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Safe Bulkers Overview
Safe Bulkers (NYSE:SB) is a dry bulk shipping company which controls a fully delivered fleet of 50 vessels with significant mid-sized market exposure (Post-Panamax, Kamsarmax, and Panamax). Although SB has typically traded at a premium to peers in the past due to a strong track record of stability and prudent financial management, shares are now trading at a sizable discount to NAV, and Safe Bulkers is by far the cheapest diversified dry bulk shipping company in our coverage at Value Investor’s Edge.
We believe Safe Bulkers should trade closer to average peer valuations and therefore this is one of our top picks in the current market. However, there is a clear factor which is likely weighing on SB’s recent stock performance, which is the currently lackluster dividend payout. Alongside Q4-21 earnings, the company reinstituted a fixed dividend at $0.05/qtr and this payout was kept for the recent Q1-22 report. This current dividend pales in comparison to surging payouts at leading firms such as Genco Shipping (GNK) and Star Bulk Carriers (SBLK); however, we expect payouts will rise over the coming year as SB continues to delever their balance sheet while prioritizing selective fleet renewal and second-hand acquisitions.
SB’s pro forma (including newbuild capex) debt-to-assets ratio is 46%, which is a healthy level and provides notable upside to improving market conditions. In previous discussions, management has floated a conservative mid-30% D/A as a rough target. If dry bulk market conditions remain moderately strong, SB should hit these levels by late-2022, and we should see an increase in fixed dividend payouts. If shares continue to trade lackluster, then SB might also institute a share repurchase program.
SB has approximately 121.7M shares outstanding for a common equity market cap of nearly $600M. SB also has $100M in preferred equity par value split between Series-C and Series-D (SB-C/D). SB currently offers a smaller fixed dividend yield of 4%, but we anticipate substantial increases over the coming year as legacy charters are renewed at high rates and financing is secured for upcoming vessel deliveries. SB has prioritized stable and secure fixed payouts in the past, and we expect this strategy will continue.
The rest of this report includes our Q1-22 earnings review, capital allocation discussion, and a valuation assessment.
Q1-22 Earnings Review
Safe Bulkers (SB) reported an adjusted EBITDA of $46.9M, and adjusted net income of $32.3M, or $0.24/sh, in-line with our $0.19-$0.24/sh estimated range with an average TCE of $21,352/day. The TCE performance was in-line with our expectations (which were based on the company’s previously disclosed charterbook).
Safe Bulkers has several below-market charters on the Panamax side of the fleet, but these will transition into index-linked market rate contracts between June and August of 2022 (which should provide a decent boost earnings into 2H-2022). The majority of the ships in the Kamsarmax and Post-Panamax segments are chartered at decent market-level rates, whereas the company also has a number of Capesizes chartered out under very long-term contracts, which are otherwise in-line with market levels for those durations.
SB declared a $0.05/sh dividend, in-line with the previous quarter’s distribution. This represents a negligible amount of operating cash flow, but management is committed to improving the balance sheet. Management’s stated goal is to “have the dividend sustained and to grow it in the long run.” Unlike a few other peers who have targeted outsized variable dividends (which move up and down each quarter), SB has preferred to offer a stable fixed payout.
Q2-22 & Q3-22 EPS Projection
SB does not provide guidance as a percentage of the fleet fixed, but it does provide its full charterbook (which illustrates recently conducted spot fixtures). Given the company’s charterbook, and given prevailing FFA expectations for June, we expect the company to report adjusted EPS of between $0.31/sh and $0.36/sh for Q2-22, which currently is above average analyst expectations.
Although market rates remain to be seen, SB has several weaker legacy charters expiring between June and August, which means Q3-22 earnings could potentially be notably higher, perhaps hitting the $0.45-$0.60 range for a single quarter.
Altogether, if the dry bulk market is reasonably strong for the duration of 2022, SB could produce total EPS ranging between $1.50-$2.00. 2023 performance could be markedly higher yet on the back of a larger fleet with significantly stronger average fixed charters.
