Is it time to overweight shipping? questions a recent news article published in the Splash 247.
Exclusive shipping research
J Mintzmyer is a well-known shipping investor and industry pundit. He has provided exclusive shipping research via Value Investor’s Edge for over seven years and has witnessed numerous up- and down-cycles across shipping segments over the past 15 years. J shares his latest thoughts and a few top picks in this latest article.
I believe shipping stocks are offering investors an exceptional risk/reward setup; one of the best I have seen in my career, as underlying valuations rival the record lows set in mid-2020. At the same time, most balance sheets are pristine, shareholder returns are ramping up, and the supply-side setup is the best in modern history. The largest environmental regulation in history, EEXI 2023, begins in just three months with a multi-year phase-in through 2027 via a variety of measures including stringent carbon-emission regulations (“CII”) which will significantly slow down much of the global fleet between 2023 and 2027. These impacts will constraint a supply-side which already offers the best setup in modern history.
The demand-side is more in-flux
Tankers are benefitting from Ukraine-related disruptions including the upcoming proposed EU ban of Russian oil. Dry bulk is heavily dependent on iron ore, coal, and grain flows. Containerships are primarily a congestion-driven story with huge pending EEXI and CII impacts. LNG and LPG are poised to profit from significant re-routing of global energy flows towards Europe.
I have followed the shipping industry for nearly 15 years and observed numerous segment-cycles. The time to get long shipping is when there is a massive dislocation between broad market sentiment and segment-specific fundamental setups. The last similar dislocation occurred during mid-2020 when broad market ignorance led to the dumping of otherwise excellent-positioned firms across the dry bulk, gas, and containership segments. This setup is similar in terms of valuations, but the supply-side setup is even stronger and firm balance sheets are rock-solid. Unlike in 2020-2021, when most firms prioritised deleveraging, this time around, massive shareholder returns are in store if rates perform well.
The best time to buy shipping stocks is when there is a significant disconnect between share price valuations and underlying segment fundamentals.
There are never any guarantees in shipping. Demand-side outcomes can be finnicky and are prone to black swan events in both directions. However, the best time to get long is when valuations are cheap, balance sheets are strong, and the supply-side is lopsided in the favour of owners and investors.
Current top picks
I recently hosted a public webinar (see video below) where I shared more segment specific commentary along with four of my current top picks (we cover about 50 firms on Value Investor’s Edge, and we have roughly 14 in our current model portfolios).
- Tankers: International Seaways (INSW)
- Dry Bulk: Genco Shipping (GNK)
- Containerships: Global Ship Lease (GSL)
- Finance Play: Textainer Group (TGH)
Genco Shipping: ‘Fair Value Estimate’ of $24.00
Genco Shipping (GNK) is exceptionally positioned in the dry bulk space with a fleet of 44 vessels, most of which are exposed to the spot market. GNK has also installed scrubbers on all 17 of their Capesize vessels, which adds around $8,000 in additional daily upside compared to benchmark rates at the current fuel spreads.
The best part about GNK is their pristine balance sheet, with a net D/A of just 12%. Additionally, GNK is fully committed to heavy dividend payouts, with a current policy of paying out nearly all free cash flows going forward after selective debt repayment. If dry bulk markets are decent next year, GNK could be net debt free as soon as mid-2023. I recently interviewed their CEO, John Wobbensmith, in a full-length discussion available on Seeking Alpha.
Global Ship Lease: ‘Fair Value Estimate’ of $40.00
Global Ship Lease (GSL) is a massively discounted and misunderstood stock, which trades below the value of their contract backlog alone. GSL stock has plummeted over the past 5-6 months even as they have completed a comprehensive refinancing and recently added massive new contract deals, some of which extend as far as 2029!
I expect GSL to ramp up repurchases later this year and they are also likely to raise their dividend in early-2023. GSL already yields near 10% and this current payout is more than 4x covered by expected cash flows in 2023-2025. Our research associate, Climent Molins, recently published a comprehensive review of GSL and I included them, along with peer Danaos Corp (DAC) in a ‘career conviction’ update a few weeks ago.
International Seaways: ‘Fair Value Estimate’ of $40.00
International Seaways (INSW) is in the sweet spot of the tanker market with a nice balance of both crude and product tankers. INSW has a very clean balance sheet and is starting to pivot towards larger shareholder returns, including a $60M repurchase of which they recently used $20M to mop up discounted shares.
INSW has a solid management team, great market exposure, is shifting towards higher shareholder returns, yet it trades at a discount to most peers. I have a conservative value estimate of just $40.00 since the tanker stocks are not quite as cheap as other segments; however, if strong rates continue, their NAV could be over $50/sh within a couple months and share prices will likely follow.
Textainer Group: ‘Fair Value Estimate’ of $56.00
Textainer Group (TGH) is not a traditional shipping firm, but they have benefitted significantly from the supply chain crisis over the past couple years by significantly growing their long-term contract base. TGH has fixed recent growth on up to 12-year to 14-year charters at near record levels of profitability, and with capex completed and unlikely to resume in large quantities for the next 2-3 years, TGH is now set to massively ramp up shareholder returns via repurchases and dividend growth.
I expect TGH will raise their dividend significantly later this year and if shares remain extremely undervalued, TGH is likely to retire over 15% of their shares over the next 4-5 quarters. Textainer has a strong balance sheet and excellent banking relationships and their customers (the major global liners) have the strongest credit quality in history. TGH stock has been beaten up alongside most other container names because the market doesn’t seem to properly understand this business model. I believe the upcoming dividend raise and strong repurchases will significantly improve share performance into 2023.
Time to significantly add to shipping?
I believe the best time to buy shipping stocks is when there is a significant disconnect between share price valuations and underlying segment fundamentals. This typically occurs when the global macro situation is challenging because generalist investors often associate shipping as a proxy to global growth without understanding the actual supply/demand dynamics.
While future returns cannot be guaranteed, and shipping stocks will likely remain very volatile for the near- to mid-term future, I believe the risk/reward setup for many of these names is among the best I have seen, with valuations similar to the record lows last set in mid-2020.
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Source: Splash 247