2023-12-01 16:46:34 ET
Summary
- Global Ship Lease posted robust Q3 results came in robust, with its containership producing highly profitable cash flows.
- The company strategically allocates these cash flows by skillfully balancing deleveraging efforts with tangible shareholder returns.
- With multi-year leases set to sustain this theme over the medium term and shares remaining cheap, I remain bullish on Global Ship Lease.
In early October, I shared an update on Global Ship Lease ( GSL ), making a case for why selling the company's preferred stock ( GSL.PR.B ) to buy more of the common would be a beneficial trade. In this update, I am revisiting GSL to comment on its Q3 results and reiterate why it remains one of my top holdings.
Q3 Results: Another Rock-Solid Trading Period
GSL's Q3 results were once again robust, a trend we've become used to seeing during the past several quarters. Its containerships keep producing stable and highly profitable cash flows as they still benefit from multi-year leases signed during the peak of the containership craze about two years ago, in the midst of the pandemic.
While liners have suffered during this time (just look at ZIM Integrated Shipping Services' ( ZIM ) share price plunge), lessors such as GSL and Danaos ( DAC ) continue to post some of the best results in their histories - funnily enough, at liners' expense. A look at GSL's recent numbers reflects this story.
Revenues for the quarter were $174.5 million, up 1.2% compared to last year. While the effect of straight-lining time charter modifications had a negative impact on the company's top line, charter renewals at higher rates on some of the vessels and the acquisition of four vessels that were delivered in the previous quarter more than offset it.
Operating income also came in robust. While it somewhat declined from last year's $101.7 million to $94.2 million due to higher vessel operating expenses and administrative expenses, operating income still represented a tremendous 54% of revenues.
Global Ship Lease's Q3 Income Statement (6K)
Another item I have highlighted in GSL's Q3 income statement above is the company's interest expenses, which fell from last year's $16.1 million to $11.5 million. We also saw this when I analyzed Danaos' income statement in my most recent article , as both companies have followed the strategy of utilizing their multi-year monster charters to pay down debt and improve their balance sheets.
It's very refreshing to see a shipping company's interest expenses come this low relative to revenues/operating income, displaying GSL's deleveraging efforts over the past few years. The slide below illustrates this, with GSL's leverage currently sitting at a record low of just 1.7X.
Global Ship Lease Q3 Presentation (Q3 Presentation)
Regardless, the direct effect of lower interest expenses is nicely shown in GSL's net income, partially offsetting the modest decline in operating income. In fact, at $85.1 million, net income represented 49% of revenues. It exhibits my earlier point regarding the benefits of GSL's highly profitable pandemic-powered leases being still in place.
Capital Allocation Excellence Instills Confidence
While discussing Danaos recently, I emphasized the significance of the company's cash flow statement over the income statement—a theme that also holds true for GSL. Both containership lessors have secured their future revenues through multi-year contracts, rendering their revenue streams, and thus earnings, highly predictable. The pivotal factor shaping their investment cases lies in how they allocate these cash flows.
In the case of Danaos, I mentioned how some investors have expressed skepticism in recent years (myself included), albeit the recent uptick in capital returns has been well-received. Conversely, GSL has garnered consistent praise from investors who applaud management's adept capital allocation decisions.
This recognition stems from their stellar approach, including the reduction of debt (as previously noted), strategic stock repurchases, and paying a hefty dividend. In fact, I would characterize GSL's capital allocation as excellent, with its most recent Q3 results reaffirming my view.
Looking at GSL's cash flow statement for the period below, operating cash flows came in at $102.4 million. From there, excluding about $23 million in CAPEX for vessel expenditures and dry dockings, we saw a healthy mix between deleveraging (about $51.0 million) and capital returns (about $17 million).
GSL's Q3 Cash Flow Statement (6K)
While the $13.3 million paid in dividends doesn't seem like much, and GSL could definitely afford to pay notably more, the stock's yield still stands at a satisfactory 8.1%. Thus, it should be enough to please investors while allowing the company to retain enough cash to keep on paying down debt.
In contrast to Danaos, which recorded an LTM Net Debt to Adjusted EBITDA ratio of 0.16X in Q3, GSL's corresponding metric stands at a more substantial 1.7X, as mentioned earlier. Due to this variance, I anticipate GSL's current capital allocation mix to remain unchanged, prioritizing improving the balance sheet over raising capital returns.
Regardless, I find no grounds for criticism in GSL's approach to capital allocation—no questionable investments or extravagant vessel acquisitions. Instead, the company demonstrates a commitment to prudent deleveraging and rewarding shareholders. They can't really go wrong with that.
Why GSL Remains One of My Top Holdings
After two years of tightly holding GSL, the stock remains a major position in my portfolio. The underlying rationale for my initial investment hasn't changed. In essence, GSL not only presents a compelling upside but also boasts a wide margin of safety in my view.
I believe the company's $1.8 billion contract backlog ensures that it will keep posting tremendous revenues/profits over the short- to medium-term. Simultaneously, as further deleveraging goes on, interest expenses will continue to decline, allowing for a further net income margin expansion. From there, you know the recipe: More deleveraging, buybacks, paying the hefty dividend.
During this unfolding scenario, I find myself positioned to benefit from the generous yield while leaving the potential for significant upside open. This upside could manifest through either a broadening appeal of GSL's earnings yield, drawing in more investors, or the prospect of a buyout. In the latter case, the possibility arises if another major shipping player or a private equity firm expresses interest in taking GSL's high-quality fleet private at a cheap P/E of just over 2.0 and with the healthiest balance sheet in its history.
GSL's Expected EPS (Seeking Alpha)
For further details see:
Global Ship Lease Remains One Of My Top Holdings - Here's Why