SFL - SFL Corporation: A Dividend Yield Of 11.2% - Time To Accumulate

2023-05-16 06:05:38 ET

Summary

• SFL Corporation reported a quarterly income of $0.05 per diluted share compared to $0.37 per share in the same quarter a year ago.
• The company declared a quarterly dividend of $0.24 per share this quarter. The dividend yield is now 11.02%. Furthermore, the company initiated a $100 million share buyback.
• I recommend buying SFL between $8.4 and $8.6, with lower support at $8.15.

Introduction

SFL Corporation Ltd. ( SFL ) released its first quarter 2022 results on May 15, 2023.

Note: This article updates my February 16, 2023 article. I have followed SFL's quarterly Seeking Alpha results since Sept. 2014.

1 - 1Q23 Results Snapshot

SFL Corporation Ltd. reported a quarterly income of $0.05 per diluted share compared to $0.37 in the same quarter a year ago.

It was another solid quarter for SFL Corporation Ltd. The company's total U.S. GAAP operating revenues consolidated were $173.27 million in 1Q23, compared to $152.39 million in the previous year's quarter.

Note: This figure is lower than the cash received as it excludes revenues from charter hire, which are not identified as operating revenues U.S. GAAP. More details later in this article. The cash revenues received in 1Q23 were $182.4 million.

The company declared a quarterly dividend of $0.24 per share this quarter. The dividend yield is now 11.02%. Furthermore, the company initiated a $100 million share buyback.

Adjusted EBITDA on a consolidated basis was $110.30 million (including the 49.9% owned associated companies), down from $119.01 million posted the same quarter a year ago.

According to the press release:

The net result was impacted by non-recurring or non-cash items, including $7.2 million net negative markto-market of equity investments and swaps relating to repurchased bonds, gain from sale of vessels of $10.1 million, impairment of vessels of $7.4 million, loss on repurchase of bonds of $0.5 million and a decrease of $0.3 million on credit loss provision in the quarter.

The backlog is up slightly this quarter to $3.7 Billion, including Energy.

As of March 31, 2023, and adjusted for subsequent transactions, the estimated fixed rate charter backlog3 from the Company's fleet of 74 wholly or partly owned vessels and newbuildings under construction was approximately $3.7 billion with a weighted remaining charter term of 6.3 years. (press release)

2 - Investment Thesis

I am a long-term SFL shareholder and have relied on the company through good times and uncertain times.

However, even in the most challenging situation, management kept a high-level distribution to shareholders. This quarter the results were weak due to the cost of the 5-Year SPS of the Semisub West Hercules ($100 million) and the lack of the West Hercules revenue for this period.

CEO Ole Hjertaker said in the press release:

The first quarter result was impacted by several one-off items, including the scheduled special survey for the drilling rig Hercules with significant costs and no revenues in the quarter. Following the announcement of new contracts for two of our existing car carriers and also the Hercules, we expect substantial earnings contribution from Q3 onwards from these assets.

A great advantage for investors is that SFL is very versatile and can adapt faster than a company focusing on a unique shipping segment. Thus, the company can quickly adapt by shifting its business model and generating a more steady cash flow.

Thus, the investment thesis continues to be the same as my preceding article, and I recommend SFL as a long-term investment with an outstanding dividend payment now above 11%.

However, I suggest trading short-term SFL using at least 35% of your entire position to fully profit from this volatile and ever-changing industry. This two-level strategy has prevailed in my marketplace, "The Gold and Oil Corner," and I believe it is the most rewarding.

3 - Stock Performance

I generally compare SFL to three other companies I follow on Seeking Alpha. Teekay Tankers ( TNK ), Scorpio Tankers ( STNG ), and Frontline plc ( FRO ). However, this comparison is not totally accurate because they are pure Tankers companies, and SFL is not. The SFL Tanker segment represents only 22% of its total fleet.

This significant difference explains why SFL is underperforming the Tankers group now, especially Teekay Tankers and Scorpio Tankers, and is down 20.4% on a one-year basis.

SFL Corp.: The Raw Numbers: First Quarter Of 2023 And Financials History

Source: SFL release .

* Estimated by Fun Trading

Analysis: Revenues, Earnings Details, Free Cash Flow, And Backlog Discussion

1 - Operating revenues were $173.27 million in 1Q23

1.1 - Revenues and others

SFL Corp. received a charter hire of approximately $182.4 million from the Company's vessels and rigs, including $4.9 million in profit sharing.

The company had $6.33 million in income for the first quarter of 2023 or $0.05 per diluted share.

