SFL - SFL Corporation: 9% Yield Stronger Earnings Ahead

2023-10-08 09:15:00 ET

Summary

• SFL Corporation Ltd. focuses on long-term charters in the marine shipping industry, providing visibility into future cash flows.
• The company has a strong customer base of blue-chip companies and expects increased earnings from new assets in the coming quarters.
• SFL paid its 78th consecutive quarterly dividend and has a high dividend yield compared to the industry average.

While spot rates in the marine shipping industry have soared post-COVID, there are attractive companies that focus on long-term charters, which afford investors visibility into future cash flows.

One such company is SFL Corporation Ltd. ( SFL ), which appears to be on the cusp of increased earnings, with new assets coming on board over the next few quarters.

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.

Time charters account for 92% of charters, with 8% as bareboat contracts. Container ships form the largest part of the fleet, with just under 50% of SFL's backlog.

SFL's customer base is comprised of blue chip companies, such as Exxon Mobil, Conoco Phillips, Volkswagen, Maersk, and Hapag-Lloyd.

SFL's fixed rate backlog continued to increase and stands at ~$3.6B from owned and managed vessels after recent charters. Management has added >$300M of backlog so far in 2023, and expects a significant cash flow increase from Q3 onward:

"This provides continued cash flow visibility going forward with significant additional cash flow from the drilling rig, Hercules, and the new build car carriers from Q3 '23 onward." (SFL site)

Earnings:

Q2 '23: SFL's fleet had more than 99% utilization in Q2 '23, with the exception of the Hercules drilling rig, which began operations with 87 days.

Net income was $16.9M, or $0.13/share, vs. $.45/share in Q2 '22. SFL's net income continues to be impacted by the drilling rig Hercules, which had no revenues in Q2, but had full operating expenses while finalizing its comprehensive special survey or SPS and upgrades.

Q1-2 '23: Although revenue rose 10.5%, net income fell 77.7% due to drilling rig expenses and interest expense.

Adjusted EBITDA was down modestly, 5.5%, whereas interest expense rose ~$31M in Q1-2 '23, also impacting net income. EBITDA/interest coverage fell 43%.

Looking forward, however, shows a much better picture ahead: "The secured backlog on the Hercules is now in excess of $200 million, and we estimate approximately $100 million EBITDA from the rig over the next 12 months." (SFL site)

The share count remained flattish - 1.1M shares were bought back in Q2 '23, via SFL's buyback program.

Dividends:

SFL paid its 78 ^th consecutive quarterly dividend, $0.24/share, in September.

At its 10/6/23 $11.05 price, SFL yields 8.60%. It should go ex-dividend next on ~ 12/2/23, with a ~ 12/30/23 pay date.

SFL has a negative five-year dividend growth rate - management decreased the quarterly dividend from $.35 to $.15 in 2020. They began raising it again in Q4 '21, and have kept it at $.24 so far in 2023.

With net income declining in Q1-2 '23, SFL's EPS/Dividend Payout Ratio ballooned, hitting 480% in Q1, and improving to 184.6% in Q2 '23 - still way over 100%, but heading in the right direction.

Keep in mind that EPS included $.40/share of non-cash depreciation and amortization per quarter. Adding that back to EPS, to obtain an EBDA/share figure of $.53, gives you an EBDA/dividend payout ratio of 45% for Q2 '23.

Profitability and Leverage:

The lower net income impacted ROA and ROE, dropping them both to lower levels vs. Q4 '22, below industry averages. EBITDA margin also declined, falling ~7% to 61.76%, which was still much higher than the marine shipping industry's average of 39.65%.

Debt/equity and net debt/EBITDA leverage both increased and remain higher than the industry averages. However, given the promise of increased earnings in the coming quarters, we should see these leverage figures improve.

Debt and Liquidity:

SFL has ample access to capital - management has secured new financing arrangements so far in 2023 in excess of $1 billion. The amount is split across 12 different facilities and a wide array of products, securing a continued well-diversified funding platform for the company going forward.

There was a NOK 700M bond due in September 2023, of which $48m was outstanding, which is expected to be paid with cash on SFL's balance sheet.

As of 6/30/23, SFL had $201M of cash and cash equivalents, in addition to marketable securities of $5.9M.

Performance:

SFL has outperformed the marine shipping industry and the S&P 500 by wide margins over the past quarter, year and so far in 2023.

Analyst Price Targets:

SFL received a downgrade in August from Pareto, from Buy to Hold, with an $11.00 price target. With its outperformance, SFL is 10.5% above analysts' lowest price target of $10.00, and just ~3% below their average $11.38 price target.

Valuations:

At this point, SFL is getting premium valuations across the board from the market. Its 8.69% dividend yield is ~250 basis points higher than the marine shipping industry's 6.2% average yield.

Parting Thoughts:

We advise putting SFL on your watchlist - the possibility for increased dividends looks bright, but you may want to wait for a lower entry price to bring its valuations a bit more in line with those of its industry.

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

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