Buy Golden Ocean and Star Bulk at their current prices

Miro Nenchev

Over the past few months, the market situation for bulk carrier businesses was not as strong as in the first quarter of 2022. Driven by lockdowns in China, rising interest rates in the United States and the European countries, and the war in Ukraine, the demand for bulk carriers has decreased. However, the golden ocean (NASDAQ:NASDAQ: GOGL) the stock price has rebounded in recent days. Also, Star Bulk Carriers (NASDAQ:NASDAQ: SBLK) the stock price is up more than 10% in the past five days. In terms of market outlook, I expect a stronger market condition for GOGl and SBLK in the coming months. Additionally, my analysis shows that both companies are well positioned to make significant profits in the second half of 2022.

Q2 2022 Highlights

In its 2Q 2022 financial result, GOGL reported total operating revenue of $317 million, compared to total operating revenue of $276 million in Q2 2021, up 15%, driven by increased time charter revenue. The company’s total operating expenses decreased from $181 million in Q2 2021 to $170 million in Q2 2022, due to a significant decline in charter expenses. Golden Ocean reported 2Q 2022 net income of $164 million, or $0.81 per diluted share, compared to 2Q 2021 net income of $105 million, or $0.52 per diluted share. In the second quarter of 2022, GOGL’s cash and cash equivalents grew 53% quarter-on-quarter to $164 million. The company reported 2Q 2022 EBITDA and Adjusted EBITDA of $208 million and $192 million, respectively, compared to 2Q 2021 EBITDA and Adjusted EBITDA of $144 million and $130 million, respectively. The company’s total fleet rental days increased from 8,633 in Q2 2021 to 8,486 in Q2 2022. For Q2 2022, Golden Ocean reported TCE per day of $29,431, compared to TCE in 1st quarter 2022 per day. of $24,920. “Golden Ocean posted another strong result in the second quarter of 2022 despite trade disruptions and economic headwinds,” commented the CEO. “Despite recent weakness in freight rates caused by reduced port congestion and the contraction of the Chinese economy due, in part, to the zero COVID policy, our market outlook remains optimistic,” he continued. .

In its Q2 2022 financial results, Star Bulk reported travel revenue of $417 million, compared to travel revenue of $311 million in Q2 2021, as its TCE per day increased 33% year-on-year and 11% quarter-on-quarter to $30,451 in 2nd quarter 2022. The company’s net income increased from $124 million, or $1.22 per diluted share in the 2nd quarter of 2021 to $200 million, or $1.95 per diluted share, in the second quarter of 2022. In the second quarter of 2022, the company’s EBITDA and Adjusted EBITDA increased 40% and 42% year-on-year to $251 million and $258 million, respectively. “With a limited supply of vessels, upcoming environmental regulations limiting vessel orders and speeds, our competitive operating costs and our scrubber-equipped fleet, we remain optimistic about our company’s revenue prospects despite a challenging environment. seemingly uncertain macroeconomics,” the CEO said. commented.

Market outlook

During the week ending September 11, 2022, global iron ore shipments decreases by 17.5%. From August 29, 2022 to September 4, 2022, 2636 million tons of iron ore arrived at Chinese ports. That number was down 41% a week later. In addition, the volume of iron ore shipments to China increased from 1,895 million tons in the week ending September 4 to 1,652 million tons in the week ending September 11. However, I expect the volume of iron ore shipments to Chinese ports to increase. According to the MMI Iron Ore Daily Index report, released on September 13, 2022, the upward trend of total iron ore inventories in Chinese ports has come to a halt (see Figure 1). In addition, China’s total iron ore import volume increased by about 5 million tons in August 2022 (see Figure 2).

Figure 1 – Total iron ore stocks in Chinese ports

Figure 1 - Total iron ore stocks in Chinese ports

IMM

Figure 2 – Total volumes of iron ore imports into China

Figure 2 - Total volumes of iron ore imports into China

IMM

Additionally, China’s production of rebar and hot-rolled coil has increased in recent weeks (see Figure 3). Additionally, Chinese consumption of rebar and hot-rolled coil in September 2022 is approaching their September 2021 levels. Baltic Dry Index shows that after a significant drop from over 3000 in May 2022 to under 1000 at the end of August 2022, the index has rebounded by more than 40% in the past two weeks (see Figure 4). Thus, after experiencing a period of weakness in recent months, the bulk carrier market situation is improving.

