Genco Shipping: Dividend Play With Upside Potential

1 year ago

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A strategy focusing connected dividends and debased leverage makes Genco Shipping & Trading Limited (NYSE:GNK) absorbing for worth investors. The institution has a way grounds of paying a unchangeable dividend and nan expertise to deleverage nan equilibrium sheet. Its valuation is reasonable, pinch a beardown dividend output of 11%. In summation to nan beardown dividend, nan banal has upside imaginable if nan institution tin clasp free rate travel astatine existent levels. The main risks are GDP improvement and costs inflation.

Genco Shipping Background

Map showing drybulk waste and acquisition routes

Genco Shipping & Trading Limited is nan largest U.S.-based barren bulk shipper. Genco's fleet is utilized connected barren bulk routes globally, and nan institution has offices successful Singapore, Copenhagen, and New York (its headquarters). Genco is afloat focused connected barren bulk shipping and does not ain different freight-type vessels. The institution owns 44 barren bulk vessels transporting robust ore, coal, grains, cement, fertilizers, and different barren bulk products. Seventeen are Capesize vessels delivering awesome bulk (iron ore and coal) products, and 27 are Ultra-/Supra-size vessels delivering insignificant bulk (grains, cement, etc.) products.

Genco's alloy portfolio enables cognition successful each awesome barren bulk merchandise categories. Genco's fleet is comparatively young, pinch an mean alloy property of 12 years. The alloy portfolio is afloat compliant pinch IMO 2020 biology regulations, and nan institution has afloat made nan investments (exhaust scrubber systems) needed to go compliant pinch regulation.

Dividends successful Focus: Management Strategy

Genco's strategy has 3 main pillars. The first pillar is important dividends done rate travel procreation and reduced rate travel breakeven rates. The 2nd pillar is equilibrium expanse deleveraging done indebtedness prepayments utilizing rate reserves. The 3rd pillar is maturation done acquisitions (the 3rd pillar will beryllium discussed successful much item successful nan risks conception below).

From a dividend investor's perspective, nan first and 2nd pillars are nan astir important. Genco's management has presented beardown capacity successful both. The institution has a dividend output of astir 11% arsenic of Feb. 10, 2023, pinch upside imaginable successful marketplace capitalization. Cash travel procreation has been comparatively beardown done nan past 5 quarters, pinch only 1 4th pinch antagonistic free rate flow. And moreover successful that 4th nan institution paid dividends. However, volatility successful rate flows besides indicates nan consequence for this dividend strategy. Free rate travel volatility tin beryllium seen successful nan quarterly rate travel floor plan and if rate flows are inspected annually.

Low-Debt Levels Help GNK Operate successful a High Interest Rate Environment

The institution began equilibrium expanse deleveraging efforts successful 2020 and has successfully decreased its full outstanding indebtedness from $449 cardinal to $171 cardinal successful Q4 2022 (the institution disclosed its unaudited indebtedness level astatine nan extremity of Q4 2022 earlier publishing its charismatic quarterly report). A alteration successful outstanding indebtedness gives Genco bully positioning successful a high-interest-rate environment. According to nan Q3 2022 quarterly SEC filing, Genco's mean liking complaint connected its existent outstanding indebtedness is 5.34%. With indebtedness levels astatine Q4 2020, nan liking complaint of 5.34% would mean an yearly liking costs of $24 million. At nan existent indebtedness level, yearly liking complaint payments will beryllium astir $9.1 million. Interest payments connected a little indebtedness load mean astir $14.9 cardinal successful savings connected liking costs.

Overall, Genco's position pinch debased comparative indebtedness decreases risks related to refinancing and liking complaint costs. Compared to Genco's adjacent group, nan institution outperforms connected leverage ratios. According to information compiled by Seaborne Capital Advisors, Genco's full debt/asset worth is 17.6% erstwhile nan adjacent group median is 44.9%. Also, Genco's mean full debt/EBITDA successful 2022 is 0.7x, while nan adjacent group median is 2.0x. Genco's adjacent mandatory indebtedness repayment is arsenic precocious arsenic 2026, but nan institution has regularly conducted voluntary indebtedness repayments. In Q1-Q3 2022, nan institution paid nan indebtedness backmost astatine a complaint of astir $20 cardinal per quarter. Genco's firm position shows that their nett LTV (loan to value) stands astatine 11%. The LTV calculation contains estimates of fleet values from a third-party alloy valuing agency.

chart showing indebtedness level improvement for Genco

dry bulk operators leverage successful 1 table

Financials

chart showing gross gross profit and nett profit for Genco

Genco's gross has been successful a diminution connected a rolling quarterly basis. The main driver successful nan top-line improvement is freight complaint development. The institution identifies Baltic Capesize and Baltic Supramax arsenic nan main index for its pricing. We tin spot a clear relationship betwixt Genco's apical statement and nan Baltic Dry Index's improvement complete time. The Baltic Dry Index peaked successful precocious 2021 and has importantly decreased to its existent level.

chart showing baltic barren scale development

The profitability of Genco's business remains strong. The disbursal broadside of nan income connection is much unchangeable than nan volatile apical line. We tin spot that full COGS (cost of equipment sold) person remained comparatively unchangeable quarterly, moreover erstwhile we spot gross volatility.

