2023-12-27 09:39:05 ET
Summary
- Safe Bulkers Inc. is trading at a significant discount compared to its peers in the dry bulk shipping industry.
- The company has a robust fleet and is actively modernizing its vessels to align with upcoming environmental regulations.
- Safe Bulkers offers a competitive advantage with its versatile approach to chartering and a commitment to shareholder value through dividends and share repurchases.
Investment Thesis
Trading at the most significant discount among its peers, Safe Bulkers Inc. (SB) represents an enticing investment opportunity in the global dry bulk shipping industry. With a robust fleet, strategic modernization initiatives, and a commitment to shareholder value through dividends and share repurchases, Safe Bulkers should trade in line with peers, providing +40% potential upside. The resumption of share repurchases should help to narrow the discount further, while the company's solid charter coverage and attractive valuation position it as one of the safest choices among dry bulk shipping companies.
Business Overview
Safe Bulkers, Inc. is a global shipping company specializing in seaborne transportation within the dry bulk sector. Operating on a worldwide scale, the company's fleet transports both major and minor bulk cargoes, encompassing essential commodities such as grain, iron ore, coal, bauxite, fertilizers, and steel products.
Safe Bulkers was established in 2007 but the family legacy dates back to 1958, providing it with a wealth of experience across diverse market conditions. At the helm of the company is Polys Hajioannou, who has served as the CEO since its inception, holding a commanding stake of over 40%.
Polys Hajioannou Ownership (Safe Bulkers 2022 annual report)
Safe Bulkers' fleet comprises 46 dry bulk vessels categorized into four sizes. This includes 8 Capesize vessels with a carrying capacity of approximately 180,000 deadweight tons (("dwt")), 18 Post Panamax vessels ranging from 85,000 dwt to 100,000 dwt, 9 Kamsarmax vessels with capacities between 80,000 dwt and 84,000 dwt, and 11 Panamax vessels ranging from 75,000 to 78,000 dwt. The aggregate capacity of the fleet stands at 4.7 million dwt, with an average vessel age of 10.5 years.
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In its effort to modernize and the establishment of an eco-friendly fleet, Safe Bulkers boasts one of the most ambitious new build programs among its peers. Over recent years, the company has placed orders for 15 new vessels, consisting of 12 Kamsarmax and 3 Post Panamax ships. Seven of these vessels have already been delivered, while the remaining eight are expected to be received between Q1 2024 and Q1 2027, with a distribution of 3 in 2024, 2 in 2025, 2 in 2026, and 1 in 2027.
Beyond the new build program, Safe Bulkers is making significant investments in its existing fleet, aiming to upgrade vessels to align with upcoming environmental regulations. Management anticipates that having environmentally friendly vessels will provide a substantial competitive advantage.
To finance a portion of this growth, Safe Bulkers has strategically divested older tonnage. For instance, in November, the company sold two vessels-an aging 2004 Panamax and a 2015 Kamsarmax . Additionally, in December, Safe Bulkers ordered a new Kamsarmax , probably it was an option since it has a prompt delivery in H1 2026.
A distinguishing feature of Safe Bulkers is its versatile approach to chartering, employing vessels in both period time charters and spot time charters based on market assessments. Vessels engaged in period time charters contribute to visible and relatively stable cash flows, a critical factor given the scale of the new build program. Concurrently, vessels in the spot market offer flexibility during periods of low charter market conditions and present opportunities for potential upside when charter market conditions improve.
As of November 3, 2023, the majority of the fleet, 32 vessels, is chartered out with an average remaining charter duration of 0.7 years. This contributes to a contracted revenue of approximately $227.6 million, excluding the Scrubber benefit. For the 8 Capesize vessels, the average charter duration is 2.1 years, with three Capesize vessels having a remaining charter duration of under one year. The average daily charter hire stands at an impressive $23,692, resulting in a contracted revenue of approximately $144.0 million, excluding the Scrubber benefit. Notably, this daily charter rate compares favorably to the market rates, with the 1-year time charter standing at $18,400 and Cal24 FFAs at $19,125 . Additionally, four of these time charters operate at variable rates ranging from BCI 5TC * 106% to 130%.
In terms of capital allocation, although Safe Bulkers lacks an official capital allocation policy, the company has consistently paid a fixed quarterly dividend of $0.05 since Q1-2022. At the current stock price, this dividend equates to approximately a 5% yield and represented a 41.6% payout ratio in Q3-2023.
Furthermore, Safe Bulkers has actively engaged in share repurchases in recent years but in an unexpected turn of events, in July 2023 the company canceled its May 2023 buyback authorization after repurchasing just 139,891 shares. During the Q2 conference call , management explained that the cancellation was prompted by low rates, with their primary focus being the improvement of their 10-year-old ships and taking delivery of the next 5 newbuilds. The decision may seem unusual, canceling the program only to announce a similar one a few months later, but it could signify a commitment to transparency. If the company is not actively engaging in buybacks, they prefer to cancel it.
As of November 30, 2023, Safe Bulkers announced a new five million share s of common stock repurchase program. This initiative represents approximately 4.5% of shares outstanding and 8% free float, translating to an estimated value of around $20 million at the current price. If followed through, this proactive step underscores the company's commitment to optimizing its capital structure and enhancing shareholder value.
Drybulk overview
While the dry bulk outlook may not be as promising as that of tankers, it remains relatively balanced.
