Golden Ocean Group: Assessing Low Valuation Amid Very Strong Business Momentum

Summary

• Global supply chains are disrupted and news headlines regularly read about product shortages.
• The dry bulk shipping industry is at the heart of this.
• Golden Ocean Group is exactly in this industry and seems to have a very low valuation.
• I assess their recent performance, current valuation, and outlook to see if it could be an interesting investment right now.

Alexey_Lesik/iStock via Getty Images

In this article, I analyse the recent performance, valuation and outlook of Golden Ocean Group Ltd (NASDAQ:GOGL) (OTCPK:GDOCY). The company is a leading dry bulk shipping company and the sector is at the heart of all issues around disrupted global supply chains and shortages. This makes the sector very intriguing, plus at first sight, the valuation of the company seems to be very low. As always, always I want to do proper due diligence on potential investments. In this article I share what I learnt about the company and how I currently assess the investment potential.

Recap: my investment strategy and goal

Let me first recap my personal investment strategy and goal, to help you understand my perspective. My goal is to reach financial independence years before my official retirement age of 67 (or perhaps even 70 or later by then). This independence is achieved when my annual dividend income equals or exceeds my annual cost of living. At that moment I become completely independent from the income from my full-time job. Maybe I am still happily working in a full-time job and continue working, but maybe I decide to quit and find a different meaning for the remainder of my life. Achieving this goal of financial independence seems very realistic and from the back of the envelope calculations, I can achieve it within the next 10-15 years.

All my investment decisions are made with this ultimate goal in mind. This means that whenever I have money to invest (my monthly addition to my investment account or re-investing dividend), I assess how it brings me closer to reach this goal. This means that I look at the dividend that I expect the investment to generate immediately, but also 10 - 15 years into the future. This means that I always try to balance between a reasonable entry yield and expected dividend growth. I also only invest in undervalued or fairly valued high-quality companies and intend to hold them for decades. Safety of principal and foremost reliability of the dividend are extremely important to me.

Introduction

Golden Ocean Group is a Bermuda registered Norway based dry bulk shipping company. Please see below their own company description from their website.

Source: Golden Ocean Group corporate website

The company market cap is around $1.8B and they have only 38 employees. This is possible due to the lean business model, where they outsource all technical operations and crewing of their vessels to a few leading ship management companies. They are therefore more like a maritime investment and leasing company and not themselves directly involved in operating their vessels.

Sector peers are for example Costamare (CMRE), Danaos Corporation (DAC), Star Bulk Carriers Corp (SBLK), Navios Maritime Partners (NMM) and Global Ship Lease, Inc. (GSL).

Source: Seeking Alpha

Reasons to Like Golden Ocean Group

Strong business momentum

The business is very cyclical as you can see from the fluctuations in the Baltic Dry Index. As a consequence of the trade wars started under President Trump the global economy was starting to cool down and so was the Baltic Dry Index (BDIY:IND) (BDRY) as prices for dry bulk shipping started to decline. When COVID-19 hit the world and economies with major uncertainties, everything further stopped and remained at lower levels until the end of 2020.

Source: Seeking Alpha

From early 2021 onwards, when vaccinations started the way back to 'normal' and economic activity started to pick up rapidly everywhere, the Baltic Dry Index has been steeply increasing. Last August the business momentum even reached 10-year highs. You are probably all aware of the headlines in the news around product shortages and supply chain issues. These issues are at the heart of the business Golden Ocean Group is operating and provides strong tailwinds due to very high demand and pricing power.

Long term Fleet Growth

The company has been steadily increasing their fleet, without disruptions from the global economic crisis like in 2008/2009, 2013/2014 or 2020/2021. This means that despite the cyclical nature of their business, the company is able to execute on a longer-term growth strategy.

Source: Golden Ocean Group corporate website

Their fleet mainly consists of Panamax and Capesize class ships. The former has a loading capacity of 60-110.000 MT and (still) fits through the Panama Canal. The latter is the largest classes of dry bulk ships with a capacity of 180-210.000 MT. They are too large for the Panama Canal, but make up for that by their much higher capacity. You can see in the chart above that Golden Ocean Group has been increasing the share of the largest category (Capesize) vessels in their fleet since especially 2015.

