Golden Ocean Is Picking Up A Tailwind

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Shipping is an essential tool to serve the growing demand for dry bulk commodities: supply chains must be maintained, amid ongoing conflicts and longer routes.Increased distances and instability risks...

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Shipping companies with bigger deadweight (dwt) capacity have a competitive edge in that segment.Golden Ocean is strategically well-positioned in the business of higher dwt vessels, where competition is low: a further penetration in this segment could boost its growth and dividends.The current price doesn’t reflect its strengths. My buy-target is in the $13.6-$15.8 range.I used a DDM model to represent potential of the company to distribute interesting dividends in the future.   Matteo Colombo/DigitalVision via Getty Images If your investment goals include selecting stocks that pay dividends and operate in traditional sectors, Golden Ocean (NASDAQ:GOGL) could be a good pick. Here’s why: The company is among the leaders in the dry bulk sector and is known for its high dividend yield, thanks to its ability to generate profits and cash flow over time. The new global landscape puts Golden Ocean in a favorable position compared to its competitors. In a geopolitical context characterized by significant uncertainty and an ever-increasing demand for raw materials, Golden Ocean can ensure the transport of large quantities of commodities over long routes, thanks to its fleet composed of large vessels. Its positioning, featuring sizable ships, makes it almost unique in its field. The current price does not reflect this strength. I used a DDM model that places the stock price in the $13.6-$15.8 range and takes into account the company's untapped potential to generate increasing dividends in the coming years. Dry bulk shipping demand In today’s world, three fundamental needs consistently stand out for people everywhere: food, shelter, and technology.   Food: International food demand is escalating, both because of a rise in the global population and because of an increase in demand for meals. Grains, and especially rise, continue to represent a large amount of the international food demand. That is also fuelling the expansion of the global fertilizer market to improve agricultural productivity.  Shelter: The construction industry is growing worldwide and especially in the emerging economies. Iron ore is a key raw material in that industry. Most of iron ore is converted into pigment iron for steel making. That steel is used in buildings and infrastructures.  Technology: Despite recent changes and environment regulations, coal still remains one of the dominant raw materials for energy production, which is in turn essential to sustain economic and technological development. Based on recent news on nuclear power plants developments, expectations for a further increase in raw materials related to this specific fields are more than reasonable  Maritime transportation stands out as a vital tool for meeting those needs and dry bulk shipping plays a crucial role in fulfilling a demand that is expected to grow at a remarkable pace in the very next years. The tables below depict bulk goods market forecast. Table 1: Iron Ore Market – Values and CAGR Straitsresearch.com Table 2: Global Coal Market – Values and CAGR Transparencymarketresearch.com Table 3: electricity production by source, World ourworldindata.org Table 4: Global Fertilizers Market – Values and CAGR finance.yahoo.com Table 5: Global Grain Market – Values and CAGR verifiedmarketresearch.comGiven the above picture, a continuous increase in bulk shipping doesn’t come as a surprise, with total demand growth for 2024 expected to land at 4-5% and break through 180m Twenty (foot) Equivalent Unit (TEU), with container volumes higher than ever. While 2024 has been characterized by cargo frontloading to safeguard inventory levels in war winds, 2025 is expected to grow at 3%. Table 6: Global Container Volumes xeneta.foleon.com Bulk shipping supply According to Marine Digital, today 10 companies dominate the international bulk shipping market. At first glance, two of them appear to have quite similar volumes, business models, financial KPIs: Table 7: Business Details – Star Bulk vs. Golden Ocean Group Author's elaboration on Star Bulk and Golden Ocean Q2 2024 Results PresentationIn 2024 the two rivals represented more than 60% of their peer market in terms of dwt: Table 8: Golden Ocean fleet composition versus its main competitors   Golden Ocean Company Presentation - September 2024 Golden Ocean has a unique positioning in that market. The company defines itself as “The Leading Owner in Large-Sized Dry Bulk”, with three main strengths:  Focus on larger vessels to capture market demand upside and volatility Modern, fuel efficient fleet Up-to-speed