Figure 3 – Steel consumption and production in China

Figure 3 - Steel consumption and production in China

IMM

Figure 4 – The Baltic Drought Index

Figure 4 - The Baltic Drought Index

tradingeconomics.com

Performance

In this section, I provide a careful analysis through the prism of the financial measures of Golden Ocean and Star Bulk. According to GOGL’s debt terms, a decrease in net debt aligned with an improvement in EBITDA led to a decline in the company’s net debt to EBITDA ratio of 6.61 in Q2 2022, compared to its previous level. from 9.47 in Q1 2022. In addition, following its lower net debt and higher operating cash flow, it is not surprising to see its leverage ratio decrease across its entire net debt on its operating cash flow to stand at 7.6 at the end of the second quarter of 2022 against 10.34 in the last quarter. Thus, Golden Ocean Group illustrates financial stability from the perspective of leverage ratios. Meanwhile, to provide a picture of the liquidity condition, their current and cash ratios have slowly improved and stood at 1.54 and 0.71 in the second quarter of 2022, respectively. (see Figure 5).

Figure 5 – GOGL leverage and liquidity ratios

Figure 5 - GOGL leverage and liquidity ratios

Author (based on SA data)

On the other hand, according to Star Bulk’s debt and liquidity conditions, it is observable that its lower net debt, higher EBITDA and operating cash flow compared to GOGL led to better ratios. of indebtedness. In the second quarter of 2022, SBLK’s Net Debt to EBITDA and Net Debt to CFO were 4.08 and 4.3, respectively.

Following SBLK’s strong cash and capital performance, it is no surprise to see increases in its liquidity ratios. The company’s current ratio of 2.07 in Q2 2022 was 84% ​​higher than its result of 1.12 at the end of Q2 2021. Despite a slight decrease in the cash ratio compared to the first quarter of 2022, the ratio cash is doubled. of 1.27 compared to its amount of 0.63 in the same period last year. In short, Star Bulk’s healthy liquidity position is observable from its liquidity ratios (see Figure 6).

Figure 6 – SBLK leverage and liquidity ratios

Figure 2 - SBLK leverage and liquidity ratios

Author (based on SA data)

Additionally, we can analyze Golden Ocean’s hedging ability at all levels of its interest coverage and liquidity coverage ratios and compare them with Star Bulk. GOGL’s Q2 2022 ICR indicates that 31 times the company can pay its interest expense on its debt with its operating profit. Golden Ocean’s interest coverage ratio improved three times from its amount in the same period last year. Similarly, as a conservative measure to compare the company’s cash balance to its annual interest expense, GOGL’s cash coverage ratio in Q2 2022 was 34.89, showing a stunning increase from compared to its level of 16.47 in Q2 2022. a well-generated free cash flow eliminates concerns about its ability to cover its obligations in the event of a slow recovery from the COVID-19 pandemic. From the perspective of Golden Ocean’s profitability, it is worth mentioning that return on assets and net profit margin improved in the second quarter of 2022 compared to the same period last year. Its ROA and net profit margin were 0.05 and 0.52, respectively, in the last quarter. All said and done, Golden Ocean’s profitability ratios indicate that the business is doing well in generating revenue and cash flow (see Figure 7).

Figure 7 – GOGL profitability and coverage ratios

Figure 7 - GOGL profitability and coverage ratios

Author (based on SA data)

In the case of Star Bulk’s profitability and coverage ratios, SBLK’s net profit margin declined 12 basis points since the start of 2022 and stood at 48% in the second quarter of 2022, although improved slightly from 40% in the same period in 2021. Despite a decrease since the start of 2022, SBLK’s ROA amount remained virtually unchanged. The ROA ratio in Q2 2022 shows that 5% of the company’s net profit is linked to its total assets. Additionally, as a measure to calculate its ability to pay debt interest expense with its operating profit, Star Bulk’s ICR was 17.5 in Q2 2022, which was lower than Golden Ocean’s. . Additionally, comparing SBLK’s cash balance to its annual interest expense shows that the company has the potential to cover its interest approximately 32 times (see Figure 8).

Figure 8 – SBLK profitability and coverage ratios

Figure 8 - SBLK profitability and coverage ratios

Author (based on SA data)

Conclusion

Although the lockdown of China, as the world’s second largest economy, may severely affect the steel supply and shipping industry, we know that this situation is most likely temporary and a better future may await the future. shipping companies. So, in my opinion, it is worth analyzing and comparing dry bulk companies from different aspects to give the best shot. In this regard, I have analyzed Golden Ocean’s debt, liquidity, profitability and coverage ratios and compared them to those of its peer, Star Bulk. Both companies are in a healthy position overall, so I think they’re a buy.

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