Solid Operational Performance
The company realized an average TCE of $21,352/day, with the charter book weighing on their overall performance due to legacy medium-term Panamax charters which were signed in 2020 and now are notably below market levels.
Daily operating expenses amounted to $5,722/day, whereas daily G&A came in at around $1,520/day. However, once we exclude dry-docking and pre-delivery expenses, operating expenses came in at around $4,923/day, which is very close to SBLK’s industry-leading $4,747/day level. SB’s overall cost structure is competitive, allowing for one of the lowest total cash breakeven levels in the industry. Going forward, and as the newbuild assets are delivered, we expect the company’s operational performance relative to peers will continue to improve.
Charter Cover: Short-Term Drag, Done by Q3-22
SB is characterized by its balanced exposure to the time charter market coupled with near-term spot market exposure. The company has done a very good job securing longer-term charter cover for their Capesize vessels, but at the same time, some of their Panamax charters secured in mid-2020 have weighed heavily against recent performance.
For example, seven out of twelve Panamaxes are chartered out at very mediocre charters (currently achieving rates of between $11,750/day and $13,800/day), which has weighed significantly on performance throughout most of 2021 and into early-2022. However, these vessels will mostly revert to index-linked market level contracts between June and August of this year, providing a substantial uplift to overall earnings, especially in Q3-22.
On the Capesize front, the company has used recent market strength to increase its charter cover with long-term contracts. It now has one vessel chartered out until September 2031 at $25,928/day, another asset chartered out at $25,250/day until May 2025, a 2014-built vessel chartered out at $25,200/day until February 2025, and finally, a 2012-built asset chartered until November 2024 at $24,400/day.
The Capesize coverage may seem low given prevailing rates, but when looking at 2023 and 2024 FFAs, these rates are quite decent and well in-line with current market rates. We have modeled a $60M charter discount on SB’s charterbook primarily due to the mediocre Panamax time-charters. The majority of this discount factor will amortize in our valuation models over the remainder of 2022.
Fleet Expansion Program
SB has expanding the fleet over the past year and a half via a series of second-hand purchases, divestitures, and newbuild contracts. Overall, the company has ordered a total of 11 newbuilds and acquired seven second-hand vessels. Since these transactions were conducted, asset pricing has continued to increase, and SB is now sitting on an estimated $125M in mark-to-market gains on recent vessel buys (over $1/sh of value creation).
In May, SB took delivery of the first of its 11 newbuild orders, a Kamsarmax vessel, financed with a sale and leaseback transaction for a period of 10 years with a purchase obligation at the end of the 10th year, with purchase options starting after the third year.
In January, SB agreed to acquire a 2014-built Capesize for $33.8M, and the vessel was delivered in February (with the acquisition funded from cash reserves). In April, another Capesize (a 2012-built asset) was acquired for $30M and was subsequently delivered in May 2022 (also financed with cash reserves).
As of May 20th, the company’s remaining capital expenditure requirements amounted to $218.6M in aggregate, consisting mostly of the newbuild orders ($217.4M), with the remainder attributable to “one scrubber and several BWTS retrofits”. Management expects to face around $29.4M in capital expenditures for the remainder of 2022, followed by $141.8M in 2023, and $47.4M in 2024. As of May 20th, cash and cash equivalents amounted to $141.5M (plus an additional $136.6M in undrawn borrowing capacity from RCFs and $20M in secured commitments for the financing of one of the newbuilds). SB has since added a pair of Kamsarmax newbuilds (Q3-24 & Q1-25 deliveries), bringing the total to 11.
SB has been one of the most active acquirers of tonnage over the past year, especially on the newbuild side, and they have been markedly more aggressive than other publicly traded peers, which have either foregone asset purchases or stuck with limited second-hand purchases. Recent newbuild ordering has allowed SB to reduce substantially its fleet age, now estimated at under 8.5 years, which is the third lowest among bulker peers (only GOGL and GRIN have younger fleets).
The company recently agreed to acquire three middle-aged Capesizes at decent pricing. Management’s reasoning for these acquisitions is that Capesize valuations have lagged those of smaller vessels, and since management has a positive outlook for Capesizes, they have decided to play some offense. Although most retail investors have scorned companies who invest in additional assets or newbuilds, if an investor is either bullish on the future dry bulk market, or expects notably higher inflation, then SB is conducting the most efficient strategy for this stage in the cycle.
