Description

Genco Shipping is inexpensive, seeing multiple fundamental tailwinds, and is paying investors to wait for Mr. Market to further revalue its shares

The dry bulk shipping industry is a notoriously volatile one.  It’s also a highly fragmented one and one with relatively lower barriers to entry as anyone can conceivably shell out $40-60 mil. for a new vessel and then begin chartering away on the high seas.  Further, it was plagued by a noticeable newbuild supply overhang following the late 2000s China-led commodities boom, which took nearly a decade to absorb.  For these reasons, many investors have continued to ignore this sector.  Recent developments however highlight the upside optionality for the leading dry bulk shipping companies.  Following a choppier 2023 that featured below normal levels of port congestion, more subdued global GDP growth, and lower year/year TCE day rates, 2024 could be a break-out year for the sector.   

A multitude of tailwinds have emerged within the last month.  First, the Baltic Capesize Index (or BCI) just posted its best December since 2009.  GNK’s Q4 23 TCE day rates are poised to improve to over $17.2k from a subdued $12.1k in Q3 23 as depicted in the chart below.  TCE day rate strength in December should not only drive a Q4 23 earnings beat for GNK, but also suggests likely upside to Q1 24 consensus estimates.  Next, water levels in the Panama Canal have fallen to a 73-year low, which has forced ships to reroute and led to shipping delays.  Another major artery, the Suez Canal, is also seeing lower volumes following a recent spike in attacks by Houthi rebels on commercial vessels in the Red Sea.  These canal disruptions have increased average voyage length and thus reduced overall fleet efficiency, a positive for shipping companies such as GNK.  Last but not least, the ever-elusive public-to-public M&A materialized a few weeks ago with Star Bulk (SBLK) announcing an all-stock bid at $52.60/sh for Eagle Bulk (EGLE).  Both stocks responded favorably to the transaction, which reinforces the benefits of fleet scale and a larger market cap in this often overlooked sector.  With EGLE now out of the picture, GNK arguably becomes the next logical takeover target.

Genco Shipping and Trading Limited (NYSE: GNK) is in a vastly more sustainable position today than a decade ago when it was saddled with over $1.3 bil. of debt in a market that simply had too much supply.  After emerging from bankruptcy protection in 2014, GNK initially focused on reducing its net debt and investing in various fuel efficiency enhancement initiatives.  In 2019 GNK began installing ballast water treatment systems and scrubbers on its fleet in preparation for upcoming IMO regulatory changes.  2019 also marked GNK’s first dividend declaration since 2008.  GNK has now paid a dividend for 17 consecutive Qs.  

As depicted in the table below, GNK’s net debt was a mere $98 mil. as of Q3 23.  Debt has been reduced by an impressive 68% since Q1 21.  Going forward, GNK plans to balance its commitment to return excess cash flow to its shareholders via its unique dividend formula with its l-t goal of reducing debt to zero.  It also has ample capacity under a recently inked $500 mil. credit facility to execute its fleet replenishment program.  Over the last five years, GNK has invested $435 mil. in various fleet growth and modernization initiatives, which have helped to reduce its cash flow breakeven rate to below $10k.  It’s important to note that unlike some of its peers, GNK has eschewed newbuilds and instead seeks to opportunistically divest older vessels approaching costly special surveys for younger second-hand vessels.  This is a lower-risk approach than the newbuild route.

GNK presently trades at a price of $16.45/sh and sports a market cap of slightly over $700 mil. along with a dividend yield of 3.7% (Q3 23 annualized).  Based on improved TCE day rates in Q4 23, GNK’s dividend could easily double from the Q3 23’s $0.15 level.  GNK’s adjusted EBITDA should slightly exceed $100 mil. in 2023, down from $227 mil. in 2022 and $253 mil. in 2021.  After averaging roughly $24k during the 2021-2022 period, TCE day rates will likely average under $15k in 2023.  That is below mid-cycle level of $16k.  

The sector’s two largest companies, Star Bulk (SBLK) and Golden Ocean (GOGL) are currently trading right around NAV.  In contrast, Eagle Bulk (EGLE), which levered up earlier this year to repurchase shares from Oaktree and is solely reliant on the Supramax segment (which focuses on grains and minor bulks instead of coal and iron ore), was just acquired for 75% of NAV.  Despite its strong balance sheet and diversified fleet of 44 vessels (17 Capesize, 15 Ultramax, and 12 Supramax), GNK is trading at only 81% of NAV.  This sizable discount to NAV and larger peers is unwarranted and presents an opportunity.

The supply-demand backdrop remains constructive as the dry bulk newbuild order book is under 8% of the existing fleet.  That effectively matches the percent of the fleet that is 20 years or older (also 8%).  Net fleet growth of 1.7% and 1.3% is expected in 2024 and 2025, respectively, according to independent maritime consulting agency Marsoft.  Meanwhile, dry bulk demand is anticipated to increase 3% in 2024 and 1.8% in 2025.  China’s iron ore port inventories are at multi-year lows, paving the way for a potential restocking and rebound in seaborne trade volumes.  Increased port congestion and longer voyage routes are other underappreciated catalysts.  With limited threat of new supply over the medium term, the risk/reward for TCE day rates skews to the upside.  

Conclusion:

GNK is the least levered dry bulk shipping company (on a net debt to fleet value basis) yet is now the least expensive on a Price/NAV basis following the SBLK+EGLE merger.  This is a stock that should be trading a lot closer to $20/sh than $15/sh.  There’s nearly 25% upside from current levels to my $20.30/sh price target.  In a more bullish scenario in which TCE day rates return to the 2021-2022 average, GNK should easily command a $25/sh price, for an upside of 50%.  Following a choppy 2023, a firming dry bulk market in 2024 should lift all boats, but especially GNK’s.

Catalyst

Earnings improvement.

Value will out.