Star Bulk Carriers Stock: Affordable, But Not Cheap (Downgrade) (NASDAQ:SBLK)

Investment thesis

In our recent article on Star Bulk Carriers (Nasdaq: SPLK) In February of this year, we maintained a buying stance based on favorable supply and demand dynamics.

The stock price has risen 20% since then February And if we look at the return since November 10, 2023, which was the previous buy call, it’s up 44%.

Investors are optimistic about the future of SBLK and many other shipping companies. Even the container sector, which should face a large influx of new buildings, is being “saved” by the Houthis, at least for now. This is the world. Ironically, some people benefit from crises and wars.

We revisit SBLK’s thesis following Q1 results.

Financial results for the first quarter

Net EPS in Q1 was $0.87 versus EPS of $0.73 in Q4 last year. year.

More important than profits is free cash flow from operating. In the first quarter of this year, SBLK had $114 million of free cash flow from operating and 113.81 million shares outstanding. As such, the FCF/share was $1.00.

From this, we can see that their dividend of $0.75 per share is well covered. The dividend payout ratio improved from 62% in the fourth quarter to 86% in the first quarter. We should look at dividend history over a longer period.

Here is their earnings history over the past five years.

In February of this year, the dividend yield was 6.17% on a TTM basis. It now stands at 6.86% based on the closing price of $26.52 per share on June 4, 2024.

In our opinion, a yield closer to 7% would have been very attractive when the fixed money market offered less than one percent on short-term deposits.

But now that two-year US Treasuries are offering 4.8%, the 2% ERP is rather low when we take into account that earnings consistency, as can be seen from the chart above, is poor. SA has a Dividend Consistency Score of F for SBLK.

In defense of SBLK, we must also take into account that the company has primarily focused on reducing debt and paying down equity in the past.

Since 2021, the company has reduced leverage by 43%. That’s a lot.

During 2022 and 2023, they also repurchased $423 million worth of their common stock.

Now, SBLK has a strong balance sheet and a market-leading low operating cost per vessel. This enables them to make money in much lower market conditions than we have now. And there is safety in that.

The average Opex cost per vessel is $4,962, and general and administrative expenses are $1,223 per vessel per day. As such, the break-even cost before financing cost is US$6,185 per vessel per day.

The daily financing cost per vessel is $1,395.

If prices drop on average or their entire fleet drops below $7,580, they start losing money. This has happened before, but the probability is low.

Ultramax and Supramax champions

With the merger of SBLK and Eagle Bulk, SBLK has become a major player in the Ultramax and Supramax segment, growing its fleet of these versatile vessels to 75 vessels.

As we mentioned in our previous article:

We like transactions because we are very bullish on Supramax size vessels. If we look at last year, they often outperformed larger ships.

SBLK also appears to be finding alpha from smart chartering strategies, as its average TCE is well above estimated market prices quoted by shipbrokers.

To illustrate this, we looked at the Baltic Supramax Index, or BSI, during the first quarter of this year. SBLK was able to earn an average of $17,655 per day during the quarter. This is much higher than the index.

The index is for Supramax vessels, and the majority of the SBLK fleet are larger Ultramax vessels. These ships, because of their greater cargo capacity, should earn a premium of about $1,500 per day.

Even taking that into account, SBLK still outperforms the market.

Shipments of iron ore and bauxite from West Africa

Recently, there have been some newspaper articles indicating that an additional 170 Capesize vessels are needed to transport all the iron ore from Simandou in West Africa.

In September last year, Singaporean ship owner Winning International Group signed a contract to build 2 x 325,000 DWT. Very large ore tankers at the China Shipbuilding Corporation’s yard. It is very economical and will be built to accommodate dual fuels, including methanol.

It is the bauxite and iron ore trade from West Africa to China that it will be built for. They have ambitions to increase this order to more than just two ships. Winning has a fleet of 38 Capesize vessels and one Post-Panamax. We wouldn’t be surprised if they build out this fleet further before shipments from Simandou begin in 2025.

The three major owners of mines and infrastructure in Simandou are Rio Tinto (RIO), Alumimum Corporation of China, and Winning International.

As such, for other shipowners, we’re not saying they won’t get any business from there, we’re just trying to pour some cold water on their over-zealous thinking that there will be a huge ship supply shortfall in the future. several years.

evaluation

Although the stock price is up 44% since mid-November last year, earnings per share have also increased significantly from $0.34 in the third quarter of 2023 to $0.87 in the last quarter.

Five analysts’ consensus estimate for 2024 EPS is $3.95 and increases to $4.33 in 2025.

This leaves us with a P/E of 6.6 which is attractive in our opinion.

We’ve already shared our view on their dividend yield.

In our valuation assessments, we often use the ratio of stock price to net tangible asset value for assets such as real estate and financials. For shipping companies, we rely less on this ratio.

Seeking Alpha provides a wealth of data that we can use to evaluate reviews. According to their assessment, the price/booking of SBLK based on TTM and FWD is as follows:

SBLK’s P/Book is attractive compared to the sector average. But as we mentioned previously, we do not view this percentage as the most important percentage. In our opinion, it is very important to use P/E, cash flow, and dividend yield

Risk and conclusion

The main risk to this thesis is the decline in iron ore imports into China in the near future, as a result of reduced demand for steel from the construction and manufacturing industries.

We are long SBLK and would like to add more to our position.

However, as with all other companies in our portfolio, we only add if the price is right. At the current price level, we think the stock is just a fair value, not as great a value as it was when we bought it.

It is possible that the stock price will continue to rise. We don’t have a crystal ball. At some point, the price peak will come. The margin of safety is now smaller.

Since we are not buying, the only sensible thing to do is to downgrade SBLK from buy to hold.