Global Ship Lease: New Charters Augur Well For Earnings And 8% Yield (NYSE:GSL)

Generic Cargo Container Ship at Sea

Art Wager

Global Ship Lease (NYSE:GSL) continues improving its long-term position, adding to its extensive list of charters. However this is not reflected in the company’s share price, which has continued to fall. But as a result, Global Ship Lease offers a juicy yield that it can more-than-afford to continue paying.

Strong Second Quarter Earnings

Global Ship Lease reported a strong second quarter with $154.5 million in revenue (nearly double last year’s level) and normalized net income of $67.4 million (nearly triple last year). Stronger earnings came as a result of more operating days (new ships) and better charter rates.

With new charters fixed in the second quarter, the company added $435 million in contracted revenue to its pre-existing backlog. There wasn’t much excitement on the call, other than the continued $40 million buyback (hopefully these new lows are being used) and an investment in Aqualung, a carbon capture initiative.

The company’s net assets improved by around $130 million and, of course, the interest rates on its debt are hedged until 2026.

New Charter Agreements

On August 30, Global Ship Lease announced new contracts on six of its vessels with Hapag-Lloyd (OTCPK:HPGLY).

The new charters are each for a firm period of five years, followed by two 12 month periods at the option of the charterer, and are scheduled to commence between late 2023 and late 2024, following the expiration of existing charters to a different counterparty. The charters are expected to generate average Adjusted EBITDA of approximately $13.1 million per ship, per year; and total Adjusted EBITDA of around $393 million for the six ships over the firm charter period.

To put that in perspective, the company is expecting around $78.6 million per year in new adjusted EBITDA from this charter agreement. This is $19.65 million per quarter. Compare this to the company’s second-quarter EBITDA of $95.33 million from 65 vessels.

Global Ship Lease just signed a charter agreement on less than 1/10 of its fleet projected to earn the company the equivalent of 1/5 of its current income. Wow.

This is emblematic of a continually strong charter market, as mentioned on the company’s conference call:

The trend is clear, rates across have improved significantly. Our contract coverage is strong through at least the medium term. And in many cases, we’ve been able to secure multi-year charters, but relatively older vessels at rates far above their previous employment. In each instance, the operating leverage in our business means that incremental cash flow goes almost entirely to our bottom-line.

This recent fixture shows that despite the HARPEX dropping almost 10% from its recent highs, actual charters are still being signed at record highs.

Dividend Still Sustainable

On the back of an even-better contract backlog, Global Ship Lease remains well-positioned to maintain, and possibly even grow, its high dividend payout. With a forward payout of $1.50, the company is currently yielding 8%.

The company’s current payout ratio is below 20%, which leaves significant room to sustain, and possibly even grow, this high dividend level. The company’s $1.85 per quarter earnings are extraordinary and positioned to grow over the coming years as new, higher contracts kick in. With extremely high coverage through 2024, the dividend is at little risk of being.

Valuation

The company’s valuation remains low. Annualizing the company’s normalized net income gives us around $7.4 in EPS. This gives the company a forward price to earnings ratio of just 2.45, far below its trailing ratio of 4.66 when I last covered the company in May. Comparing Global Ship Lease to Atlas Corp. (ATCO) which was bid for at 7.7 times forward earnings, the company appears strikingly cheap.

I think that you could easily justify a higher earnings multiple, of at least 5, for Global Ship Lease as the company continues to improve its earnings potential and debt load. This would give the company a value of $37 per share, roughly 100% upside.

Takeaway

Global Ship Lease is signing superior charters, in spite of the seeming decline in charter indices in recent weeks. The company has a resilient charter backlog and improving balance sheet that back its high dividend yield, that is only a modest percentage of its earnings. Global Ship Lease has been caught up amidst a broader market and shipping selloff that is largely unlinked from the company’s underlying earnings potential. Even if you can’t fight market sentiment, Global Ship Lease still offers you a strong yield while you wait for the tide to turn.

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