Star Bulk Carriers: Appealing Income Idea For Investors In The Dry Bulk Segment

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Star Bulk Carriers: Appealing Income Idea For Investors In The Dry Bulk Segment

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Star Bulk Carriers owns a large, diversified fleet of 159 vessels, with 97% equipped with scrubbers.SBLK reported strong 2Q24 results with a 47% YoY revenue increase, a 127% net profit growth, and a $...

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I highlighted the company’s large fleet, with 97% of the ships equipped with scrubbers, prudent balance sheet, and attractive dividend yield. At the time of the publication, the company traded at 83% PNAV. In conclusion, I gave SBLK a Buy rating. In today's article, I review the SBLK report for 2Q24 and the company’s rating. Introduction Star Bulk owns a fleet of over 150 vessels from Handymax to Newcastlemax. SBLK is the equivalent of International Seaways (INSW) in the tanker segment. Both companies are like ETFs, giving exposure to a broad theme—in SBLK’s case, the dry bulk market and INSW’s tanker market. I own SBLK shares as an income generator. At the present stock price, the yield is 9.79% (trailing LTM). The company reported strong results in 2Q24. In April, SBLK also completed the Eagle Bulk transaction. That said, SBLK is a keeper. SBLK fleet update  Star Bulk owns 159 vessels with an average age of 11.4 years. 97% of the ships are equipped with scrubbers. The chart below shows the SBLK fleet composition. SBLK 2Q24 presentation What I like about the company is its balanced approach. Spreading across multiple subsegments reduces uncertainty compared to exposure to only one, which is crucial for income seekers. In other words, the downside risk is relatively limited compared to a company focused on only one type of vessel, for example, only Capesize. In 2023, one of the big news in the dry bulk world was the merger between Eagle Bulk and Star Bulk. Eagle has a modern fleet with scrubber-equipped vessels. The two enterprises combined to create a formidable company with the largest feet in the industry. SBLK announced that the transaction was completed on April 09, 2024. In August, Eagle convertible notes were converted into 5.9 million SBLK shares. As a result of the merger, operating expenses have dropped. SBLK reported crew management costs ripped by $600/day. This number is notable compared to the daily OPEX for the average dry bulk operator. Crew wages are part of operating expenses. SBLK reported for 2Q24: $19,268/day TCE and $5,319/day OPEX. Those $600/day significantly improve the company's cost structure. Golden Ocean Group Limited (GOGL), a company with a diverse dry bulk fleet, reported the following figures: $23,535/day TCE and $6,120/day daily OPEX. GOGL has a younger fleet, with an average age of 7.7 years. Despite its older fleet, SLBK commands lower daily OPEX as proof of its efficient OPEX management. For 3Q24, SBLK has contracted 65% of its fleet at an average TCE of $19,388/day. Newcastlemax/Capesize ships are contracted for $27,937/day. Respectively, Panamax/Kamsarmax and Ultramax/Supramax are contracted for $18,184/day and $16,678/day. Those numbers are very competitive if we look at the present 1Y TC rates. The chart below is from Fearnley’s weekly report. Fearnley's weekly In 2024, SBLK sold ten vessels for total gross proceeds of $180 million. Their average age is 15.1 years. Most of the sold vessels are planned for delivery to their new owners in 3Q24. Considering the company's fleet size, the dry dock schedule is always busy. In 3Q24, 573 days are expected off-hire, while in 4Q24, 393. As per the 2Q24 report, SBLK's total ownership days for the first half of 2024 are 24,420. So, the dry dock days will have a minimal impact on the company utilization rate and, hence, on realized revenues in 3Q24/4Q24. SBLK Financials Star Bulk reported robust results YoY and QoQ. The chart below from Koyfin shows SBLK's financial highlights for the last five quarters. Koyfin In 2Q24, the company reported $352 million in revenue, a 47% increase compared to 2Q23, due to higher day rates. On the other hand, operating expenses increased only by 10%. As a result, net profit grew by 127% YoY. EPS for 2Q24 is $0.93 vs $0.43/share for 1Q24. SBLK has