Genco Shipping: 12% Yield, Low Debt, Very Strong Earnings

Summary

  • GNK has a new dividend policy - its forward yield is 12.40%.
  • Management has paid down significant debt - Net Debt/EBITDA is only 0.51X, interest expense dropped 50% in Q1 2022.
  • Q1 2022 EBITDA rose 181%, net income grew ~20X, revenue rose 46%.
  • GNK had its highest shipping rates since 2010 in Q1 2022.
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Aerial view of Large Cargo Ship Vessel in transit.

bfk92/E+ via Getty Images

Looking to profit from the global supply chain logjam? The volatile Baltic Dry Index, which measures the relationship between the supply of large super bulk cargo ships (across 3 different sizes), and the market demand to utilize the ships and their trade routes, has been on a tear since 2021.

It topped out at ~5650 in October 2021, and was at 2633 as of 6/2/22:

baltic dry chart

tradinggeconomics

Those higher index values have greatly benefited bulk cargo shipping companies, such as Genco Shipping (NYSE:GNK), which has seen its Time Charter Equivalent, TCE, rates ramp up considerably since early 2021.

GNK's average daily fleet-wide time charter equivalent, or TCE, for Q1 2022 was $24,093, 98% higher YOY and its highest first quarter TCE since 2010.

Those high rates didn't slow down for GNK in April '22 either, staying in the same high area. Management "estimates our TCE to date for Q2 2022 to be $27,596 for 68% of our owned fleet available days, based on both period and current spot fixtures."

Genco Shipping tce rates

GNK site

Profile:

Genco Shipping & Trading Limited is an international ship owning company. We transport iron ore, coal, grain, steel products and other dry bulk cargoes along worldwide shipping routes. Our wholly owned modern fleet of dry cargo vessels consists of Capesize, Ultramax and Supramax vessels that provide an essential link in international trade.

GNK's fleet consisted of 44 vessels, as of 3/31/22, with the delivery of the Genco Mary and the Genco Laddey, two high quality, fuel-efficient Ultramax vessels built in 2022 at Dalian Cosco KHI Ship Engineering.

Fleet utilization was 94.4% in Q1 '22, indicating the ongoing high demand for these vessels. Russia's invasion of Ukraine has led to higher commodity prices and a re-directing of cargo flows, especially for grains and energy, which has ramped up ton-mile demand. Additionally, higher fuel prices have led to a slowdown in the fleet, thereby reducing available capacity; while a lower newbuild rate for the global fleet has also supported chartering prices.

Genco Shipping fleet data

fleet

Dividends:

High rates led to much higher earnings, and also led to management rejiggering its dividend calculation, resulting in a much higher dividend over the past 2 quarters. The Q4 '21 dividend rose from $.15 to $.67, and rose again in Q1 '22, to $.79.

Using a traditional EPS metric shows GNK's Q1 '22 dividend payout ratio at 81.4%, with a very low trailing payout ratio of ~33%:

Genco Shipping dividend coverage

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GNK's new dividend policy deducts Debt Repayments, Maintenance Capex, and a reserve from Operating Cash Flow to calculate Distributable Cash Flow for dividends. That figure is then divided by the number of shares that are due dividends, in order to calculate each quarter's dividend/share, which was $.79 for Q1 '22.

This 2022 cash flow chart shows that Q2' 2022 will have much higher Capex: dry docking/BWTS/ESD expenses of $24.71M, up ~$22M vs. Q1 '22.

If GNK's Net Revenue stays flat in Q2 '22, the Operating Cash Flow would be ~$58.14M. With the additional $22M in Capex, the Distributable Cash Flow would equal ~$13.93M, and the Q2 dividend would be ~$0.33/share, down $.46 vs. $.79 in Q1 '22. It depends upon the Net Revenue.

However, management sees much lower Capex costs in Q3 of just $3.95M, and $3.50M in Q4 '22, so if TCE rates stay high in Q3-4 2022, GNK would be able to return to a paying out a bigger quarterly dividend in the 2nd half of 2022.

Another plus from this chart is that, according to the steady 42.5M share count, management doesn't plan on issuing more shares in the balance of 2022.

Genco Shipping dividend

GNK site

Genco Shipping drydock

GNK site

GNK's trailing dividend yield is 6.71%, while its forward dividend yield is 12.4%. Most likely the yield will end up somewhere between the two in 2022. It should go ex-dividend next on ~8/16/22, with an ~8/25/22 pay date.

Genco Shipping dividend yield

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Performance:

With rates and dividends rocketing so much higher, GNK has charmed Mr. Market, and has outperformed the Marine Shipping industry and the S&P 500 by very wide margins over the past month, quarter, year, and so far in 2022:

Genco Shipping performance

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Earnings:

GNK's gaudy Q1 2022 earnings growth numbers show you far bulk cargo rates have risen since Q1 '21. 4-digit growth rates aren't seen around these parts too often. And these numbers happened in spite of China being in lockdown mode for part of Q1 2022, due to its Covid outbreaks. That bodes well for the 2nd half of 2022, when China should fully reopen.

2021 full year growth was also robust, with 3-digit growth across the board. In addition to much higher shipping rates, Interest Expense also declined by 31% in 2021, and fell over 50% in Q1 '22, thanks to management's focus on paying down debt, and lower interest rates.

Genco Shipping Earnings and revenue

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While Q1 2022 revenue jumped by 57%, expenses only rose by ~14%:

Genco Shipping fleet profit

GNK site

Profitability & Leverage:

Normally when you look at the shipping industry, you expect high levels of debt leverage, but not with GNK, which has the lowest debt leverage we've seen in this industry for a long time. Since 1/1/2021, management has paid down $252M, or 56% of GNK's debt.

GNK's trailing ROA and ROE are much higher than shipping industry averages.

Genco Shipping roe

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Debt & Liquidity:

GNK has no debt amortization payments until 2026, when its credit facility matures. It had $49.1M in cash, plus $222M in availability on its credit revolver, as of 3/31/22.

Valuations:

The 2 compelling under valuations for GNK are its trailing P/E of just 4.91X, vs. the 18.34X marine shipping industry average; and its very low EV/EBITDA of 4.16X, vs. the 12.29X industry average. With low debt, but strong EBITDA, all that's left for GNK's Enterprise Value ratio to rise is its market cap, which should do so, in light of its prospects for continued profitability in 2022.

Genco Shipping valuation

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Analysts' Estimates & Price Targets:

Looking forward, we see that GNK has a forward 2022 P/E of 5.14, still much lower than industry averages, and a 2023 P/E of 5.57.

Genco Shipping yearly estimates

Barrons

GNK received a recent BUY rating from Jefferies on 4/27/22, who resumed coverage, with a $27.00 price target. At $25.49, GNK is 10.7% below the $28.53 average price target, and 31% below its $37.00 highest price target.

Genco Shipping upside variance

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Parting Thoughts:

With few orders for new ships, and China reopening, shipping rates should continue to find support in 2022, which will, in turn, support GNK's new dividend policy.

We rate GNK a BUY, based upon its improved debt leverage, dividend policy, and shipping industry tailwinds.

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This article was written by

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Disclosure: I/we have a beneficial long position in the shares of GNK either through stock ownership, options, or other derivatives. 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.

Additional disclosure: Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.

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