SBLK - Star Bulk Carriers: Cutting Through Volatile Times With Stellar OPEX Efficiency

2023-05-22 12:00:00 ET

Summary

• While the recent recovery in Capesize rates may be encouraging, we are uncertain if the trend may hold due to the potential moderation in China's iron ore imports.
• For now, SBLK has outperformed its peers with the low daily OPEX per vessel, triggering improved profitability and excellent dividend payouts.
• However, with the economic downturn unlikely to lift in the near term, the cyclical dry-bulker stock may remain volatile, negating any of the juicy dividends.
• We shall discuss this further.

The SBLK Investment Thesis Remains Highly Cyclical And Speculative

Star Bulk Carriers ( SBLK ) has declared an FQ2'23 dividend of $0.35 (-41.6% QoQ/ -78.7% YoY), improved from our projection of $0.30 as discussed in our previous article here . The improved distribution is naturally attributed to the FQ1'23 double beats , with revenues of $224.04M (-24% QoQ/ -37.9% YoY) and EPS of $0.44 (-51.1% QoQ/ -74.4% YoY).

Then again, investors must also note that its latest quarter performance has been boosted by the operational gain of $33.2M, mostly from the insurance proceeds from Star Pavlina, without which the dry bulker's profitability may have come in much lower at $26.14M, instead of the current $59.37M.

Nonetheless, we must highlight that SBLK's eventual FQ1'23 TCE rate of $14.19K is much improved from the Q1'23 spot average rate of $13.08K, despite being lower than the original guidance of $15.12K .

SBLK adj. Daily Vessel Operating Expenses

In addition, SBLK's adj. Daily Vessel Operating Expenses [DVOE] (excluding non-recurring expenses) has remained relatively stable at $4.69K by the latest quarter (-1% YoY), compared to the FQ1'22 cadence of $4.74K (+11.5% YoY). This feat is impressive since it contributes to its profitability, despite the rising inflationary pressures.

Interestingly, other dry bulkers may not be as prudent, such as Eagle Bulk Shipping's (NYSE: EGLE ) DVOE at $6.4K (+9.9% YoY), with Genco Shipping's (NYSE: GNK ) DVOE remaining elevated at $6.16K (-9.8% YoY) at the same time.

This cadence further underscores SBLK's stellar operating efficiency and dividend safety, thanks to its fully scrubber-fitted vessels, despite owning a relatively older fleet at an average age of 11.2 years, compared to EGLE at 9.8 years and GNK at 11.2 years.

We suppose there are further tailwinds to its margin expansion as well, with the sale of two older (less efficient) vessels made in 2011. This is on top of the long-term charter arrangements for newly produced vessels scheduled to be delivered by 2024, likely coming with improved fuel efficiency and reduced carbon emissions to comply with IMO 2023.

Most importantly, SBLK guides exemplary FQ2'23 TCE rates of $20.69K for Capesize ( +23.1% QoQ / -31.6% YoY ) and $16.1K for its smaller-to-mid-sized vessels (+22.9% QoQ/ -46.9% YoY). These numbers are excellent compared to the prevailing market spot rates of $18K and $16.87K, respectively, suggesting its enhanced profitability due to the efficient break-even rate of approximately $12K in FY2023.

As a result, we may see the dry bulker pay out expanded dividends of up to $0.50 for the next quarter (+42.8% QoQ/ -69.6% YoY), pursuant to its current dividend policy . Assuming a similar cadence through 2023, we may see a total FY2023 payout of up to $1.95, suggesting a more than decent dividend yield of 10.72% based on its current stock prices, against its 2022 average of 22.17%, 2021 average of 2.66%, and sector median of 1.63%.

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

SBLK 3Y Stock Price

For now, SBLK has dramatically lost much of its pandemic gains and already retesting its current Q4'22 support levels. Assuming that the pessimism sustains, we may see the stock further retrace to Q1'21 levels of $14s, implying another -20% downside from current levels.

We suppose part of this may be attributed to China's uncertain iron ore demand, since Capesize comprises 52.65% of its fleets in the latest quarter, with the vessel most commonly used in the transport of the said commodity.

For April 2023, the country imported only 90.44M MT of iron ores, compared to the 110.23M reported for March 2023 and 194M for January/ February 2023 (reported together due to the impact of the Chinese New Year). The government may also place a cap on crude steel output by -2.5% YoY in 2023, in favor of expanding its use of scrap-to-steel usage of 210M MT in 2023, with the sum eventually growing to 320M MT in 2025 and 380M MT by 2030.

The latter cadence is expected to displace up to 500M MT of iron ore demand, as part of the country's effort in achieving its peak carbon intensity by 2030, with a net zero goal by 2060. As a result of the ambitious goal, we may see SBLK's Capesize rates impacted ahead, triggering further headwinds to its recovery prospects, despite the current 1Y contracted rate of $21K and 2Y rate of $18.25K.

Therefore, while SBLK may look attractive here, triggering a Buy rating from us, we are cautiously adding a caveat that the exercise must consecutively reduce or match investors' dollar cost average. The potential volatility ahead may not be worth the juicy dividends, assuming a widening gap in stock prices.

Investors must proceed with caution indeed, especially since the economic downturn is not expected to lift through 2024, if not 2025.

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