Smart asset recycling

These bulk dry ships are very large and capital expensive. Recently Golden Ocean Group announced they will sell two older vessels and order four new ones instead. The strong business momentum helps them to sell off their older ships for good prices. The new ones are much more fuel-efficient, which is very important with energy prices at their current high levels.

Source: Golden Ocean Group corporate website

This shows how management is timing such moves smartly and with a longer-term strategy. They also prioritize their dividend capacity, which is good to see as a (potential) shareholder.

This smart asset recycling also helps them to keep a well-laddered age distribution in their fleet. The oldest vessels are from 2008, but the age distribution skews towards more recent years. The average building year is actually around 2015, so pretty young considering these ships can often be operated for decades. This helps to limit potential issues with new or tightened safety regulations, technical and fuel efficiency demands.

Financial performance

The Q2 2021 results (published 26th of August 2021) show a strong improvement compared to the Q1 2021 results.

Source: Q2 2021 results investors presentation

Net revenues almost doubled from $119M to $216M and adjusted EBITDA more than doubled from $54.6M to $130.5M. EPS did increase from $0.14 to $0.52, tripling!

In addition to that, the company completed the acquisition of 15 new vessels and order 3 new vessels. They also signed a refinancing of their credit facility leading for up to $435M in new long term financing. These new conditions are very attractive and helped further reduce their daily cash break-even levels.

Source: Q2 2021 results investors presentation

As you can see they have very low cash break-even levels. The current cost base allows the company to remain profitable in any of the weekly prices that has occurred since 2017. Currently, the prices are strongly above previous years and you can see how this makes the company a cash printing machine. They have a cost base per ship of on average $10k per day while generating revenue of around $30k per day in the most recent months (see the graph above)!

Positive outlook

Demand for dry bulk shipping is expected to continue to outpace supply through 2023.

Source: Q2 2021 results investors presentation

This means that the strong business momentum and high prices for their services are expected to continue at least until 2023.

The optimism is also reflected in their Q2 2021 update:

Source: Q2 2021 results press release

Solid balance sheet

As you can see the balance sheet has increased from Q1 2021 to Q2 2021 to $3.5B. This is mainly due to the newly acquired vessels (assets) and new long term debt (liabilities).

Source: Q2 2021 results investors presentation

The balance sheet looks solid to me with equity of $1.8B and liabilities of $3.5B or approx 50%. For me as a value investor this is a ratio that I feel comfortable with. The company is not over-leveraged and this leaves cushion for unexpected headwinds before having to raise additional equity and diluting existing shareholders.

Positive analysts and quant ratings

Of course, everyone should do their own due diligence before investing in anything, but it can be complimentary to look at the view of others. Please see below the ratings and Quant factor grades on Seeking Alpha.

Source: Seeking Alpha

It is positive and assuring to see that SA Authors, Wall Street analysts and also Quant rating are all (mostly) Bullish on the company. This also seems to be in line with the findings in my own research on the company (and I share via this article with you).

Reasons to less like Golden Ocean Group

Cyclical business

As already mentioned the business where Golden Ocean Group operates in is very cyclical. Check out the chart below which only displays the volatility in the last year. The highs are easily triple the lows.

Source: Q2 2021 results investors presentation

Looking at a wider time frame the volatility is also clearly visible.

Source: Bloomberg

Besides the spike towards new highs in 2021, the Baltic Dry Index has been fluctuating between roughly $500 and $2.000, averaging around $1.000. This clearly shows how volatile and cyclical the dry bulking prices are.

Fortunately, the Golden Ocean Group has a very low cash break-even level (at any price level seen since 2017 they would remain profitable), the 'normal' sector volatility is something they are able to deal with. It is also clearly visible in the long term fleet growth that they have achieved and still continue with. If the company would easily fall to losses when the sector faces headwinds, they would not be able to execute on such a long term strategy.

