2023-12-01 16:34:17 ET
Summary
- Global Ship Lease has had a negative total return and underperformed the market since August 2023, when my last bullish article came out. It's time to review my rating again.
- GSL had a great Q3 FY2023: Both top and bottom lines surpassed the consensus estimates.
- I particularly like the fact that the company is focusing on the vessels segment, where the lowest future supply is expected.
- The total shareholder return that GSL intends to achieve looks enormous, with a dividend of >8% and a generous buyback plan.
- I think it's fair to assume an EPS surprise of 5% for FY2024 and an exit P/E of 3x. Then, we get a fair value of $27.03, which is 46.6% above today's price. So, GSL is still a 'Buy' today.
Introduction
I first wrote an article about Global Ship Lease ( GSL ) in August 2021 , before the Q2 2021 report. Back then, it was a strategic bullish call, as I called to buy the company's shares before the report release based on the underestimated EPS consensus estimates. At the time, my prediction came true: GSL beat EPS and revenue estimates by 30.17% and 4.76%, respectively, and, by the way, has never had a negative earnings surprise since, despite the dire conditions in the industry.
I then mentioned GSL in comparison to Danaos ( DAC ) in December 2022 and last updated my bullish thesis in August 2023 . Since the last update, the stock has had a negative total return and underperformed the broad market:
Seeking Alpha, Oakoff's latest article on GSL
Due to this recent underperformance and the fact that GSL has already published figures for Q3 2023, I have decided today to update my coverage and review the strength of my previous 'Buy' rating.
Recent Developments
In Q3 FY2023 reported on November 9th, Global Ship Lease had $174.5 million in operating revenues, reflecting a YoY 1.2% increase. Year-to-date operating revenue reached $495.9 million, marking a 3.2% growth over the same period in the previous year. GSL generated $121.9 million of Adjusted EBITDA for Q3 2023, representing a 9.4% increase from Q3 FY2022. EPS for Q3 2023 was $2.33, down 4.1%, with normalized earnings per share at $2.33, down 2.1%. Both top and bottom lines surpassed the consensus estimates for the quarter:
The company added $224.7 million of contracted revenues to forward charter cover between January 1, 2023, and September 30, 2023. With 82% of 2024 ship days already contracted, the current year was effectively fully covered, the management team commented during the earnings call .
The company expanded its relationship with Ascenz Marorka to implement Smart Shipping solutions across its containership fleet, aiming for real-time data and AI-supported live performance management capabilities.
Ian Webber, Chief Executive Officer, highlighted GSL's strategy of de-levering and de-risking, maintaining a competitive cost of debt, and making value-enhancing investments to ensure long-term success. And the company's actual results are indeed in line with what the CEO says: GSL's debt profile is getting better and better every quarter:
The company demonstrated a robust balance sheet by reducing gross debt to $874.3 million from $999.5 million in Q3 FY2022, despite adding $76 million in new debt for recently acquired vessels. GSL closed the quarter with $267.3 million in cash, including $155.3 million in restricted cash (total liquidity level is at ~42% of market cap, which is a lot).
Despite macro headwinds and geopolitical uncertainty in the industry, GSL's fleet of mid-sized and smaller containerships, supported by fixed-rate time charters, positions the company well for future opportunities and shareholder value creation. I particularly like the fact that the company is focusing on the vessels segment where the lowest future supply is expected (relatively low order book): This indicates potentially more stable freight rates in the future and consequently more stable contract revenues compared to other companies with larger vessels.
At the same time, the company does not forget to reward its shareholders. GSL continued its share repurchase program, buying back an aggregate of 187,479 Class A common shares during Q3 2023. Also, GSL maintained a sustainable quarterly dividend, totaling $1.50 per share on an annualized basis. Analysts expect these dividend payments to remain unchanged over the next 2 years, giving investors a dividend yield of 8.14% on top of the buybacks - the total shareholder return that GSL intends to achieve looks huge.
Overall, I like the fundamental profile of the company, which I believe is operationally less risky than many of its peers due to its strong balance sheet and the nature of its fleet of vessels. GSL's reasonable shareholder policy should, in theory, also provide some kind of protection.
Global Ship Lease's Valuation
In my opinion, the dividend yield of over 8% itself is an indication of undervaluation, especially if we assume that this yield is sustainable. At the moment, the consensus is unanimous on just that, but in terms of EPS, analysts have a completely opposite opinion :
As contracts expire and roll, analysts see rates significantly lower than previous ones (which is logical) - hence the sharp fall in EPS in FY2025. However, as we have already seen before, analysts have been wrong with their forecasts in recent quarters, despite the apparent ease of predicting contract revenue.
But even if they are correct with the EPS for FY2025, GSL's implied P/E ratio will still be below 3.5x amid such a pessimistic decline forecast. I already wrote in my recent article on Danaos, where we see a similar picture, that this is very little even for a cyclical company like GSL.
By the end of FY2025, the company's debt will likely decrease even further (due to rich FCF generation), which should have a positive impact on the bottom line. Therefore, the company's profit margins should be relatively stable. They will most likely be lower than today, but I don't think the extent of the decline can explain the discrepancy between the decline in estimated EPS and revenues.
Speaking of FCF: The enormous 32.43% at GSL is even higher than what we saw in DAC's case (24.3%):
Following the same logic as for the valuation of Danaos, I think it's fair to assume an EPS surprise of 5% for FY2024 and an exit P/E of 3x. Then we get a fair value of $27.03, which is 46.6% above today's price.
Risk Factors
GSL's financial performance is sensitive to global economic conditions and fluctuations in charter rates, making it susceptible to market volatility. Additionally, the company's use of leverage for vessel acquisitions poses financial risks, especially during economic downturns or challenging market conditions. Counterparty risk, tied to GSL's reliance on charter agreements with liner operators, and operational risks such as geopolitical tensions further contribute to the investment landscape.
In cyclical industries, everything seems cheap when companies are approaching their operational peak - perhaps I am wrong to say that GSL is undervalued. The company's EPS and revenue estimates for the next few years could actually be well below current stock market estimates.
So investors should be mindful of these factors and conduct thorough due diligence before considering GSL as an investment.
Your Takeaway
Despite the existing risks, I like Global Ship Lease at $18-19 per share, which in my opinion is too little with an FCF yield of >34% and a dividend yield of >8%. I reiterate my Buy rating and recommend income-oriented investors to consider buying this stock.
For further details see:
Global Ship Lease Q3: It's Not Too Late To Buy