2023-10-06 09:15:00 ET
Summary
- Global Ship Lease was able to raise its quarterly dividend by 50% in 2022, and has kept it at a higher level in 2023.
- GSL looks very undervalued vs. its industry.
- It yields 8.5%, with a very strong 5.47X dividend coverage.
Global shipping rates soared in post-COVID 2022, benefiting fleet owners with higher earnings, and in certain cases, leading to much higher dividends.
One such shipping beneficiary is Global Ship Lease ( GSL ), which was able to increase its quarterly dividend by 50% in 2022.
Company Profile:
Global Ship Lease is a container ship owner, leasing ships to container shipping companies under industry-standard, fixed-rate time charters. The Company is a Marshall Islands Corporation, with offices in London and Athens, and has been listed on the New York Stock Exchange since Aug. 15, 2008.
GSL focuses on mid-size Post-Panamax and smaller container ships , the workhorses of the global fleet, which tend to serve the faster-growing non-Mainlane and intra-regional trades collectively representing over 70% of global containerized trade volumes. Global Ship Lease owns 68 container ships, ranging from 2,207 to 11,040 TEU, with an aggregate capacity of 341,230 TEU. 36 ships are wide-beam Post-Panamax. (GSL site)
As of 6/20/33, CMA CGM remained GSL's biggest customer, at 26%, down slightly from 27% in Q1 '23. Hapag-Lloyd, Maersk and ZIM are next in line, accounting for 58% of GSL's contracted revenue, up from 49% in Q4 '22, due to higher ZIM and Maersk exposure:
As of June 30, 2023, GSL had ~$2B of contracted revenue with reputable counterparties, spread over a TEU weighted average of 2.3 years.
GSL bought four 8,544 TEU vessels for an aggregate purchase price of $123.3M in Q2 '23. Management signed 15 new charters in Q1-2 '23, including ones for the new vessels purchased during that period. This added $211.9M of firm contracted revenues to its forward charter cover.
Valuations:
At its 10/4/23 closing price of $17.52, GSL was very undervalued vs. the marine shipping industry, with a trailing P/E of just 2.07X, less than half of the industry's 5.95X average, and an even lower forward P/E of 2.03X , only 27% of the value of the industry's 7.51X average. It's also cheaper on a P/sales and P/book basis, as well as having a more attractive dividend yield.
Analyst Price Targets:
At its 10/4/23 closing price of $17.52, GSL is ~16.5% below analysts' lowest price target of $21.00, 35.7% below their average price target of $27.25. It seems like there's a lot of headroom here.
Performance:
GSL has outperformed the marine shipping industry so far in 2023, but has lagged the S&P 500. It has slightly lagged them both on a total return basis over the past year, with a ~16.8% return.
Earnings:
Q2 '23: GSL had another strong quarter, with operating revenue of $162.1M, up 4.9% from $154.5M in Q2 '22. Net income available to common shareholders of $75.4M, an increase of 41.2% on net income of $53.4M year over year.
Normalized net income rose 11.8%, to $74M, vs. $66.2M in Q2 '22. Adjusted EBITDA was $108.2M, up 12.0%, vs. $96.6 for the prior year period. EPS was $2.13, up 45%, vs. $1.47, while normalized EPS was $2.09, up 14.8%, vs. $1.82 for the prior year period.
Q1-2 '23: No complaints here - net income and diluted EPS both grew over 20%, while normalized EPS rose 15%, and adjusted EBITDA rose 14%. Here's a stat you don't see too often lately - interest expense actually fell by 55%.
2022: For full-year 2022, GSL had strong two-digit gains in net income, diluted EPS, normalized EPS, and adjusted EBITDA, with operating revenues up 44%. Interest expense rose 8.75%, much less than the amount we've seen in many other companies for full-year 2022.
Industry Tailwinds:
Idle capacity was just 1.1% in Q2 '23, after increasing in Q1 '23.
There's only 1.4% implied net growth of the global sub-10,000 TEU fleet through 2026, if all 25+ year old ships were to be scrapped.
Looking forward, no one knows where spot rates will be in the next two years, but GSL's management offered three adjusted EBITDA projections for three rate scenarios.
-A repeat of 2022 spot rates would result in 15% growth in 2023, and ~13% growth in 2024.
-15-year historic average rates would result in 15% growth in 2023, and ~15.7% growth in 2024.
-10-year historic average rates would result in 15.6% growth in 2023, and ~16% growth in 2024.
Dividends:
At its 10/4/23 $17.52 closing price, GSL yielded 8.56%. It should go ex-dividend next on ~11/21/23, with a ~12/4/23 pay date.
GSL didn't pay a dividend in 2016 - 2020 - management began paying a $.25 quarterly dividend in Q2 '21. Management raised the quarterly payout by 50%, from $.25 to $.375 in Q2 2022, and has continued to pay that amount in May and August 2023. Management feels that $1.50/year is a sustainable dividend.
They also added a new $40 million buyback authorization.
Indeed, GSL's EPS/dividend payout ratio of 17.67% is one of the lowest we've seen in the high-yield arena.
Adding back non-cash depreciation and amortization gives you an even lower EBDA dividend payout ratio of 14% in Q2 '23, and trailing average of 13.85%.
Taxes:
"Distributions we pay to U.S. unitholders will be treated as a dividend for U.S. federal income tax purposes to the extent the distributions come from earnings and profits (E&P) and as a non-dividend distribution or a return of capital (ROC) to the extent the distributions exceed E&P." (GSL site)
Profitability & Leverage:
GSL's ROA and ROE were roughly stable in Q2 '23, with ROA up slightly and ROE down slightly, while its EBITDA Margin rose. All three metrics remained well above the marine shipping industry's averages.
On the leverage side, debt/equity and net debt/EBITDA both improved considerably, as did interest coverage.
Management has decreased financial leverage by 77% since 2018, improving it from 8.4X all the way down to 1.98X.
Debt and Liquidity:
Management is focused on chipping away at GSL's debt load, targeting a ~13% reduction for 2023, and a further 23.5% reduction in 2024.
GSL site
GSL's Corporate Family Rating was upgraded to Ba3 from B1, with a stable outlook, by Moody’s Investor Service in June '23. S&P Global Ratings also revised the company’s outlook to positive and affirmed its long-term issued credit rating at "BB," and the Kroll Bond Rating Agency affirmed both the Company’s BB corporate rating with a stable outlook, as well as the BBB/stable investment grade rating and outlook for the $350M 5.69% Senior Secured Notes due 2027. (GSL site)
As of 6/30/23, GSL had $259M in cash on its balance sheet, of which $161.9M is restricted, with $129.8M of that being receipt of charter hire in advance. The balance of $97.1M covers minimum liquidity covenants and working capital.
Parting Thoughts:
We rate GSL a Buy based upon its undervaluation, its attractive 8%-plus yield with very strong dividend coverage, and vastly improved debt leverage.
]All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.
For further details see:
Global Ship Lease: 8% Yield, Very Undervalued, Buy Rating