an attractive dividend policy. Since 2021, the company has distributed $1.25 billion in dividends. Additionally, SBLK repurchased shares for $423 million since 2022. For 2Q24, the dividend is $0.70/share, resulting in a 9.79% trailing LTM yield and a 69% payout ratio. For reference, GOGL offers an 8.02% yield at an 82% payout ratio. On September 09, SBLK announced a share buyback. The company repurchased 791,015 shares, or 0.5% of the total outstanding, at an average price of $20.58/share. SBLK trades at an 18% discount to its NAV. That said, the timing for share buybacks is good. As of August 08, 2024, SBLK reports $466 million cash, $1,169 long-term debt, and $132 million long-term lease agreements. Total Debt to Equity is 66%, while Total Liabilities to Total Assets is 42%. SBLK maintains a reasonably leveraged balance sheet, considering its large fleet. Valuation  SBLK is not the most expensive dry bulk shipowner. Himalaya Shipping (HSHP) commands the highest multiples, and the reason is not a secret: HSHP owns a fleet of brand-new dual-fuel Newcastlemax vessels. SBLK, on the other hand, trades at reasonable multiples, 3.4 EV/Sales and 5.9 EV/EBITDA. The chart below compares EV multiples for major dry bulk shipowners. All figures are NTM. Koyfin Since my last note on SBLK, its share price has dropped by 12%, making its multiples even more attractive. GOGL is the closest competitor, considering fleet size and dividend yields. It trades at 7.8 EV/EBITDA, representing 28% upside potential for SBLK. If we consider GOGL's EV/Sales, the potential is 55%. Now, let’s see how SBLK trades based on PNAV. Inputs for the NAV equation are:  Fleet replacement value: $4,100 million Current assets: $722 million Total Liabilities: $1,700 million Total Debt: $1,620 million  SBLK's market capitalization is $2,570 million, while its net asset value is $3,122 million, resulting in 82% PNAV and 40% gross LTV. In summary, SBLK trades at an attractive discount to its NAV and its peers. Risks Regardless of how attractive my idea is, the risks are always present. The prime risk for SBLK is declining tonne mile demand for major and minor bulks. The dry bulk segment generally has better fundamentals (age profile, order book, and shipyard availability) than other segments, such as containers and LNG/LPG carriers. Therefore, I do not expect sudden supply growth. The unknown in the equation is the demand for dry bulk transportation. Unlike Capesize vessels, which carry primarily iron ore, bauxite, and coal, smaller ships transport everything from steel pallets to fertilizer. This makes their demand a function of global economic health. The following chart from the 2Q24 presentation shows the tonne-miles demand for iron ore, coal, grain, and minor bulks. SBLK 2Q24 presentation According to SBLK's last report, dry bulk trade in 2024 is expected to grow by 2.6% in tons and 4.4% in tonne-miles. The growth rate is stable across all groups. As mentioned earlier, it depends on the world economy. The IMF estimates global GDP growth to be 3.2% in 2024 and 3.3% in 2025. These numbers match the CAGR for dry bulk cargo shown in the chart above. Chinese economic growth was slower than expected. Nevertheless, the IMF projects that the Chinese economy will expand by 4.5%-5% in 2024 and 2025. Chinese iron ore demand is robust. Meanwhile, iron production growth is higher in the West of Suez. Brazil and Guinea became hot spots for iron ore and bauxite exports. Grains trade is expected to expand by 4.4% in tons and by 10% in tonne-miles in 2024. LatAm exports, led by Argentina and Brazil, grew by 12% during 1H24. Financial risk is well managed considering SBLK's operating figures, which exceed its interest expenses multiple times. The company maintains a prudent capital structure, with total debt/equity below 100%. Final Thoughts  Star Bulk is an income idea for those who want to invest in the dry bulk segment. The company owns a large fleet, has a robust balance sheet, and distributes dividends with attractive yields. Besides that, SBLK has a share buyback program. Macro tailwinds are supportive for dry bulk investors, too. In summary, SBLK gets upgraded from a Buy to a Strong Buy.","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":[],"hasMoreComments":false,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}