Adjusted EBITDA was $110.30 million, down 7.3% from last year.

1.2 - Highlights during 1Q23 (press release)

• 77th consecutive quarterly dividend declared of $0.24 per share
• Net profit of $6.3 million, or $0.05 per share in the first quarter
• Received charter hire of $182.4 million in the quarter, including $4.9 million of profit share
• Adjusted EBITDA of $102.6 million from consolidated subsidiaries, plus an additional $7.7 million adjusted EBITDA from 49.9% owned associated companies
• New contract for ultra-deepwater drilling rig Hercules in Namibia for a period of approximately four months with start up in Q4 2023, adding approximately $50 million to charter backlog
• Extension of contracts for car carriers SFL Composer and SFL Conductor for a minimum period of three years, adding approximately $155 million to charter backlog
• Sale of two suezmax crude oil tankers and a chemical tanker in March and April 2023, and agreement to sell a chemical tanker with expected delivery in June 2023
• New financing arrangements totalling more than $1 billion
• Announced a buyback program of SFL shares of up to $100 million.

1.3 - The quarterly dividend was $0.24 per share in 1Q23, and the company initiated a share buyback program of $100 million.

It is still a historical low for the company, but we see definitive progress on this side, with a yield now of 8.85%.

2 - Free cash flow is estimated at $57.06 million in 1Q23

Trailing 12-month free cash flow ("ttm") is a loss of $85.08 million, with a free cash flow estimated at $57.06 million in 1Q23.

CapEx went down significantly this quarter to $23.99 million.

3 - Debt analysis: Net debt is estimated at $1,937 billion in 1Q23

CEO Ole Hjertaker said in the press release:

The quarter was busy with more than $1 billion in new financings, including our newbuild dual-fuel car carrier program, sustainability-linked notes and refinancing of our drilling rigs. With this funding, virtually all our near term financing and capital expenditure requirements have been secured at very attractive terms.

4 - Segment Analysis

4.1 - The offshore segment

SFL owns two HE rigs. The semisub West Hercules and the support jack-up West Linus have been chartered to Seadrill since 2008 and 2014.

The offshore drilling market is rapidly recovering. During the first quarter of 2022, SFL received a charter hire of $18.8 million of charter hires for the rigs. The semi-submersible rig Hercules was idle this quarter for its special periodic survey. The cost of the SPS was $100 million, doubling the estimated price. SFL pays the cost of the 5-Year SPS.

4.2 - SFL dry bulk segment

The Company has 15 dry bulk carriers, of which eight were employed on long-term charters in the quarter.

In the first quarter, SFL generated approximately $19.7 million in gross charter hire from the dry bulk fleet. During the first quarter, the seven vessels employed in the spot and short-term market earned approximately $4.6 million in net charter hire.

4.3 - Tankers segment

SFL has a fleet of 18 crude oil, product, and chemical tankers, including announced transactions, with the majority employed on long-term charters. The vessels generated approximately $46.5 million in gross charter hire during the quarter.

SFL disposed of four vessels traded in the spot and short-term market. After selling these four vessels, SFL will have no tanker vessels trading in the short-term market.

The company realized a gain of approximately $10 million on the sale of the Glorycrown in the first quarter, and expect to book a gain of $6.4 million in the second quarter in connection with the sale of Everbright. As the sales price for the two chemical tankers was lower than book value, we recorded an impairment of approximately $7.4 million in the first quarter.

4.4 - Liners segment

SFL has a liner fleet of 36 container vessels, including announced transactions and seven car carriers, of which four are under construction.

The quarter's liner fleet generated approximately $97.3 million in gross charter hire. Roughly $4.9 million of the hire was a profit share from fuel savings.

Technical Analysis (Short Term) And Commentary

Note: The graph has been adjusted for the dividend.

SFL forms an ascending channel pattern with resistance at $9.3 and support at $8.4.

Descending channel patterns are short-term bearish in that a stock moves lower within a descending channel, but they often form within longer-term uptrends as continuation patterns. The descending channel pattern is often followed by higher prices, but only after an upside penetration of the upper trend line.

The overall strategy I regularly promote in my marketplace, "The Gold And Oil Corner," is to keep a core long-term position and use about 35% to trade LIFO while waiting for a higher final price target or enjoy a dividend yield of nearly 11.2%.

The trading strategy is to sell 35% between $9.3 and $9.5 with higher resistance at $9.8 and wait for a retracement between $8.4 and $8.6 with lower support at $8.15.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

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