Star Bulk Carriers Delivers Another Good Quarter

seekingalpha11-21 20:30

We initiated our position in Star Bulk Carriers Corp. in October 2022 due to strong fundamentals, good management, and shareholder-friendly practices.Star Bulk's Q3 revenue was $344 million, slightly ...

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(NASDAQ:SBLK) in October 2022, based on their strong fundamentals, what we perceived as good management, and our belief that they treat shareholders well. It is also a business that we know well from having working experience in the industry. So far, it has met, and at times exceeded our expectations. Not because the share price has gone up, but because the company is executing well. Trying to predict future outcomes is, as we all know, very difficult. Uncertainties around trade patterns and vessel routings make it difficult to assess what the next year will be like. All we can do is assess where we stand and what is more likely to happen. As usual, we start by looking at their latest financial results and market conditions. Star Bulk Carriers Q3 Financial Results SBLK compares its quarterly reports against performance from the same quarter in the previous year. Under normal circumstances, that is fine, especially since it then considers the seasonality factors which are important in shipping. However, this year, such a comparison becomes distorted as Q3 last year was pre-merger with Eagle Bulk, hence the numbers cannot be compared. As such, we want to compare Q3 with Q2 numbers this time around. On the top line, the revenue in Q3 was $344 million, compared to $353 million in Q2. This was in line with the somewhat lower charter rates we observed throughout the previous quarter. Their average timecharter equivalent rate went from $19,268 in Q2 to $18,843 in Q3. The synergy effect from the merger with Eagle Bulk is becoming clear from their latest quarterly report. Over the last two quarters, the cumulative savings has been $9.2 million. Management believes they are well positioned to achieve a yearly run rate of $26 million in savings just in Opex and G&A. In addition, comes some savings from drydocking of their fleet. Let us look at their balance sheet and capital management. In their Q3 presentation, there is one slide that tells a story of how well they have managed their capital, both in terms of return of capital to shareholders and the reduction of debt. Star Bulk Carriers - value creation (SBLK's Q3 Results Presentation) As can be seen in the graph, the debt per vessel is lower than what the vessels are worth as scrap. With such a young fleet with an average of just 11.9 years, this is a low and very manageable level of debt. The dividend yield on a TTM is 13.2%. However, it must be taken in the context that dividend safety is low due to the nature of the dividend policy. They distribute the cash balance minus a minimum cash balance of $2.1 million per vessel. In terms of the net tangible book value per share, we calculate this to be $22.60. That is a P/B of 0.84 which is quite attractive. So is the P/E on a TTM basis of just 6.2. Business and Market Development With a fleet of 156 vessels, there is a constant need to renew the fleet. The average expected life of a bulk carrier is somewhere between 20 and 25 years of age. SBLK has been quite good at selling off vessels at a good time within the cycle when second-hand prices are attractive. In Q3 they let go of four vessels. Three of them will be delivered to their new owners in this quarter at a gross proceeds of $50 million. The market for Capesize and Panamax vessels has been lackluster. Not terrible, just so-so. Especially the Panamax vessels. SBLK's CEO Petros Pappas gave a good explanation in the Q&A session of the latest earnings call, on why the Panamax vessels had seen lower rates. Those vessels rely heavily on the movement of grains and coal. Congestion eased up and some coal moved on shorter voyages from Indonesia to China. On a more long-term basis, coal volume should decrease with less coal being used for power generation, but grain trade is growing steadily year after year. In September, we saw trans-Atlantic round voyages bottom out at $8.265 per day. After going above $12,000 per day, it has fallen back to $9,145 per day as of the 20th of November. This period is seasonally a time when the rates should be quite strong. Panamax Trans-Atlantic R/V spot market (Fearnley - Weekly Market Report 20 Nov 2024) Changing trade patterns and routing of vessels bring us to the risk of this thesis. Risk to Thesis We know that there will be changes taking place in the U.S., once the incoming President takes office on the 20th of January 2025. The same thing happened during his first term. Increased tariffs on China are a given, and China will in return try to buy commodities from other countries. Last time around, a lot of grain came out of South America, as opposed to the U.S. That is positive for drybulk. Mr. Trump's claim of stopping the two wars in just one day, or possibly before he takes office should be taken with a grain of salt. However, I would not be surprised if it will be high up on his \"to-do list\". If the Houthis lay down their arms and the Suez Canal and the Red Sea become a safe sea passage early next year, this would negatively affect the ton-miles and lower freight rates. Share prices for all shipping companies will go down. At least on the news. Conclusion Is the cup half full or half empty? It certainly does seem to be a fairly well-balanced market in dry bulk shipping. When we look at the fleet growth for the first 10 months this year, it is not insignificant. According to Petros Pappas, 29.4 million deadweight was delivered, and only 2.9 million deadweight was sent to demolition for a net fleet growth of 26.5 million deadweight. That is a growth to the total fleet of 2.6% year-to-date. That growth should be able to be absorbed by the 5.2% growth in ton-miles for 2024, which is estimated by Clarkson Research. We do not believe there will be large spikes in earnings next year. The cup is probably more likely to already be half full, as uncertainties outweigh the potential upside. Even if 2025 were to deliver similar kinds of returns that 2024 is doing, our previous buy stance remains.  On pullbacks like what we saw in the share price just after the Q3 results came out, we are looking to add to our position.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","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/2485707460"}