Summary
- Shares sold off after fourth quarter earnings missed consensus expectations by a wide margin due to a combination of lower charter rates and unusually high operating expenses.
- Income-oriented investors headed for the exits after the company reduced its quarterly dividend by 67% sequentially to $0.60 per share.
- With the average daily TCE rate for Q1 expected to be down 40% sequentially, the company's first quarter distribution is unlikely to exceed the stipulated minimum of $0.10 per share.
- With dry bulk charter rates on the rise in recent weeks and current Forward Freight Agreement ("FFA") rates signaling expectations for further recovery, this might be an opportune time for speculative investors to scale into the shares.
- While Eagle Bulk Shipping continues to command a premium over many of its Greece-based peers, investors are getting a rock solid dry bulk shipper with a rather modern fleet, strong corporate governance, decent liquidity and very low debt levels in return.
After the close of Thursday's regular session, Eagle Bulk Shipping Inc. or "Eagle" ( EGLE ) reported fourth quarter earnings well below consensus estimates due to an unfortunate combination of weaker charter rates and record-high operating expenses.
On the conference call , management cited expenses in conjunction with recent vessel purchase activities, general inflationary pressures and " certain year-end non-cash impacts " as the main reasons behind the large sequential increase.
That said, the company expects operating expenses to moderate this year despite some additional costs related to Eagle's ongoing fleet expansion efforts and the fact that the company continues to provide temporary housing for many of its Ukrainian seafarers.
In accordance with the company's variable dividend policy adopted in late 2021, Eagle declared a quarterly cash dividend of $0.60 per share:
In October 2021, Eagle’s Board of Directors instituted a dividend policy which targets the payment of quarterly cash dividends equal to a minimum of 30% of reported net income, but not less than $0.10 per share.
Management also provided an outlook for the traditionally weak first quarter with 92% of available days already fixed at an average daily time charter equivalent ("TCE") of $13,335.
While the recent recovery in dry bulk charter rates should benefit the final Q1 TCE number somewhat, with only 8% of days still open, the impact is likely to be limited.
At these levels, Eagle's quarterly dividend won't be materially higher than the minimum $0.10 per share stipulated in the company's above-discussed dividend policy.
Since Eagle Bulk Shipping reinstated its dividend 16 months ago, investors apparently have become used to receiving distributions around $2.00 per share in each given quarter despite the company's variable dividend policy.
As evidenced by Friday's sell-off, a surprisingly large number of market participants has seemingly been caught flat-footed by the material dividend reduction and very real prospects for the first quarter distribution decreasing all the way down to the $0.10 minimum payout level.
But with dividend chasers heading for the exits and the Baltic Supramax Index ("BSI") having recovered by approximately 85% from recent lows, this might actually be an opportune time for speculative investors to scale into Eagle Bulk Shipping's shares.
Current Forward Freight Agreement ("FFA") levels indicate further improvement over the course of the year and with the vast majority of the company's fleet being scrubber-fitted, Eagle's TCE rates should outperform the market quite meaningfully.
During the question-and-answer session of the conference call, management elaborated on the recent charter rate recovery:
(...) It’s up dramatically in just a little over two weeks. Really we have seen the Atlantic market move up significantly. Definitely South Atlantic, Brazil has come alive and that’s put pressure on even just yesterday, as an example, we fixed one of Ultramaxes out of West Africa with manganese ore going out to China at $20,000, plus the scrubber benefit for the owner, which is around, call it, $2,500 a day and that’s up probably, $8,000, $10,000 from just a couple of weeks ago.
And that’s really driven because that there’s a lot more activity out of Brazil. So that ship had an opportunity to balance across and we have seen the Gulf come back too, in terms of we lost a lot of grain volume out of the U.S. earlier because of water levels and so we see more activity there and that puts pressure and pull ships from other parts of the Atlantic. (...)
Please note that the recent recovery appears to be largely tied to the Atlantic basin at this point. Should China indeed come back strongly over the course of the year, there would be further meaningful upside to current charter rate levels.
From a valuation perspective, even after Friday's sell-off, the company is trading just 10% below estimated net asset but investors should keep in mind that second hand vessel values have moved down quite meaningfully in recent quarters and are likely to recover alongside charter rates going forward:
Company Earnings Release / MarineTraffic.com
Moreover, unlike many of its Greece-based peers, Eagle Bulk Shipping isn't subject to any sort of corporate governance issues.
In addition, the company has a solid balance sheet with decent liquidity and very low levels of net debt.
That said, cash on hand is likely to come down by approximately $70 million over the next couple of months as the company expects to take delivery of three additional Ultramax vessels in the first half of this year.
Bottom Line
With dry bulk charter rates on the rise, projected improvements in operating expenses and startled dividend chasers heading for the exits, speculative investors should consider taking advantage of Friday's sell-off by scaling into Eagle Bulk Shipping's shares.
While the stock continues to command a premium over many of its Greece-based peers, investors are getting a rock solid dry bulk shipper with a rather modern fleet, strong corporate governance, decent liquidity and very low debt levels in return.
For further details see:
Eagle Bulk Shipping: Post-Earnings Sell-Off Provides Buying Opportunity