with tightening environmental regulations  In fact, Golden Ocean presents some peculiarities that could positively impact its growth perspectives: 1. Fleet composition. The Company fleet is mainly composed of “Capesize Vessels”, the largest in terms of dimensions and capacity. Capesize (Baby Cape, Cape, Newcastlemax, Ultra Cape) are too big to go through the Panama canal. They are mostly used in iron ore and coal traffic. Their name is derived from their suitability for navigating around capes. In fact, Golden Ocean employs them for longer routes that often go past the Cape of Good Hope. Table 9: Main vessel types LinkedIn.com2. Growth model. Companies in the sector have grown and may be growing thanks to acquisitions. This may imply the risk of not being able to integrate different realities. Golden Ocean seems instead more focused on its fleet renewal to meet its expansion objectives, by relying on internal growth and cost efficiency 3. Revenue mix. The dry bulk market is mainly composed of two different offers: time charter agreements and voyage charter agreements. Under a time charter agreement, a vessel is contracted for a specific period of time and a specified daily fixed or index-linked charter hire rate. Under a voyage charter agreement, a contract is signed in the spot market for the use of a vessel for a specific voyage to transport a specified cargo at an agreed per unit freight or occasionally as a lump sum. Golden Ocean uses a quite balanced mix in its offer, though slightly skewed towards voyage charters. This is also consistent with its high dwt vessels, suitable for long distances and longer time, not convenient for a buyer entering a time charter agreement. In time charter contracts the charterer must pay for fuel and supply costs, as well as the cost of cargo operations and port charges, as the ship owner is simply leasing the vessel to the charterer. On the contrary, in voyage charter agreements the ship owner is tasked with delivering the cargo and paying for all costs related to that obligation. To make the two types of contract comparable, a KPI is commonly used in the sector. That is a non-GAP measure and it’s known as Time Charter Equivalent (TCE). TCE is generally calculated by subtracting voyage expenses from voyage revenue and dividing the net amount (time charter equivalent revenues) by the number of days in the period. Table 10: Golden Ocean Revenue composition Golden Ocean FY2023 Financial Statements Table 11: Golden Ocean Time Charter Equivalent Income and TCE Golden Ocean FY2023 Financial Statements 4. Investments. For Golden Ocean, investments are essentially related to fleet renewal. It’s not a case that at the end of FY2023 the average vessel age was about 7.3 years (quite low in comparison with rivals) 5. Environmental requirements. Golden Ocean fleet lower age implies that the company is up-to-speed on compliances like ballast water discharge regulations, having no vessels constructed before September 8, 2017 (that generally miss on-board systems to treat ballast water and eliminate unwanted organisms). Company valuation: main assumptions The Company is well equipped to create value in the future, based on several assumptions:  High demand for critical raw materials require to decrease the impact of transportation costs%: high dwt vessels and voyage charters agreements are the right mix to achieve that goal. Other Countries apart from China may become the new catalysts of raw materials demand and supply. That implies that a slowdown in China economy would have a lower impact on dry bulk demand in comparison with the past, when China was the undiscussed emerging market star. Present conflicts are not expected to end soon. On the contrary, recent events show that outbreaks of war and acts of terrorism are escalating in several regions: circumnavigating war territories becomes even more strategical.  Information and financial data on Golden Ocean reveal that: The company is dividend-paying and has been generating positive operating cash flow for years. Table 12: Golden Ocean Net Income, Dividends and Cash Flow Golden Ocean FY2023 Financial Statements2. Its income and cash results are improving in time, despite one exception only, in 2023 3. It plays in a risky environment, subject to raw materials market volatility and war winds. This may generate opportunities as well, as in the case of increasing raw materials demand, emerging market catch-up effect, new routes required to circumnavigate dangerous battlefields 4. It is well-stocked in terms of vessel dimension and age: its revenue growth is essentially related to modern fleet investments. This in turn implies that Golden Ocean isn’t in a hurry to acquire other companies and make the subsequent (and not efficient) effort to integrate them. Company valuation model Based on the above: I expect a significant growth in the voyage charter