Genco Shipping: the reason for 14.14% loading at low tide

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Investment thesis

The market seemed short-sighted for punishing Genco Shipping & Trading Limited (NYSE: GNK) with a security of -18.91% goes from $18.91 on August 3 to $15.32 on August 25, 2022. Its performance continued to suffer from market pessimism, after Powell’s hawkish comment on August 26 and the August 2022 CPI release on September 13, 2022.

However, we believe this creates the perfect storm for opportunistic investors looking to stock up on short-term dividend gains speculatively through H123, as GNK will continue to report excellent execution and future profitability. Q3 and Q4 dividends would likely be exceptional given the market projection of 14.14% returns. Don’t miss this monster boat at low tide. A monster wave could be coming soon.

GNK continues to benefit from high TCE tariffs

GNK Sales, Net Income, Net Income Margin and Gross Margin

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In the second quarter of 2022, GNK recorded revenues of $137.76 million and gross margins of 51.4%, representing a remarkable year-on-year increase of 13.8% and 4.1 percentage points, respectively. . This directly contributed to its growing profitability, with net revenues of $47.38 million and net revenue margins of 34.4% in the last quarter, indicating a considerable increase of 47.8% and 7.9 percentage points. year-on-year percentage, respectively.

GNK TCE tariffs

GNK TCE tariffs

S&P Capital IQ

These astonishing numbers are directly attributed to the massively inflated TCE rates over the past two years, which had increased by 369.8% for major volume and 394.6% for minor volume at FQ2’22, compared to the levels pre-pandemic at FQ2’19.

While analysts are concerned about the slight drop in GNK’s TCE rates for FQ3’22, investors should keep in mind that these numbers represent a minimal decrease of -6.3% for major volumes and a notable increase by 39.5% for minor volumes compared to FQ2’21 levels. . The company reported a massive 44.8% expansion in revenue and more than 200% in profitability year-over-year. Otherwise, considerable increases of 305.4% and 357.3% over pre-pandemic levels, respectively. Therefore, we consider that the market has punished and corrected equity valuations too much so far. However, this momentum also creates the perfect entry point for opportunistic investors who are patiently waiting to recharge.

GNK's long-term debt, interest charges, net PPE and Capex

S&P Capital IQ

Additionally, GNK appears to have done well over the past two years, given the rapid decline in its long-term debt so far. In FQ2’22, the company competently deleveraged at $181.6 million from FQ2’19 levels of $433 million, representing a 58% decline so far. This directly contributed to reducing its interest expense by $2.4M in the last quarter, compared to $8.1M in Q2 2019.

In the meantime, GNK has also slowly rebuilt its fleet capabilities to 44 ships in FQ2’22, from 40 in FQ2’21 after a drastic reduction from 58 in FQ2’19. Thus, indicating management’s optimism ahead, with PPE net assets increasing by $1.03 billion and capital expenditure by $3.3 million in the last quarter, despite the deteriorating macro economy.

Cash/equivalents GNK, FCF and FCF margins

S&P Capital IQ

Despite the increase in CAPEX of $50.28M in H1’22 from $26.23M in H1’21, GNK continued to impress with high free cash flow (FCF) generation of $43.3M and an FCF margin of 31.4% at FQ2’22. This represents an increase of 71.7% and 10.6 percentage points year-over-year, respectively.

While some investors may be concerned about GNK’s perceived decline in cash and cash equivalents, these are attributed to its tremendous value return to its long-term investors through dramatic increases in dividends in H1’22. Naturally, this is also in addition to its excellent deleveraging efforts.

An upward reassessment of its turnover and profitability is imminent

GNK Projected Revenue and Net Profit

S&P Capital IQ

Over the next three years, GNK is expected to experience an apparent deceleration in revenue and net profit at a CAGR of -16.11% and -6.04%, respectively. This is likely attributed to pessimism towards the market, due to a normalization of TCE rates and the easing of port congestion due to the slowing global economy. However, we are less pessimistic as the 30-year low order book and slower shipping speeds by 2023 will continue to impact supply, contributing to mid-level speculative TCE rates at l ‘coming. Therefore, while current rates are clearly unsustainable, we are unlikely to see pre-pandemic rates in the coming quarters. Thus preserving the profitability of GNK.

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 profit margins of -14.4% during the year. 2019, from 33.3% in fiscal 2021 and finally to 46.7% in fiscal 2024. For fiscal 2022, the company is expected to report revenue of $388 million and net revenue of $185 million, which is a massive -29% decline albeit relatively in line year over year, respectively.

Again, we are more bullish, as GNK reported bumper H1’22 earnings, with promising TCE rates ahead. Combined with the expected reduction in the dry docking rate of -69.8% compared to the previous quarter and the increase in the days available for the owned fleet of 10.7% compared to the previous quarter during the third quarter of 2022, we expect an upward revaluation of its revenue for fiscal 2022 to nearly $550 million (if not more to $600). M). Naturally, high oil prices are likely to impact its otherwise improved profit margins through 2023, as seen in the past two quarters.

As revised earnings represent an excellent 41.7% upside from estimates, we could see a potential increase in GNK’s stock valuation by FQ3’22 during the underperforming market ahead. FQ3 dividends will also be smashing, based on management’s forecast so far.

So is GNK Stock a buysell or keep?

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 2.00x EV/NTM Revenue and 3.49x P/E NTM, below its 5-year average 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, closing in on its 52-week low of $12.97. Nonetheless, consensus estimates remain optimistic 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

Looking for Alpha

GNK Dividend Payout and Yield

GNK Dividend Payout and Yield

S&P Capital IQ

GNK’s long-term investors would also have been pleased with the recent hike in dividend payouts, with further hikes to come in Q3’22 and speculatively, through H1’23, given the improving its profitability. Analysts still forecast excellent forward dividend yields of 14.14%, highlighting the stock’s excellent position as a short-term dividend stock for those with a higher risk tolerance, dividends of the third quarter probably generating close to 20%.

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

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