve energy efficiency and modernize shipping fleets. The regulation also aims to limit carbon emissions by -40% by 2030 and -70% by 2050.

These have resulted in increased off-hires days for many companies, such as GOGL at 753 days and Star Bulk Carriers ( SBLK ) at 1.26K days over the past nine months, with the former recording elevated dry-docking expenses of $11.7M (+18.2% YoY) and the latter $29M (+20.9% YoY) at the same time. These are mainly attributed to the companies' continuous upgrading and maintenance efforts to achieve improved Carbon Intensity Indicator [CII] ratings, with GOGL reporting an average fleet rating of B and a fleet age of 6 years thus far. However, the same cannot be said of many other companies, with the latter suggesting that up to 75% of the global aging fleet as non-compliant with IMO 2023 and, therefore, requiring slow steaming.

30Y Low Order Book For Global Fleet

Notably, the supply of efficient dry bulk fleets will still be limited with the 30Y record low order book . Due to the rising inflationary pressure across raw materials, labor, and energy prices, dry bulk shipbuilding costs have also risen by nearly 33% over the past two years. This is the steepest increase in twenty years, suggesting minimal fleet growth over the next few years, while most fleets continue aging. As a result, the average age of dry bulk fleets has risen to 11.4 years by mid-2022 , which further worsened the supply side due to slower steaming regulations.

In addition, many shipping companies also choose to slow down their forward investments due to falling TCE rates, complex fuel regulations, and uncertain macroeconomic outlooks. John Hatley, GM at Finnish marine technology company Wartsila, said:

We have a clash between an industry that is very long-term investment-oriented and a very fast pace of change... They ( ship owners ) would rather wait for maybe the whole life of the ship of 20 years, but that's even more uncertain now because of the pace of change. ( Reuters )

These may trigger notable tailwinds to GOGL indeed, due to its younger fleet age, improved efficiency, and optimized sailing speed. Furthermore, the company diligently divested five aging non-core fleets in 2022, while putting in new orders for elongated 2024/2025 deliveries, due to the reduced shipyard capacity. The sale has also aided in another -$20M deleveraging to $1.06B of long-term debts in the last quarter. These points to the management's highly competent forward investment, despite the uncertain short-term outlook.

5Y Baltic Dry Index

While the Baltic Dry Index has also tragically plunged below the 2019 average, we are not overly concerned now, since GOGL guided decent FQ4'22 TCE rates of $23.1K for 75% of Capesize available days and $19.1K for 78% of Panamax. These numbers suggest a notable plunge of -24.6% and -30.7% from pandemic heights, however, an expansion of 13% and 2.2% from pre-pandemic levels, respectively. The numbers for FQ1'23 may seem less promising at $21.3K for 4% of Capesize and $21.1K for 21% of Panamax. However, these are primarily attributed to the growing recessionary fears, instead of fundamental global demand.

We are confident that these rates will recover moderately, due to China's rapid reopening cadence. Many commodity stocks such as BHP Group Limited ( BHP ), Rio Tinto Group ( RIO ), and Freeport-McMoRan ( FCX ) have rallied upon the country's relaxing of Zero Covid Policy. Despite the continuous lockdown in FY2021, the country accounted for 43.07% of global iron-ore demand at 1.12B tonnes and 53.19% of global copper demand at 12.5M tonnes .

While China's property market suffered in 2022 , things may quickly turnabout due to the regulator's new supportive measures moving forward. The country will be rolling out a 16-point plan , including new financing policies toward debt-ridden developers, loosening down-payment requirements for new homebuyers, and easing previous cooling-down measures, among others. For example, the China Securities Regulatory Commission has already announced that qualified property developers may secure back-door financing via other listed companies, reversing a decade-old policy.

While these strategies may not directly trigger the immediate recovery of the property market in the country, early signs already prove optimistic enough for the consequent recovery of commodity and dry-bulk rates ahead. Several government stimulus packages, including 300B Yuan ($43B) in infrastructure investments and 1T Yuan ($140B) in semiconductors, may further contribute to this cadence indeed. John Woods, chief investment officer from Credit Suisse, said:

Authorities were urged to support the fundamental demand for housing and ‘reasonable financing demands’ of developers. In the coming months, we expect China to further ease property policies, which could potentially boost economic growth and corporate earnings in turn. ( South China Morning Post )

Therefore, it is not surprising that market analysts are bullishly predicting that iron ore prices may recover to $150/ton by H1'23 , suggesting an excellent 35.74% upside potential, similar to peak June 2022 levels. It is important to highlight that 98% of all iron ores produced are used to make steel, of which over 50% are attributed to the global housing and construction sector . In addition, up to 77% of Capesize fleets are used to transport iron ores over the past five years, suggesting the close linkage in spot prices.

As a result, the increased demand and prices for iron ore may also trigger the recovery of TCE rates, more than doubling the Baltic Exchange Dry Index to $2.5K, triggering tailwinds to GOGL's improved financial performance through 2024.

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

GOGL 1Y P/E Valuations

GOGL is currently trading at an NTM P/E of 7.05x, higher than the FY2022 mean of 5.92x, though slightly lower than the FY2021 mean of 7.31x. Based on its projected FY2024 EPS of $1.59 and current P/E valuations, we are looking at an aggressive price target of $11.21, suggesting an excellent 39.6% upside potential from current levels. Based on the consensus estimates' projected dividend of $1.11 by FY2024, we are also looking at a stellar forward yield of 13.8% then, compared to its 4Y average of 10.62% and sector median of 1.69%.

GOGL 1Y Stock Price

Interestingly, this optimism is not reflected in many dry bulk stock prices, with GOGL, SBLK, and Genco Shipping & Trading Ltd ( GNK ) still trading sideways after the drastic correction since mid-2022. Eagle Bulk Shipping Inc. ( EGLE ) would be the notable exception, rising from the ashes by 5.08% over the past year against the S&P 500 Index's decline of -19.62% at the same time.

While we agree that the shipping industry, particularly dry bulk, is highly cyclical in nature and, therefore, volatile, no one can refute that GOGL's dividend yields look stellar for short-term trades. The combination of record low order books and slower steaming from 2023 onwards suggests that its prospects remain robust over the next few quarters, despite the 70% chance of a recession in 2023 . China's economic activity may also rebound from Q2'23 onwards after the stabilization of COVID cases , with market analysts projecting a GDP of 4.7% in 2023 , against 2022 numbers of 3% and 2019's 6% .

With the GOGL stock already trading close to its previous support level of $7s, the risk-reward ratio looks quite attractive here. Therefore, we continue to rate the stock as a Buy, with the caveat that investors should stay on their toes and monitor the market closely.

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