Dependability on Coal and Iron Ore

The Golden Ocean Group vessels are transporting different types of products with their vessels, but the majority consists of Iron Ore and Coal.

Source: Golden Ocean Group corporate website

This makes them more vulnerable to product-specific developments and issues. Coal is currently being scrutinized due to the shift to green energy sources to lower emissions. Due to the recently spikes in energy prices and shortages, China has turned back to coal to help meet energy demands source. This currently helps Golden Ocean Group's customers/vessels demand, but you see how political developments can impact the demand for some of the core products their customers are transporting. Iron Ore is also a commodity with demand volatility and political policies influencing demand/supply and therefore prices. In calendar year 2022 Iron Ore demand and prices are expected to remain strong, but a few years later things can be very different again as it is closely linked to wider economic activity.

Loyal dividend payer, but amounts fluctuate

The company has a history of paying dividends, but the amount being paid out has fluctuated from quarter to quarter.

Source: Golden Ocean Group corporate website

For someone relying on the quarterly dividend as regular income, this clearly is a red flag. When you are however less dependent on the consistency of the income per quarter, this is less of an issue. You see that they have always paid a dividend since Q4 2017, but the lowest amount is $0.025 versus $0.5 most recent for their Q2 2021.

The current dividend yield is very high considering a share price of $9. If the company would pay no dividend for the rest of 2021, the dividend would still come at $0.75 or a yield of 8.3%! EPS in fiscal Q2 2021 was 0.52, which would put the payout ratio around 100%. Considering the strong business momentum, it is not unreasonable to expect the remaining fiscal 2021 payouts to remain at least at the fiscal Q1 2021 level of $0.25. This would translate into a payout of $1.25 or annual dividend yield for fiscal 2021 at 13.8%!

Normally I would also calculate how their dividend would grow in the next 10-15 years, to see how it could fit into my personal investment strategy and goals. Considering however the volatile nature of their dividend payouts I decided not to do so, it is simply too volatile for me and doesn't fit my needs.

Investment Thesis

As you have seen, Golden Ocean Group is a well managed company in a sector that is having strong tailwinds in 2021 that are expected to continue until 2023.

The dividend has been substantially increased recently and due to strong business momentum now and throughout 2022 and 2023, it looks safe with even room for further growth. Even if the two remaining dividend payments for fiscal 2021 would stay at the previous $0.25 level (fiscal Q1 2021), the annual 2021 dividend yield would be 13.8%!

The share price of around $9 reflects a PE (TTM) ratio of 7.5 and PE (FWD) ratio of below 5, which is both very low. In addition the company market cap is $1.8B, which is about the same as the total equity. This means a price/book value of exactly 1.0. This doesn't indicate strong undervaluation, but also surely no overvaluation. You pay 1 dollar for every dollar of company value. The share price has dropped 25% off it's 52-week high last August, which indicates a potential discount.

Considering the low valuation and the extremely high dividend yield (expected to stay at this level until 2023), the company looks like an attractive investment. Be aware however that the business is very cyclical in nature and the situation after 2023 can be very different. I however think the current low valuation and the dividend you would collect until 2023 could provide an interesting margin of safety.

I rate Golden Ocean Group a BUY for investors with a higher risk/rewards appetite. The valuation is low and dividend payout very attractive right now, but investors should also consider the cyclical nature and business (and therefore share price) volatility. This can especially play out after the current strong business momentum would fade away.

For me as a value investor looking for reliable and steadily growing dividend income in the next 10-15 years, it is a pass.

Conclusion

As you have seen Golden Ocean Group is at the heart of the current supply chain issues and shortages. They are a well managed company successfully executing a longer term strategy in a cyclical business with strong business momentum. Investors with a higher risk/rewards appetite could consider an investment, but if you have less risk appetite and look for reliable growing dividend income, I recommend to look elsewhere. For example at Morgan Stanley (MS) or Sanofi (SNY) as I highlighted in previous articles.

Happy to hear your feedback, do you (dis)agree with my conclusions on Golden Ocean Group?

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in GOGL, GDOCY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.