From a dividend investor's perspective, nan expertise to make rate travel is important. Net operating rate flows person remained beardown connected quarterly inspection. Operating rate travel is afloat limited connected gross development. The main takeaway regarding operating rate travel is that nan company's underlying business is powerfully rate profitable.

Valuation

We will attack Genco's valuation done elemental DCF calculation pinch 2 scenarios. The first script estimates Genco's existent valuation, and nan 2nd takes a affirmative outlook connected nan rate travel maturation rate. During early February 2022, Genco shares traded astatine astir $18.50. From nan DCF array above, we spot that successful a five-year play pinch a free rate travel yearly maturation complaint of -95%, we get to nan existent stock value of $18.48. The existent value intends that nan banal marketplace estimates Genco's rate flows to alteration almost to zero successful a five-year clip frame.

The 2nd scenario, which tin beryllium viewed successful nan DCF calculation below, estimates that Genco tin support free rate travel procreation astatine existent levels. If Genco tin support its rate travel procreation astatine existent levels, nan value per stock could beryllium $32.92. The 2nd script intends nan banal could person a 78% upside potential. However, aggregate risks mightiness impact Genco's rate flows. The institution noted liking complaint risks arsenic 1 of nan awesome consequence for its business successful nan Q3 2022 filing linked above.

Individual investors are encouraged to do their ain owed diligence erstwhile it comes to valuation. The existent marketplace situation seems to person small belief successful Genco's expertise to prolong its rate flows astatine existent levels.

Risks

Genco operates successful nan commodity marketplace and is exposed to aggregate risks, pinch constricted expertise to impact outcomes successful nan marketplace environment. The improvement of macro factors has a awesome effect connected barren bulk trade.

Genco's 3rd strategy pillar, maturation done acquisitions, tin beryllium seen arsenic a imaginable consequence from a dividend investor's perspective. The institution discloses its volition for mergers and acquisitions indirectly successful its strategy slide by noting that it's capable to "use shares arsenic a rate to grow." If nan institution decides to utilize this instrumentality successful its strategy toolbox, guidance mightiness displacement its attraction excessively overmuch distant from moving soft operations. Failed corporate acquisitions tin put a batch of financial accent connected nan institution and mightiness weaken Genco's expertise to salary dividends.

Global GDP improvement is heavy correlated pinch barren bulk trade. Global GDP and barren bulk waste and acquisition have a correlation of 0.72. If world GDP improvement is negative, Genco's business mightiness suffer.

Interest rates besides person an effect connected Genco's costs. The institution is hedging its liking rates to amended liking costs forecasts. However, moreover erstwhile hedging liking rates, nan institution is still exposed to liking complaint volatility done unrealized losses and gains connected guardant statement positions.

Genco has decreased its leverage significantly, but nan institution still has semipermanent indebtedness connected its equilibrium sheet. This could impact nan company's expertise to discuss financing position pinch suppliers.

Conclusion

In conclusion, Genco Shipping has a bully position successful nan barren bulk shipping market. The institution has a reliable strategy focusing connected dividends and debased leverage. Management is knowledgeable successful nan manufacture and has served astatine Genco for a agelong period. The equilibrium expanse is beardown compared to its competitors, which helps Genco navigate inflationary and precocious liking complaint environments. When adding successful a comparatively debased valuation pinch a P/B of 0.64 and P/E of 3.50, nan banal seems to beryllium an absorbing campaigner for a dividend-focused worth investor's portfolio.

This article was written by

Henri Suutari floor plan picture

Henri Suutari is an independent banal expert willing successful accepted industries specified arsenic maritime shipping, commodities, and existent estate. As an analyst, I purpose to understand nan company, its operations, and its positioning successful nan marketplace successful arsenic item arsenic possible. I person an undergraduate grade successful Finance and Accounting, and I americium pursuing a Master's grade successful Auditing. As my time job, I activity arsenic an subordinate auditor. All opinions and comments are solely my ain and do not correspond immoderate statement I whitethorn beryllium affiliated with.

Disclosure: I/we person a beneficial agelong position successful nan shares of GNK either done banal ownership, options, aliases different derivatives. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Additional disclosure: The writer of this article is not a financial advisor and is not successful a position to propose nan acquisition of immoderate securities.