Quick Genco Shipping Update
September 29, 2010
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My blog post pitching Genco Shipping was done before Q2 earnings came out, so the information was stale. I've been keeping tabs on Genco since and I thought I'd give an update. Most of this information can be found on their investor presentations, recent earnings calls, and press releases (except where I added my comments, of course).
As of 9/23/10, 13 of 18 ships from the two recent acquisitions had been received: 11 of 13 Supramax vessels and 2 of 5 Handysize vessels. I expect higher revenues in Q3 on a sequential basis due to the number of ships now deployed. Genco's been receiving new ships since Q2 and will likely see higher revenues and costs until the rest of the fleet is delivered.
I've seen that a lot of ships being acquired were signed to below-market charters, so I don't expect anything crazy on the EPS front, since depreciation and amortization expenses will go up in step. That seems to have happened in Q2. Genco's management seems to be pretty good at handling the charters, so I expect at least decent charter rates going forward. Genco's management has a goal of fixing 75% of ships to time charters. When spot rates are bad, Genco ups the time charters. When spot rates are good, they'll go with a lower percentage of time charters.
Similarly, Genco is opportunistic with ship purchases. Going back to Q3 2009, I heard on earnings calls that Genco was looking to acquire ships. Genco waited till June 2010, when it saw ships at what it thought were attractive prices. Seems like common sense to buy at low or at least moderate prices, but I've seen many cases where management teams don't do that.
Analysts have been forecasting a decent drop in EPS from Q2, but I'm not entirely sure why. Most of Genco's ships were already signed for charters through Q3, so revenues should remain fairly consistent. Many in the dry bulk industry, Genco management included, have been forecasting better rates in Q4. I do know that Genco management looks to fix some ships to longer-term charters in Q4. If rates are indeed better, this should lead to slightly better EPS in Q4 2010 (depending on when in Q4 the rates were fixed) and definitely better EPS in Q1 2011. That earnings release is likely in May 2011, so that's a while to wait.
Debt-to-capital is currently 62%. Management views the mid 50s as a better range. One short-term financial goal is likely to delever a bit. I'm not aware of the specifics on the loan covenant keeping Genco from paying the dividend, but I know that another financial goal is to reinstate the dividend sooner rather than later.
Genco owns a 25.4% interest in Baltic Trading. It has received 7 of 9 vessels, with 2 more to come in Q4. They will have 2 Capesize, 4 Supramax, and 3 Handysize vessels as of the end of the year. The ships have an average of 1 year, so they're brand spanking new. Peter Georgiopoulos and John Wobensmith of Genco management will also head up Baltic Trading. On August 26th, Baltic Trading paid a dividend of $0.16 per share. If BALT can get all of its 9 ships and employ decent charter strategies, Genco should benefit decently from the partial ownership.
Due to scarce bank capital, Genco's CFO John Wobensmith seems to think not all of the newly ordered ships will reach their destinations. The ones that do will still add to an already large supply of dry bulk ships in the industry. I haven't heard anything more on the scrapping front, but it doesn't seem like as many ships are being scrapped this year. Ship supply is still likely to grow by more than ships will be scrapped. Regarding the scarcity of bank capital, I'll have to dig around to see if that's true.
The BDI near the end of September 2010 is about where it was last year.
The steel industry drives a good amount of dry bulk trade due to iron ore and coking coal requirements. The sense I get from US Steel, Nucor, and ArcelorMittal Q2 earnings calls is that Q3 is likely to be flat or unimpressive due to China's recent slowdown, European debt fears, and seasonal effects from a Summer slowdown. Actually, I remember that was from Lakshmi Mittal's business update, but I don't see any reasons to expect any different from US Steel or Nucor. It sounds like Q4 will be better than Q3. Utilization is likely to be in the 75% to 80% range.
I intend to learn more about the global grain trade, but I don't have much useful to add at the moment. The only major item I know is Russia's export ban and that the US and some others will likely be benefactors.
I still believe Genco should be 20% to 50% higher, as I suggested in my pitch. It would take major economic recovery for a sharp spike in share price, but I do believe it is cheap relative to other dry bulk shippers at this time. Cash flows are strong and I see no major debt concerns since this modern fleet is likely to remain at high utilization rates.
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