Genco Shipping: 12% return, low leverage, very strong earnings (NYSE: GNK)

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Looking to take advantage of the global supply chain lockdown? The volatile Baltic Dry Index, which measures the relationship between the supply of large super bulk cargo ships (across 3 different sizes) and market demand for using the vessels and their trade routes, was on a tear since 2021.

It peaked at ~5650 in October 2021 and was at 2633 as of 6/2/22:

baltic dry map

tradeeconomy

These higher index values ​​have greatly benefited bulk cargo shipping companies, such as Genco Shipping (NYSE: GNK), which has seen its Time Charter Equivalent, TCE rates increase significantly since early 2021.

The average daily time charter equivalent for GNK’s entire fleet, or TCE, for the first quarter of 2022 was $24,093, 98% higher year-on-year and its highest TCE in the first quarter since 2010.

These high rates have also not slowed for GNK on April 22, remaining in the same high zone. Management “estimates our TCE to date for Q2 2022 at $27,596 for 68% of the available days of our owned fleet, based on both period and current spot luminaries.”

Rates Genco Shipping tce

GNK website

Profile:

Genco Shipping & Trading Limited is an international ship-owning company. We transport iron ore, coal, grain, steel products and other dry bulk cargo along global shipping routes. Our modern fleet of wholly owned dry cargo vessels consists of Capesize, Ultramax and Supramax vessels which provide a vital link in international trade.

GNK’s fleet consisted of 44 vessels, as of 03/31/22, with the delivery of Genco Mary and Genco Laddey, two high-quality, fuel-efficient Ultramax vessels built in 2022 at Dalian Cosco KHI Ship Engineering.

Fleet utilization was 94.4% in Q1 2022, indicating the continued strong demand for these vessels. Russia’s invasion of Ukraine led to higher commodity prices and a redirection of commodity flows, particularly for grain and energy, which drove up demand per ton-mile. In addition, rising fuel prices have led to a slowdown in the fleet, reducing available capacity; while a lower construction rate for the global fleet also supported charter prices.

Genco Shipping Fleet Data

fleet

Dividends:

High rates resulted in much higher earnings and also led management to change their dividend calculation resulting in a much higher dividend over the past 2 quarters. The Q4 21 dividend increased from $0.15 to $0.67, and increased again in Q1 22, to $0.79.

Using a traditional EPS metric shows that GNK’s Q1 22 dividend payout ratio is 81.4%, with a very low payout ratio of around 33%:

Genco Shipping dividend coverage

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GNK’s new dividend policy deducts debt repayments, maintenance investments and a reserve from operating cash flow to calculate distributable cash flow for dividends. This figure is then divided by the number of shares that receive dividends, to calculate the dividend/share for each quarter, which was $0.79 for Q1 22.

This 2022 cash flow statement shows that Q2 ‘2022 will have much higher capital expenditures: Drydock/BWTS/ESD expenditures of $24.71M, up approximately $22M from Q1 ’22.

If GNK’s net income remains stable in Q2 22, operating cash flow would be approximately $58.14 million. With the additional $22 million in Capex, distributable cash flow would equal ~$13.93 million and the Q2 dividend would be approximately $0.33/share, down $0.46 from $0.79 in Q1 ’22. It depends on net income.

However, management expects much lower capital costs in Q3 of only $3.95 million and $3.50 million in Q4 22, so if TCE rates remain high in Q3 2022, GNK would be able to revert to a larger quarterly dividend payment in the 2nd half of 2022.

Another advantage of this graph is that, based on the constant number of shares of 42.5 million, management does not expect to issue more shares during the year 2022.

Dividend Genco Shipping

GNK website

Genco Shipping dry dock

GNK website

GNK’s rolling dividend yield is 6.71%, while its forecast dividend yield is 12.4%. Most likely, the yield will end up somewhere in between in 2022. It should be ex-dividend on 8/16/22, with a payout date of 8/25/22.

Genco Shipping Dividend Yield

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Performance:

With rates and dividends rising so much, GNK has charmed Mr. Market and outperformed the shipping industry and the S&P 500 by very wide margins over the past month, quarter, year and so far in 2022:

Performance of Genco Shipping

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Earnings:

GNK’s eye-catching Q1 2022 earnings growth numbers show you that bulk freight rates have increased since Q1 2021. 4-digit growth rates are not seen too often in these regions. And those numbers came despite China being in lockdown mode for part of the first quarter of 2022, due to its Covid outbreaks. This bodes well for the 2nd half of 2022, when China is expected to fully reopen.

Full-year 2021 growth was also robust, with triple-digit growth across all areas. In addition to much higher shipment rates, interest expense also fell 31% in 2021 and fell more than 50% in Q1 22, driven by management’s focus on debt repayment and falling interest rates.

Genco Shipping Profit and Revenue

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While Q1 2022 revenue jumped 57%, expenses only increased about 14%:

Genco Shipping Fleet Profit

GNK website

Profitability and leverage:

Normally when you look at the shipping industry you would expect high levels of leverage, but not with GNK, which has the lowest leverage we’ve seen in this industry in a long time. Since 01/01/2021, management has repaid $252 million or 56% of GNK’s debt.

GNK’s ROA and ROE are much higher than shipping industry averages.

Genco Expedition Roe

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Debt & Liquidity:

GNK has no debt amortization payments until 2026, when its credit facility matures. He had $49.1 million in cash, plus $222 million available on his credit revolver, as of 3/31/22.

Estimates:

The 2 compelling undervaluations for GNK are its P/E of just 4.91X, versus the shipping industry average of 18.34X; and its very low EV/EBITDA of 4.16X, compared to the industry average of 12.29X. With low leverage but strong EBITDA, GNK’s only remaining opportunity to increase the enterprise value ratio is its market cap, which it should, given its outlook for continued profitability in 2022.

Estimate Genco Shipping

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Analyst estimates and price targets:

Looking ahead, we see GNK has a 2022 P/E of 5.14, still well below industry averages, and a 2023 P/E of 5.57.

Genco Shipping annual estimates

Barrons

GNK recently received a buy rating from Jefferies on 4/27/22, which resumed coverage, with a price target of $27.00. At $25.49, GNK is 10.7% below the mid-price target of $28.53 and 31% below its highest price target of $37.00.

Genco Shipping upward spread

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Parting Thoughts:

With few new ship orders and the re-opening of China, shipping rates should continue to find support in 2022, which in turn will support GNK’s new dividend policy.

We rate GNK as a BUY, based on its better debt leverage, dividend policy and shipping industry tailwinds.

If you’re interested in other high-performance vehicles, we’ve got them covered every weekend in our items. All charts by Hidden Dividend Stocks Plus, except where noted.

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