Star Bulk Carriers: The Stock Is Still Undervalued

Apr. 24, 2022 2:19 AM ETStar Bulk Carriers Corp. (SBLK)DSX, GOGL, GRIN, NMM, SB14 Comments16 Likes

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Summary

Since my first article on SBLK, the stock's price increased by more than 45% to $32 per share, then retreated to below $30.
Based on my new calculations, the stock is worth $31 per share. However, based on the market condition, I believe the stock is worth even more.
Iron ore prices increased in the last months, reflecting increasing iron ore demand from China. However, China’s iron ore strong demand is not stable.
According to the iron ore demand, freight rates, and charter rates, Star Bulk is ready to stay profitable in the second quarter of 2022.
As charter rates increase, SBLK's strategy will make it more competitive than GRIN and GOGL.

Aerial View Cargo Ship Waiting to Enter the Port — AegeanBlue/E+ via Getty Images

In my first article on Star Bulk Carriers (NASDAQ:SBLK), Star Bulk is a buy at around $22: here is why, published on 2 February 2022, I explained why SBLK is opportunistic. After the company reported its 4Q 2021 financial results, I increased the fair value of SBLK to $30 per share in my second article on the stock, Star Bulk vs. Grindrod and Golden Ocean: a comparison between peers. Since my first article, SBLK stock price increased by more than 45% to $32 per share, then retreated to below $30. I am still bullish on the stock as the market condition is in favor of bulk carriers. Moreover, on 6 April 2022, Star Bulk announced the signing of a joint letter of intent to develop an iron ore Green Corridor (specific shipping routes where elements of zero-emission shipping are more feasible) between Australia and East Asia. Due to environmental regulation, Star Bulk has increased its competitiveness compared to other bulk carriers. In a word, SBLK is still undervalued. Based on my calculations, the stock is worth $31 per share. However, based on the market condition, I believe the stock is worth even more.

4Q 2021 financial results and my 1Q 2022 estimations

Below, I explain a summary of my recent articles on Star Bulk. If you have read my recent articles on SBLK, pass this section.

In its fourth-quarter 2021 financial results, SBLK announced a profit of $2.96 per diluted share, compared with a diluted EPS of 30 cents in the same period last year. Star Bulk reported a voyage revenue of $499.9 million, compared with 4Q 2020 voyage revenue of $186 million, up 169%. SBLK announced a profit of $2.96 per diluted share in the fourth quarter of 2021, compared with a diluted EPS of 30 cents in the same period last year.

In my first article on SBLK, I explained how the TCE rates correlate with the Baltic Dry Index. Also, in my second article on Grindrod Shipping (GRIN), Grindrod Shipping is still worth investing: about 35% upside potential, I mentioned that due to increased time charter rates in 2022, how we can estimate a reliable TCE rate for a dry bulk company. Using the quarterly Baltic Dry Index and dry time charter estimates, I estimate 1Q 2022 TCE per day of $26397 for Star Bulk (see Table 1). Furthermore, as Figure 1 shows, The Baltic Dry Index in the second quarter of 2022 is higher than in 1Q 2022. Thus, I predict the TCE per day of SBLK will increase to more than $28000 in the second quarter of 2022. However, to predict with more accuracy, we need to see what will happen for the dry bulk market in the next 30 days. Also, using my estimated TCE per day, I estimate revenue of $316.4 million and diluted EPS of $1.38 in the first quarter of 2022 for Star Bulk.

Table 1 – estimation on SBLK’s 1Q 2022 TCE per day

Figure 1 – Baltic Dry Index

Promising market condition for bulk carriers

Monitoring the bulk carrier freight rates, bulk carrier time charter rates, and iron ore demand, I am bullish on Star Bulk. The second quarter of each year is bulk carriers’ traditional peak season. According to the Metals Market Index (MMI), in the second season, the shipping volume of major mines will reach a year high. Figure 2 shows that since the beginning of 2022, the iron ore port index and iron ore seaborne index have been increasing. Figure 3 shows that compared to February 2022, China’s iron ore import increased in March 2022.

Figure 2 – Iron ore port index & iron ore seaborne index

Figure 3 – China’s iron ore import

According to Figure 4, in the first two months of 2022, China’s steel consumption and production decreased. However, since the end of February 2022, China’s steel consumption and production bounced back. We can see that in the first quarter of 2022, China’s steel production was not as strong as in 1Q 2021. But, in February and March 2022, China’s steel consumption was higher than in 2021. Figure 5 shows that iron ore prices increased in the last months, reflecting increasing iron ore demand from China. However, China’s iron ore strong demand is not stable. Based on the MMI report as of 20 April 2022, iron ore is expected to remain volatile in the next weeks.

