SFL - SFL Corporation: 10% Yield On Long-Term Charters

2023-03-17 09:15:00 ET

Summary

• SFL Corporation yields 10.42%, with a solid 55% dividend payout ratio.
• Its diverse fleet's charters run from 5 to 9 years.
• The company has an expanding blue-chip customer base.

We've been a steady fan over the years of high yield stocks with long term charters and contracts. They usually give a company visibility into the future, offering support for their dividends.

SFL Corporation Ltd. ( SFL ) is a diversified shipping company with a business model based upon long term charters.

Company Profile:

SFL Corporation Ltd., a maritime and offshore asset owning and chartering company, engages in the ownership, operation, and chartering out of vessels and offshore related assets on medium and long-term charters. The company is also involved in the charter, purchase, and sale of assets.

It operates in various sectors of the maritime, and shipping and offshore industries, including oil, chemical, oil product, container, and car transportation, as well as dry bulk shipments and drilling rigs. SFL Corporation Ltd. was incorporated in 2003, and is based in Hamilton, Bermuda.

Fleet:

SFL's fixed rate backlog has increased significantly over the last year and is ~$3.6B from owned and managed vessels. The average charter tenor ranges from 4.9 years for its 17 tankers, to 9.2 years for its 7 car carriers. SFL's 36 container vessels, its biggest segment, has an average tenor of 6.8 years.

SFL owns 2 harsh environment drilling rigs, the 2014 built jack-up rig Linus and 2008 built semi-submersible rig Hercules. The Linus is currently under a long term contract with ConocoPhillips Skandinavia AS until 2028. During the fourth quarter, the rig generated ~$18.6M in contract revenues

Management recently signed the Hercules to a ~4.5 months contract with ExxonMobil Canada Ltd. The deployment is expected to start in Q2 '23.

During Q4 '22, SFL took delivery of 4 vessels with long-term charters, including the final 2 out of 4 Suezmax tankers chartered to Koch Industries, a newbuild container vessel chartered to Maersk Line, and a car carrier chartered to Eukor. These 4 vessels added $260M million to SFL's fixed backlog, in addition to profit share optionality on fuel saving.

Its customer base is populated by blue chip companies, such as Exxon Mobil, Conoco Phillips, Volkswagen, Maersk and Hapag-Lloyd.

Container vessels account for 52% of revenue, far above the remaining segments - the tanker vessels account for 15%; car carriers and energy vessels each account for 13%, and dry bulk accounts for 7%. In Q4 '22, 93% of charter revenues from its shipping assets came from time charter contracts and only 7% from bareboat or dry lease.

Earnings:

Q4 '22 revenue rose 18.5%, aided by a full operating quarter from the Linus deep sea rig. SFL received a $10.5M catch up payment on the Linus from Seadrill, and $6.5M of profit sharing from scrubber fuel savings. Its profit sharing deals can add quite a bit to the bottom line - they added ~$28M in full year 2022.

Like many other companies, Interest expense has risen for SFL.

With more assets to finance, and higher rates, interest expense was up 25% in Q4 '22, which brought Net Income down slightly, by -2.81%, vs. Q4 '21. Interest expense rose ~22% in full year 2022.

Adjusted EBITDA was up 5% in Q4 '22, outpaced by Interest expense growth, decreasing EBITDA/Interest coverage from 4.36X to 3.66X.

2022 was a big year for SFL - management added $1.5B to the backlog, with several new investment grade customers.

30.6% topline growth led to 23% growth in Net Income, and 18.5% EPS growth, with Adjusted EBITDA rising ~28%, and EBITDA/Interest coverage rising to 4.05X.

SFL had an EBITDA margin of 65% in Q4 '22.

Dividends:

SFL has paid $2.5B in cumulative dividends since its inception, with 76 straight quarterly payouts. Management raised the dividend by $0.01 in Q1 '23. With this week's pullback bringing the share price down to $9.21 as of the 3/15/23 close, SFL's forward yield is 10.42%.

It should go ex-dividend next on ~6/14/23, with a ~6/29/23 pay date. While SFL's 5-year average dividend growth rate is -3.39%, management did raise dividends/share by ~40% in 2022, from $.63 to $.88.

Dividend coverage was ample in 2022, even with the higher payouts, with an average EPS/Dividend payout ratio of 55.35% for the year. Since EPS includes a great deal of non-cash Depreciation, adding that back to EPS gives you a much lower EBDA/Dividend payout ratio of 28.51% for 2022:

Profitability & Leverage:

You may be surprised to learn that the overall marine shipping industry has a low debt profile, and very high EBITDA/Interest coverage. While it's a leading player in the industry, SFL's management uses higher than average leverage to manage its fleet. ROA and ROE were lower than the industry average in 2022, while EBITDA margin was higher.

Debt & Liquidity:

SFL has ample access to the capital markets:

SFL raised a new $150M sustainability-linked unsecured bond loan in January 2023. The proceeds will be used to refinance bond loans maturing in 2023 and for working capital purposes.

In Q1 '23, management also bought back notes with nominal amounts of ~$70M, and currently, there's ~$105M remaining on a convertible note due in May 2023, and ~$40M in a Norwegian kroner-denominated bond due in September 2023.

In Q4 '22, SFL entered into long-term financing arrangements for 2 4,000 TEU container vessels in the Japanese leasing market. The combined amount was $240M, with a 7-year term. SFL also secured long-term financing facilities of $145M for 4 newly acquired Suezmax vessels.

As of 12/31/2022, SFL had ~$188M in cash and cash equivalents. It also had investments in equity securities of $7M and unencumbered vessels for a combined value of ~$180 million at the end of the fourth quarter. 70% of SFL's financing is fixed rate or swap to fixed by financial hedging instruments.

Management has a strategy of selling older vessels and reinvesting in newer and more fuel-efficient vessels. They plan to sell a 2009 build Suezmax tanker, to take advantage of a stronger spot market. Net cash proceeds are expected to $23M, which they'll use partially to pay the debt on the vessel, netting ~$5M.

Performance:

Although there are several strong companies in the marine shipping industry, marine shipping stocks can be volatile. For example, in this week's bank-inspired pullback, SFL fell 10.4%, and the overall industry fell 12.12%, vs. a 2.42% decline for the S&P 500.

That decline pushed SFL down to about breakeven so far in 2023, as of the 3/15/23 close. SFL has outperformed the shipping industry so far in 2023, and over the past quarter and year; and has outperformed the S&P and the shipping industry on a total return basis over the past year.

Analysts' Targets:

The pullback has brought SFL down to being 17.77% below analysts' $11.20 lowest price target, and 23.57% below the $12.05 average price target.

Valuations:

Even after this week's pullback, SFL is getting mainly premium valuations vs. its industry. The exception is its forward P/E of 9.69X, which is cheaper than the 11.02X industry average.

Parting Thoughts:

At its 3/15/23 closing price of $9.21, SFL was just ~6% above its 52-week low. Of course, it could go lower, especially given the jitters in the current market environment.

While its valuations are higher than its industry averages, SFL's long term charters give it a clear cash flow runway that should support continuing distributions. Its diversification is also a plus. We rate it a BUY, but don't bet the ranch quite yet - there may be more market fireworks ahead in 2023, offering even lower prices.

If you're interested in other high yield vehicles, we cover them every Friday and Sunday in our articles.

All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.

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