The shipping industry is undeniably cyclical, a feature that has kept away legions of investors burned by too many sudden downturns with no clear pattern of recovery.
Genco Shipping & Trading
(ticker: GNK) there is a compelling reason to get in now: The company has a cleaned-up balance sheet and a new dividend policy that smartly ties payouts to quarterly cash flow.
During this year’s market turmoil, Genco’s stock has proved to be a port in the storm. Shares are up 42% in 2022, but investors may still underappreciate the company’s staying power.
Genco operates 44 dry-bulk ships, which are essentially metal hulls with an engine used to transport large quantities of commodities. Its ships are diversified by size: 17 are the massive Capesize variety, focused on carrying iron ore and coal, and 27 are smaller Ultramax and Supramax vessels used for transporting grains, cement, fertilizers, and a variety of other bulk commodities. Genco has a market value of $935 million and is based in New York.
The shipping industry has faced difficult conditions since the 2008-09 global financial crisis. It took a decade to work through an oversupply of ships that plagued the market and depressed shipping rates. Meanwhile, several shipping firms including Genco went bankrupt, and shipyards reduced capacity.
Then the Covid-19 pandemic hit in 2020. Demand from locked-down consumers for physical products soared, and supply chains snarled.
|Market Value (mil):||$935|
|2022E Sales (mil):||$473|
|2022E Net Income (mil):||$215|
The Baltic Dry index, which tracks dry-bulk shipping rates along some two dozen global routes, ranged from as low as 400 points in May 2020 to more than 5500 by fall 2021.
Renewed Covid-19 lockdowns in China and a particularly wet rainy season in Brazil have caused a decline in iron-ore shipments, bringing more volatility to the index. The Baltic Dry was recently trading around 3300.
Futures contracts on individual components making up the index are generally pointing to higher rates later this year, as China is expected to open up again, boosting demand for coal and iron-ore imports, and Brazil’s iron-ore exports catch up. Genco, like all shippers, benefits from higher rates.
Limited supply of new dry-bulk vessels should also keep rates high, even if demand slows. Dry-bulk shippers have held back on placing new orders for ships, given overordering in the last boom cycle along with uncertainty around the shipping fuel and propulsion systems of a greener future.
The result is dry-bulk vessel order books near their historic lows, says BTIG analyst Gregory Lewis. Meaningful supply growth in dry bulk isn’t in the cards for several years.
That supply-demand dynamic could keep the boom times in dry-bulk shipping going, even in a broader economic slowdown.
While rivals quickly boosted their dividends during flush times over the past year, Genco made just a small increase in its payout, while paying down more than $250 million of debt.
“It’s a cyclical industry; you can’t get away from that,” says H.C. Wainwright senior maritime analyst Magnus Fyhr. “[Genco] is trying to come up with a model that will attract investors through the cycle.”
“In order for investors to really take notice, you need to have a dividend that’s not only attractive but also sustainable,” says CEO John Wobensmith. “Not just for the next 12 months or 24 months, but for the next five years or 10 years.”
Genco’s debt pay-down and resulting lower interest payments have drastically reduced the all-in daily cost of running its ships to an average of about $8,100 fleetwide. Dry-bulk rivals, including
Star Bulk Carriers
Golden Ocean Group
Eagle Bulk Shipping
(EGLE), face daily break-even costs of more than $10,000 per ship, due to higher interest and debt repayment costs.
Fyhr estimates that Genco’s ships could command an average price of about $28,000 per day this year.
Genco just declared its first full dividend payout under its new formula: operating cash flow minus capital expenditure, debt repayment, and an additional cash reserve. The first-quarter dividend payable this week will be 79 cents per share, up from five cents in the year-ago period. Maintaining that rate would give Genco a 14% dividend yield at its recent close of $22.20. That’s probably close to a peak-cycle yield, but the new strategy means that Genco should continue to pay some form of a dividend even in a downturn.
There could even be upside to the payout, should shipping rates rise later this year: Fyhr’s model shows every $1,000 increase in daily shipping rates adding 37 cents per share to Genco’s distributable cash flow.
“Investors have said to cyclical companies that they want to see the cash,” says BTIG’s Lewis.
For now, Genco is a show-me story. The company will need to demonstrate that its new dividend approach works through the course of a shipping cycle, and that the stock deserves to be valued relative to its payout or its earnings power—not to the net asset value of its fleet, as is typical in the industry.
Lewis and Fyhr both have Buy ratings on Genco stock, with price targets of $28 and $30, respectively, upside of 25% to 35% from current levels.
“The model hasn’t been tested yet; it hasn’t been through a downturn,” says Fyhr. When it happens, “I think Genco is in much better shape to deal with it.”
Write to Nicholas Jasinski at [email protected]
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