Genco Shipping: The 14.14% Reason To Load Up At Low Tide

Boat at the Wadden Sea at Low Tide, Hallig Hooge, Wadden Sea National Park, Germany

Conny Pokorny/iStock via Getty Images

Investment Thesis

The market appeared to be short-sighted to have punished Genco Shipping & Trading Limited (NYSE:GNK) with an -18.91% stock declines from $18.91 on 03 August to $15.32 on 25 August 2022. Its performance continued to suffer from the market pessimism, post Powell’s hawkish commentary on 26 August and the release of August 2022 CPI on 13 September 2022.

However, we are of the opinion that this creates the perfect storm for opportunistic investors looking to load up on short-term dividend gains speculatively through H1’23, since GNK will continue to report excellent execution and profitability ahead. Q3 and Q4 dividends would likely be stellar, given the market’s projection of 14.14% yields. Do not miss this monster boat at low tide. A monster wave may be coming soon.

GNK Continues To Benefit From Elevated TCE Rates

GNK Revenue, Net Income, Net Income Margin, and Gross Margin

S&P Capital IQ

In FQ2’22, GNK reported revenues of $137.76M and gross margins of 51.4%, representing a remarkable increase of 13.8% and 4.1 percentage points YoY, respectively. This has directly contributed to its growing profitability, with net incomes of $47.38M and net income margins of 34.4% in the latest quarter, indicating a tremendous increase of 47.8% and 7.9 percentage points YoY, respectively.

GNK TCE Rates

GNK TCE Rates

S&P Capital IQ

These astounding numbers are directly attributed to the massively inflated TCE rates over the past two years, which had grown by 369.8% for major bulk and 394.6% for minor bulk by FQ2’22, from pre-pandemic levels in FQ2’19.

Though analysts were concerned about the slight fall in GNK’s TCE rates for FQ3’22, investors must not forget that these numbers represent a minimal decrease of -6.3% for major bulk and a notable increase of 39.5% for minor bulk from FQ2’21 levels. The company reported a massive YoY expansion of 44.8% in revenues and over 200% in profitability then. Otherwise, tremendous increases of 305.4% and 357.3% from pre-pandemic levels, respectively. Therefore, we consider the market to have over-punished and over-corrected the stock’s valuations thus far. However, that momentum also creates the perfect entry point for opportunistic investors who have been waiting patiently to load up.

GNK Long-Term Debt, Interest Expense, Net PPE, and Capex

S&P Capital IQ

In addition, GNK appeared to have done well for itself in the past two years, given the rapid decline in its long-term debts thus far. By FQ2’22, the company has competently deleveraged to $181.6M from FQ2’19 levels of $433M, representing a decrease of 58% thus far. This has directly contributed to its reduced interest expenses of $2.4M in the latest quarter, compared to $8.1M in FQ2’19.

In the meantime, GNK has also been slowly rebuilding its fleet capabilities to 44 vessels in FQ2’22, compared to 40 in FQ2’21 after drastically reducing from 58 in FQ2’19. Thereby, indicating the management’s optimism ahead, with increased net PPE assets of $1.03B and capital expenditure of $3.3M in the latest quarter, despite the worsening macroeconomics.

GNK Cash/ Equivalents, FCF, and FCF Margins

S&P Capital IQ

Despite the increased capital expenditure of $50.28M in H1’22 compared to $26.23M in H1’21, GNK continued to impress with elevated Free Cash Flow (FCF) generation of $43.3M and an FCF margin of 31.4% in FQ2’22. It represents an increase of 71.7% and 10.6 percentage points YoY, respectively.

Though some investors may be concerned by the perceived fall in GNK’s cash and equivalents, these are attributed to its tremendous return of value to its long-term investors through stellar dividend increases in H1’22. Naturally, this is on top of its excellent deleveraging efforts as well.

An Upwards Rerating Of Its Revenue & Profitability Is Imminent

GNK Projected Revenue and Net Income

S&P Capital IQ

Over the next three years, GNK is expected to report an apparent revenue and net income deceleration at a CAGR of -16.11% and -6.04%, respectively. This is probably attributed to the market’s forward pessimism, from a normalization of TCE rates and the easing of port congestion due to the slowing global economy. However, we are less pessimistic, since the 30Y low order book and slower sailing speeds by 2023 will continue to impact supply, contributing to speculatively mid-level TCE rates moving forward. As a result, while the current rates are obviously unsustainable, it is unlikely that we will see pre-pandemic rates over the next few quarters. Thereby, preserving GNK’s profitability ahead.

In the meantime, it is also evident that consensus estimates remain relatively optimistic about GNK’s forward execution, given the impressive improvement in its net income margins from -14.4% in FQ2019, 33.3% in FY2021, and finally to a stellar 46.7% in FY2024. For FY2022, the company is expected to report revenues of $388M and net incomes of $185M, representing a massive decrease of -29% though relatively inline YoY, respectively.

Again, we are more optimistic, since GNK reported stellar earnings in H1’22, with promising TCE rates ahead. Combined with the projected reduced drydocking rate by -69.8% QoQ and higher available days for the owned fleet by 10.7% QoQ in FQ3’22, we expect to see an upwards rerating of its FY2022 revenues to nearly $550M (if not more at $600M). Naturally, elevated oil prices are likely to impact its otherwise improved profit margins through 2023, as seen in the past two quarters.

As the revised revenue represents an excellent 41.7% upside from estimates, we may see a potential boost in GNK’s stock valuation by FQ3’22 during the underperforming market ahead. FQ3 dividends will be smashing as well, based on the management’s guidance thus far.

So, Is GNK Stock A Buy, Sell, Or Hold?

GNK 5Y EV/Revenue and P/E Valuations

GNK 5Y EV/Revenue and P/E Valuations

S&P Capital IQ

GNK is currently trading at an EV/NTM Revenue of 2.00x and NTM P/E of 3.49x, lower than its 5Y mean of 3.01x and 14.85x, respectively. The stock is also trading at $14.14, down 47.9% from its 52-week high of $27.15, nearing its 52-week low of $12.97. Nonetheless, consensus estimates remain bullish about GNK’s prospects, given their price target of $28.50 and a 101.56% upside from current prices.

GNK 5Y Stock Price

GNK 5Y Stock Price

Seeking Alpha

GNK Dividend Payout & Yield

GNK Dividend Payout & Yield

S&P Capital IQ

Long-term GNK investors would have been delighted with the recent hike in dividend payouts as well, with more hikes ahead in FQ3’22 and speculatively, through H1’23, given its improved profitability. Analysts still project excellent forward dividend yields of 14.14%, pointing to the stock’s excellent position as a short-term dividend stock for those with higher risk tolerance, with Q3 dividends likely delivering near 20%.

Therefore, we rate GNK stock as a speculative Buy, as the stock continues to decline over the next two weeks. The Feds will likely announce a 75 basis point hike at its upcoming meeting on 20 September, given the relatively elevated inflation rate of 8.3% in August 2022, compared to pre-pandemic levels of 2%. This would prove to be an excellent time for loading up, since GNK’s fundamental performance remains intact over the next few quarters, if not through 2024.

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