Summary
- Global Ship Lease reports another set of quarterly results in Q4.
- The attractive almost 8% dividend remains well covered beyond fiscal 2023.
- GSL shares should continue to rally from here but investors must continue to watch volatility.
Intro
We wrote about Global Ship Lease, Inc. ( GSL ) back in November of 2022 post the company's third-quarter earnings when we stated that current trends pointed to the stock being undervalued. Although the Q3 earnings beat stood out as the main precursor to GSL shares rallying higher at the time, sustained share buybacks, a high single-digit dividend yield, a keen valuation, and successful deleveraging of the balance sheet all pointed to a fundamentally strong shipping outfit which still sees plenty of growth ahead of it. In that November article, we went through a technical bottoming pattern which we still maintain is playing itself out here.
In fact, when we take the company's recent Q4 earnings numbers into account, shares of GSL have rallied north of 11% since that November piece with most likely more gains on the cards here. Why do we state this? Well, the CEO actually pointed to this premise on the recent fourth-quarter earnings call. With earnings beating consensus by a wide margin once more as in Q3 (Non-GAPP Q4 EPS of $2.14 per share beating expectations by $0.39), the CEO laid out the implications of how different trading conditions would impact GSL's growth profile accordingly. This is a worthwhile exercise because GSL's fleet is practically fully chartered in fiscal 2023 with fiscal 2024 three quarters way there.
Therefore, what we see below is the expected downswing in contracted revenue over the next few years irrespective of how trading conditions will shape up going forward. What will obviously change however is the growth path of GSL's profits (Adjusted EBITDA) as well as the revenues from the spot market. Suffice it to say, at this stage, we do not know the rates or the charter lengths of future voyages which the market (investors) obviously wants to get a read on as soon as possible.
Strong Contracted Base
Investors who participate in the cyclical shipping industry are well used to the above and for good reason. Trading conditions can change on a whim and GSL has already experienced this over the past five months. Charter fixtures have become far fewer in number with rates dropping as a result. Will these conditions continue to normalize is anybody's guess but what we do know is that GSL remains in a solid place with respect to being able to withstand whatever the market throws at it. Long-term debt continues to come down, there is no refinance risk until 2026 and the successful recent US private placement is a strong reason why EBITDA margins are expected to grow going forward.
Suffice it to say, given GSL's internal improvements, large diversified charter base along with the fact that dividend payments are well covered from the 2.7 years of cemented contracted revenues, some investors may believe it is a no-brainer to be long here. The understanding behind this premise is that shares would have to drop by at least 16% for the investor to lose (nominally) on his investment assuming an 8% yield at a minimum is paid out.
Implied Volatility For GSL Stock
The above is true but a 16% move over two years (8% annually) is nothing for a shipping company as we learn below. As we see from the 12-month implied volatility chart of GSL, GSL's implied volatility currently hovers around the 36% mark but its 52-week average (IV-Rank) is closer to the 50%+ mark. Therefore, since implied volatility is mean reverting, GSL could easily trade between $10 a share and $30 a share over the next 12 months alone which is elevated volatility for a $20+ stock to say the least.
Position Needs Managing
Therefore, forget the comfort of knowing that you will be paid a high dividend for the next two years and do this instead. For the record, we remain bullish but the market is a predictive mechanism in that it is constantly trying to predict future market conditions. If it foresees a softening (which will not affect GSL's near-term numbers), the share price will drop, period. Therefore ride this trend (as the weekly 10-week moving average has just crossed above its corresponding 40-week) and shares look like they are about to trend. If the opposite occurs as they did in 2018, 2020, and most recently 2022, be prepared to liquidate as we do not know where the bottom would finally occur (remember the volatility argument discussed above).
Conclusion
Therefore, to sum up, GSL both technically and fundamentally looks like it is about to embark on a trending move to the upside. The last two sets of quarterly earnings results have been really encouraging and the market likes what it sees. We recommend you let your profits run here but be prepared to exit on a close below the stock's key moving averages. We look forward to continued coverage.
For further details see:
Global Ship Lease Q4 Earnings Message: Let Your Profits Run