Figure 4 - China’s steel consumption & production

Figure 5 – Iron ore price

What about freight rates and charter rates? Figure 6 shows the bulk carrier freight rates (iron ore) for capsize vessels in two major routes in the first quarter of 2022 are lower than in the last quarter of 2021. It is consistent with my estimation of SBLK’s 1Q 2022 TCE per day, which is lower than its TCE per day in 4Q 2021. On the other hand, Figure 7 shows that time charter rates have been increasing since the beginning of 2022. Despite the low chartering rates in 2021, Star Bulk didn’t use the charter-in strategy as much as Golden Ocean (GOGL) and Grindrod Shipping. As charter rates increase, Star Bulk’s strategy will make it more competitive than GRIN and GOGL.

Figure 6 – Bulk carrier freight rates (iron ore)

Figure 7 – Bulk carrier time charter rates

Performance

Star Bulk has a dividend yield of 14.8%, the highest after Golden Ocean's. The company’s dividend yield is 860 bps more than the peers’ average of 6.20%. Generally speaking, a higher dividend yield is a sign of more income. However, a higher dividend yield often brings more risks. Thus, it is crucial to investigate the circumstances that cause the higher dividend yield. In this regard, SBLK's other metrics may give a better picture of its return (see Figure 8).

Figure 8 – SBLK dividend yield vs. peers

As Figure 9 indicates, after GOGL, SBLK has the highest dividend payout ratio, 2638 bps more than the peer group’s average of 36.40%. Although SBLK’s high payout ratio could put its sustainability in question, it could be a sign of the company’s strong balance sheet. Moreover, Star Bulk’s current ratio is 2.35x, about 34% higher than the peer group’s average of 1.75x. It implies the management is using the assets efficiently and is more likely to pay the investors back, keeping the risk of its dividend yield low.

Figure 9 – SBLK’s payout and current ratios vs. peers

Valuation

I used Competitive Companies Analysis (CCA) to evaluate SBLK stock. Comparing Star Bulk Carriers with other peer competitors and using the CCA method, I estimate that the stock is still undervalued and has around 8% upside potential to reach $31. This method reflects the real-market data and is an appropriate way of analyzing SBLK due to the company’s relative stability. Based on market cap and financial operations, I selected the dry bulk peers and used common key ratios in a CCA method to illustrate the value of similar companies. Data was gathered from the most recent quarterly and TTM data (see Table 2).

Table 2 – SBLK and its peers

Comparing SBLK’s ratios with other peer companies, I observe that the stock is relatively undervalued – SBLK’s P/E ratio is 4.60x, which is in line with the group’s average of 4.91x. Also, the company’s EV/EBIT ratio is 5.75x, which is 17% lower than the peers' average of 6.93x. Moreover, Star Bulk’s EV/EBITDA ratio equals 4.77x, which is 13% below average. These ratios indicate that the company is attractive as a potential investment (see Table 3).

Table 3 - SBLK stock valuation

Besides SBLK, I have done some analysis on the peer companies. Navios Maritime (NMM) and Diana Shipping (DSX) have higher EV/Sales amounts than the peers’ average of 2.65x. Moreover, NMM’s EV/EBIT is 21% higher than the group's average. They could be signs of being overvalued. The EV/EBITDA of Safe Bulkers (SB) and Grindrod Shipping is 35% and 22% below the peers’ average of 5.53x, respectively, which could signal that stocks are potentially undervalued.

Summary

I am still bullish on SBLK; the stock is worth $31 per share. I expect the company reports strong 1Q 2022 financial results. Moreover, according to the iron ore demand, freight rates, and charter rates, Star Bulk is ready to stay profitable in the second quarter of 2022. Also, compared to its peers, Star Bulk has performed well. The stock is a buy.

This article was written by

SM Investor

599 Followers

As a fundamental stock market analyst, I mostly use real-market data to estimate stocks' intrinsic value. I evaluate dividend stocks using Comparative Company Analysis and Dividend Discount Model methods. I also use statistical analysis to make projections on variables related to the market to turn my observations into numbers.

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 SBLK 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.

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