If you are looking for value in a high yield investment, take a look at Genco Shipping & Trading Ltd. (NYSE:GNK). Genco’s management launched a new value strategy last year that focuses on three elements — dividends, deleveraging, and growth.
They repaid $203 million in debt in 2021 and are paying off $8.75 million per quarter on a voluntary basis in 2022 a medium-term goal of achieving zero debt.
During the last 3 quarters (Q4 ’21-Q2 ’22), the quarterly dividend has increased to a range of $0.50 to $0.79 from $0.02 to $0.10 a year ago; and they were able to achieve a trailing 12-month EPS/dividend payout ratio of 38.09%. The payout ratio was a strong 45% in Q2 ’22:
We look forward to Q3 ’22, Management expects the dividend to increase, due to lower dry dock costs. They brought those issues forward in the second quarter of ’22 and they were still able to declare a $0.50 dividend.
At its 8/10/22 close of $17.57, GNK had a forward yield of 11.38%. It goes ex-dividend on 08/15/22 with a payout date of 08/23/22.
GNK’s new dividend policy subtracts debt repayments, maintenance investments, and a reserve from operating cash flow to calculate distributable cash flow for dividends. That number is then divided by the number of shares that are due dividends to calculate each quarter’s dividend/share, which for Q2 ’22 is $0.50.
Looking ahead to Q3 22, GNK has already booked 79% of its fleet at $25,059 per day and dry dock costs are expected to decrease by $6.8m. Net sales will drive the final available figure for Q3 22 dividend payouts.
Genco Shipping & Trading Limited is an international shipping company. We transport iron ore, coal, grain, steel products and other dry bulk cargo on global shipping routes. Its modern fleet of dry cargo vessels, wholly owned by the company, consists of Capesize, Ultramax and Supramax vessels, providing an essential link in international trade. (Source: Company Resources)
GNK’s fleet as of 6/30/22 consisted of 44 vessels, with the delivery of the Genco Mary and Genco Laddey, two high-quality, fuel-efficient Ultramax vessels built at Dalian Cosco KHI Ship Engineering in 2022.
Fleet utilization in Q2 ’22 was slightly lower at 97.2% from 98.3% in Q2 ’21 but this was offset by a much higher time charter equivalent, TCE, rates of $28,756.00, up 36% $21,137.00 in Q2 21, surmounted. Meanwhile, daily vessel operating costs increased by just $2,207.00, less than the $7,619.00 TCE rate increase:
Management estimates that a $1,000 increase in TCE would generate an additional $16 million in annual EBITDA from its fleet. They estimate that GNK’s Capesize vessels earn an additional $31M/yr in EBITDA for every $5,000 increase in TCE:
Q2 ’22 earnings were strong as revenue increased ~14% compared to Q2 ’21, net income increased 48% and Adjusted EBITDA increased 28%.
Q1-2 2022 continued the strong growth pattern of full year 2021 on much higher shipment rates, with revenue up 31%, net income up 163%, earnings per share up 159% and Adjusted EBITDA up 72% .
As in 2021, interest expense decreased significantly by -48% after decreasing by -31% in full year 2021:
In addition to supply chain and geopolitical issues, the lower rate of newly built ships has helped increase shipping rates. More new builds are expected in 2023, but they will only account for 3.4% of the drybulk fleet, while new builds for 2024 will only account for 2.2%, which is not an excessive expansion of the fleet.
Profitability & Leverage:
GNK’s ROA, ROE and EBITDA margin all increased sequentially in 2Q21 compared to 1Q22. Debt/equity was roughly flat while EBITDA/interest coverage improved to 27.66X from 22.21X.
GNK’s ROA and ROE are much higher than the shipping industry average, and leverage ratios are significantly lower.
Debt & Liquidity:
Management has repaid $260.7 million in debt since January 2021, or 58% of the previous debt burden. GNK has no quarterly debt repayment obligations through 2026, but management has continued to repay $8.75 million per quarter.
With the success of management’s new dividend and debt-repayment policies, GNK has outperformed over the past year and so far in 2022. However, it underperformed its industry and the S&P in the most recent quarter of trading, falling -11%.
It’s up 8% in the past month of trading, lagging its industry but slightly outperforming the S&P:
At its lower price level GNK is selling at 22% off book value, versus an average 7% premium to book for the shipping industry. It also looks cheaper on a trailing P/E, P/E, and EV/EBITDA basis, in addition to a much higher dividend yield.
Analyst Upgrades & Price Targets:
GNK has initiation/buy ratings from 2 analysts in July-August with Jefferies giving it a buy rating with a price target of $25; and Alliance Global rates it a Buy with a price target of $29.00.
At its 8/10/22 close of $17.57, GNK was ~36% below the median price target of $27.39 and 45% below the highest target of $32.00:
GNK seems undervalued; Management is committed to reducing debt to $0.00 and its dividend policy offers a very attractive yield. We rate it as a speculative BUY speculative only because the shipping industry is notorious for its ups and downs.
If you get seasick easily, tread carefully, maybe sell a few puts below GNK’s price to lower your breakeven point. Just don’t bet on the ranch or the yacht.
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All tables are provided by Hidden Dividend Stocks Plus unless otherwise noted.