business, thanks to longer routes and higher demand in heavier dwt where competition is low. Star Bulk (SBLK) is trying to penetrate this market, but at present its fleet lacks such a specialization, is older and more focused on time charter revenues. Because of that and thanks to the continuous fleet renewal, I expect revenues to approach $1.5B in 2026, with voyage charter revenues representing more than 50% on total, while time charter revenues are expected to grow in line with the market. Recent forecast shows that Capesize demand has been growing in the latest years and is expected to furtherly increase. The Capesize segment represented more than 32% of the market share in 2023, thanks to the increased demand for bulk commodities, particularly iron ore, and coal where Golden Ocean is significantly present. TABLE 13: Dry Bulk Shipping Market, Size by Vessel Type, 2022-2032 ($B) gminsights.com 2. This in turn may translate into higher TCE for Golden Ocean. In 2021, thanks to an increasing post-covid demand and high impact of voyage charter revenues, the company TCE peaked $27,582 for FY2021. Q2 2024 YTD data reveal that the company has dramatically improved its TCE rate in the latest months. With its recognized long-haul positioning, the company could easily come back to 2021 TCE rates. While it’s true that TCE rates bottomed in October, after September peak and many believe the market is severely impacted by China slowdown, a volatile demand in the Capesize segment could represent an upside potential for Golden Ocean, as Q2 2024 company financial results seem to prove. TABLE 14: Dry Bulk Spot Rates - YTD lloydslist.comIn addition, the significant focus of forecasters on China relenting economy and its impact on dry bulk business risk ignoring part of the story. In fact, a fresh and dynamic trend could come from the huge electricity demand expected for the very next year. That trend is mainly the result of AI sector dramatic growth. Datacenters are essential tools for AI deployment. They are hungry for energy and make a significant impact on global energy consumption. This would imply the need to feel the gap between electricity supply and demand, by recurring to new plants (including nuclear reactors), power grid equipment, renewable energy production. The use and transportation of several raw materials will be essential to meet those requirements. Table 15: Use of nuclear reactors, 1970-2041 cpram.com Table 16: EU Renewable Energy Capacity required to meet datacentre demand cpram.com3. Despite relevant fixed capital and depreciation, other costs are more volume-sensitive: growing revenues are expected to translate into higher net income figures. In addition, the lower fleet age could have a positive impact by translating into lower environmental compliance costs 4. The high-dividend yield history of Golden Ocean is expected to be preserved, considering that even in 2023, when results were disappointing, the company distributed a dividend that encompassed income. In my model I projected a DPS/EPS ratio of 0.89, in line with 2023 dividend distribution and more prudential than 2024 Table 17: Golden Ocean Dividend Yield History macrotrends.net All that said, a DDM model seems appropriate to depict the company valuation. In fact:  The company has a recognized history of dividend distribution, high dividend yields and DPS/EPS ratio It has always emphasized its ability to distribute dividends thanks to its capacity to generate cash and profits Its traditional and volatile business does not allow it to achieve significant growth rates like those in other sectors, where profits and cash flow are dramatically high and are generally largely reinvested in future opportunities  My analysis has been developed on a 3-year dividend forecast, with a terminal value based on a dividend multiple in the 8x-10x range, based on the company dividend yield history. I expect the price to be in the $13.6-$15.8, making a buy recommendation appropriate. Risks An economic slowdown may negatively impact the demand for raw materials and thus generate a domino effect in the dry bulk market. This is especially true in the long-haul business, which is more volatile in terms of both volumes and prices. Should this happen, a contraction in revenues and TCE may not only impact Golden Ocean's profits and operating cash flows but also its ability to maintain a high dividend policy. In addition, investments in large vessels may negatively affect its cost structure, resulting in a higher expense percentage and greater reliance on debt.  The significant escalation of geopolitical tensions would also impact Golden Ocean more than its competitors. Its substantial presence in the voyage business may, in fact, translate into higher voyage expenses, from insurance to fuel costs to cargo losses.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2480820317"}