In terms of demand, the first three quarters of 2023 witnessed a 3.1% increase in dry bulk trade volumes. This growth was primarily attributed to a significant surge in Chinese demand, registering an impressive +13.7% year-to-date, versus a -3.7% reduction in the rest of the world. According to Clarkson , there is an anticipated further improvement in dry bulk trade volumes to +4.6% for the full year of 2023 and +1.8% for 2024. However, it's crucial to approach these estimations with caution, as they are highly contingent on the performance of the Chinese economy and the consumption of coal by India.
A more granular examination of segments reveals that Clarkson expects a slight reduction in ton-mile growth for Iron Ore and Coal in 2024. In contrast, the projections suggest an increase in ton-mile growth of approximately +3% for grains and other minor bulk commodities. These insights provide a nuanced perspective on the dynamics shaping the dry bulk sector in the coming years.
Ton-miles Growth (Star Bulk Q3 presentation)
In terms of supply, the current orderbook stands at 8.1%, while the proportion of the fleet aged above 20 years is approximately 7%. This suggests a balanced supply, indicating an absence of a significant drybulk deficit.
Drybulk Age Profile (Genco Shipping Q3 presentation)
Amid this equilibrium in supply and demand, a critical factor influencing rates could be port congestion or the adoption of longer routes around the Cape of Good Hope due to potential disruptions by the Houthi attacks. Presently, port congestion remains below historical averages, but there is a possibility of an increase in the event of disruptions. Notably, approximately 6% of dry bulk trade traverses the Suez Canal. In the absence of a short-term resolution to the conflict, ton-mile demand is poised to witness a substantial increase. Bulk carriers, lacking priority in the Panama Canal, would be compelled to navigate around the Cape of Good Hope, thereby increasing ton-miles.
Drybulk Port Congestion (Genco Shipping Q3 presentation)
Financial Position & Stock Valuation
Safe Bulkers is in a comfortable financial position with a 35% LTM, $83.3 million in cash, and $251.9 million secured contracted revenues.
Safe Bulkers Financial Position (Safe Bulkers Q3 presentation)
In terms of debt, Safe Bulkers currently holds a total of $448.9 million, characterized by a manageable repayment profile. Notably, in 2024, only $23.8 million is due, illustrating a comfortable repayment schedule. As of September 30, 2023, the weighted average interest rate on their debt stands at 6.24% and is expected to decrease with the easing of rates.
The ongoing newbuild program is expected to increase existing debt, with $233.2 million still outstanding as of November 3. Despite this, the company's robust financial position, encompassing cash reserves, contracted revenues, and the available liquidity from the undrawn revolving credit facility, is poised to absorb the increase in leverage, maintaining it fairly stable. Furthermore, the payment schedule for the remaining capital is well-structured, with expenditure requirements totaling $23.7 million in 2023, $92.4 million in 2024, and $117.1 million from 2025 to 2027. Given the anticipated decrease in interest rates, financing the newbuild program at improved rates should be reasonably straightforward.
Utilizing Arctic Securities' asset values and Q3 company information, an estimation of the Q3 NAV can be derived, valuing just the fleet on the water NAV stands at $6.85 per share.
NAV Calculation (Author)
This indicates that Safe Bulkers is currently trading at approximately 0.6 times NAV. Considering the management's cautious approach with charter out fleet, maintaining a fixed dividend policy, and conducting moderate repurchases, as well as comparing with peer valuations, I would conservatively value the stock at least at 0.8 times NAV until there is confirmation of aggressive repurchasing, as observed in the period from July 2022 to May 2023 when they repurchased 10M shares. This valuation yields a fair estimate of around $5.5 per share, about a 40% upside. This figure could potentially improve if the bulker market remains robust and the management follows through with repurchase plans.
With a similar repurchase as last year, it would be fair to value Safe Bulkers at NAV, implying a fair value above $7 per share. This represents a substantial upside potential of about 75%. Additionally, such a repurchase initiative would lead to a significant reduction in the company's free float.
Risks
Chinese growth. The trajectory of the dry bulk market is intricately tied to Chinese economic growth. In the absence of robust growth in China, the demand for dry bulk is likely to remain low, potentially even turning negative, thereby exerting downward pressure on rates.
Orderbook The ongoing increase in the orderbook poses a potential challenge. Currently standing at 8%, a continued rise in the orderbook could adversely impact rates, surpassing the levels of scrapping candidates and creating a drag on market dynamics.
Capital allocation. The strategic decisions of the management play a pivotal role. While the current approach involves rewarding shareholders with a fixed dividend and repurchases, a shift towards more fleet expansion without corresponding repurchases will be a negative. Balancing these elements is crucial for sustaining investor confidence.
Conclusion
In summary, Safe Bulkers, Inc. stands out as a strong player in the global dry bulk shipping sector. With a substantial fleet and a proactive approach to modernization, the company is well-positioned for sustainable growth. The strategic balance in chartering strategies and a focus on eco-friendly practices contribute to its competitive advantage.
Safe Bulkers' capital allocation, including a fixed dividend and recent share repurchases, underscores a commitment to shareholder value. Despite a cautious stance, the company trades at a significant discount to NAV, offering an attractive investment opportunity with a potential 40% upside.
Safe Bulkers presents a distinct advantage by trading at a significant discount to NAV. Even in a scenario that falls short of market expectations, both the NAV discount and the company's robust charter coverage provide a level of protection superior to its peers. Simultaneously, it remains poised to benefit from a strong market, offering a well-balanced investment proposition
For further details see:
Safe Bulkers: The Resurgence Of Repurchases Poised To Propel Stock Re-Rating