2023-05-11 15:21:21 ET
Summary
- Global Ship Lease, Inc.'s Q1 results were strong, showcasing its highly predictable charter backlog.
- Capital allocation appears excellent, featuring a nice blend of deleveraging, capital returns, and accretive acquisitions.
- Shares remain attractively priced, sustaining Global Ship Lease's bullish investment case.
I first wrote on Global Ship Lease, Inc. (GSL) back in July of last year, praising the stock's bullish investment case based on several factors, including its impressive and resilient charter backlog, notable capital returns, and undervaluation. Since then, the stock has delivered a total return of 23%, comprised of a 15.7% price gain return and a roughly 7.3% dividend-driven return, notably outperforming the S&P500's total return of roughly 9%.
Moving forward, I believe that the stock's investment case remains equally attractive. Global Ship Lease's backlog is still tremendous, boasting $2.11 billion of contracted revenues over 2.5 years. It should provide excellent cash flow visibility while management continues to press the right buttons across the board. This includes strengthening the company's balance sheet , paying an attractive dividend, and identifying accretive vessel opportunities within its pipeline, thus securing Global Ship Lease's future success.
Combined with the fact that shares remain quite cheap against their net asset value, which the company has been taking advantage of by repurchasing shares on the cheap, I remain bullish on Global Ship Lease, Inc. stock.
Insulated Cash Flows Despite Industry Slowdown
Containership rates have experienced a massive decline from their 2020-2022 records, with industry volumes normalizing. This is mainly due to the supply issues persisting at the time having mostly been resolved, as well as an overall slowdown in global trading.
Global Container Freight Index (Freightos Baltic Index)
That said, as is the case with other containership lessors (e.g., Danaos Corporation ( DAC )), Global Ship Lease's cash flows have remained insulated from this plunge in rates due to securing multi-year charters at highly attractive rates at the peak of the industry's frenzy a couple of years back. Importantly, the company's charters have not only delivered reliable cash flows during a period of industry volatility but have also transitioned to higher rates, resulting in an increase in revenue.
Hence, in its Q1-2023 results , Global Ship Lease posted operating revenues of $159.3 million, an increase of 3.7% compared to last year. In the meantime, tight expense control and lower interest expenses due to continuous debt pay downs allowed net income to grow by an even larger 6.5% to $72.2 million.
For the rest of fiscal 2023, it is appropriate to expect Global Ship Lease's performance to trend in line with Q1. The company's vessels have been fixed for essentially the whole rest (97%) of 2023, leaving no room for unpleasant surprises.
What happens post-2023?
Moving further out of 2023, I wouldn't expect the company's earnings to take a notable hit for a few reasons:
Firstly, some of the company's charters run as far as 2027-2028, thus providing partial cash flow visibility for years to come. These are highly profitable charters.
Secondly, even though the freight rates have plummeted for liners, lessors such as Global Ship Lease should be able to secure relatively attractive leases. Despite being well below recent peaks, leasing rates are still attractive by historical standards. The charter market presently has limited tonnage and liquidity, prompting liner companies to opt for term charters, even if they are indeed lasting no more than a year or two. This is also evident by the fact that the Hapex Index has not only stabilized lately but even started to rebound.
Finally, as affirmed in the Q1 earnings call , management believes that they possess a robust lineup of potential vessel acquisitions. It's worth noting from previous instances that management refrains from finalizing any such acquisitions unless they prove to be accretive to earnings. Most recently, on May 8th, the company announced it has agreed to acquire four post-Panamax containerships, each with a carrying capacity of about 8,500 TEU, for $123.3 million. These vessels are attached to charters with a leading liner operator.
The contract cover for each vessel is for a minimum firm period of 24 months from the date each vessel is delivered (expected in Q2-Q3/2023), followed by a 12-month extension at the charterer's option. These are old vessels (average age is 20 years).
By doing some napkin math, however, based on management's expected EBITDA estimates and crap values, I believe that this transaction guarantees a decent profit in the worst-case scenario or a great profit for the company if they can squeeze more life out of these vessels thereafter. Indeed, management mentioned that this transaction is "very asymmetrical in terms of reward or potential reward versus risk."
Smart Capital Allocation Builds Shareholder Value
Thankfully for us, Global Ship Lease's management has been implementing a very shareholder-friendly capital allocation strategy that continues to build tremendous value. For starters, the company has been deleveraging aggressively, reducing its future interest expenses (critical in the current environment) and lowering its cost of debt whenever possible. At the end of the quarter, its cost of debt stood at a rather attractive 4.53% , notably lower than the 7%+ rates the company bore prior to the pandemic.
Q1 Investor Presentation (www.globalshiplease.com/static-files/a226750c-bb27-45e2-8017-a0183e07ad26)
Simultaneously, the company has been rewarding shareholders through its hefty $1.50 annualized dividend. Even though shares have gained since my previous update, the dividend still yields a substantial 8.1% at the stock's current price levels.
And then, the cherry on top is Global Ship Lease's ongoing share repurchases program, which management continues to utilize aggressively (relative to the shipping industry's standards). The company repurchased $10 million worth of stock during the quarter and another $3.8 million during April. The remaining $6.2 million under authorization should be completed sooner than later.
Final Thoughts
Global Ship Lease keeps executing its capital allocation strategy thoughtfully, which is frankly all the company has to do given the forward-looking nature of its cash flows.
The predictability of Global Ship Lease, Inc. short-to-medium-term cash flows, combined with the hefty dividend, the supporting buybacks, and the stock's clear undervaluation ($1.0 billion of shareholders' equity which isn't even adjusted for the real value of vessels and the value of backlog against a $670 million market cap), comprises a very compelling investment case. It's certainly a case in which I feel I can sleep comfortably being invested. As a result, I plan to maintain a tight grip on my shares.
For further details see:
Global Ship Lease: 8.1% Yield, Notable Buybacks, Discounted Valuation, Still Bullish