When asked on the recent earnings call about acquiring smaller second-hand vessels, the CEO mentioned those ships are very expensive relative to Capesizes, making the Capes a clear choice at this stage. Granted, smaller vessels have posted impressive performance over the past year (especially on a relative basis vs. Capesizes which have been held back by weaker China growth), but the company does not expect this negative performance gap to continue. If the dry bulk markets are strong into the next few years, the larger vessels will provide the highest torque.
Strong Financial Position
As of March 31st, the company had $166.3M in cash, cash equivalents, and restricted cash, and a further $146.6M in undrawn borrowing capacity available under RCFs. Additionally, the company also had $46.2M in secured commitments for sale and leaseback agreements for the financing of two newbuilds.
This compares to a total debt position (including the recently placed Greek Bond) of $409.4M, which is virtually fully covered by the scrap value of the company’s fleet (estimated at $395M assuming a scrap rate of $660/ton). However, we also need to include the $100M of preferred equity between the remaining Series-C and the Series-D tranches.
SB entered the current bulker upswing with one of the most levered balance sheets in the sector, and management is now focused on lowering debt ratios to closer to 30% D/A (SB currently has 48% D/A including the remaining newbuild capex, or roughly 35% against the current fleet). Operating cash flow generation for the remainder of the year will easily top $120M (potentially closer to $150M), which should bring SB to reasonable leverage ranges by the end of 2022.
Capital Allocation: Delevering & Selective Fleet Renewal
SB has been one of the last dry bulk peers to transition to heavy shareholder with returns (via dividends or share repurchases). Management has been clear regarding capital allocation priorities: they want to delever the overall balance sheet and continue renewing the fleet if asset pricing remains attractive.
Management will continue to prioritize fixed dividend distributions (instead of the variable option many bulker peers are utilizing). They want the dividend “to be sustainable and here for the long-term”. In previous years, SB has also incorporated a share repurchase when the stock is 20%+ below NAV, so if shares continue to muddle, we might see a repurchase.
This defensive approach is not surprising given how hard the past decade has been (SB is one of the only survivors from the past cycle), but it underpins that we should not expect massive dividends in the immediate future. This will most likely continue to drive a slightly higher discount relative to peers but given the extremely high insider ownership in the company (insiders control around 40% of the common shares), we should see prudent asset allocation and a return of repurchases if large discounts continue. SB currently trades at one of the largest discounts to peer averages we have seen in nearly a decade, and we should see stronger relative appreciation in the near- to medium-term.
In the medium-term (late-22 through mid-23), we expect to see higher dividend payments and perhaps a series of share repurchases (if shares remain underpriced). Therefore, SB is currently one of our favorite stocks in the bulker sector given the extremely high relative discount the stock continues to trade at (even after applying a $60M below-market charter discount).
In addition to deleveraging, management will also continue to selectively renew the fleet. They have recently focused on second-hand Capesize vessels given the discount on these ships relative to their smaller counterparts and they have pursued a newbuild program to replace parts of their mid-sized fleet. Although many have critiqued the acquisitions and limited push into newbuilds, SB has already driven more than $1/sh in value by moving early and securing yard slots well before the spike in prices.
Battle-Tested Management
It’s worth noting/reminding that SB was one of the very few dry bulk firms who survived the last downcycle without massive share dilution. If we go back to 2008-2009 and look at all dry bulk comps, almost every other firm went bankrupt or diluted shareholders by over 90%. SB never resorted to heavy dilution nor a reverse split like many of its peers. However, management also strives to establish a company which is strong enough to survive any cycle, hence their previously stated goal is to drive total leverage closer to 30% while also selectively renewing the fleet.
SB Focus Question Review
Note: These initial focus questions were included as part of our extensive earnings season coverage at Value Investor’s Edge, where we cover 40+ firms across the maritime shipping sectors.
Commentary on fleet positioning? Usage of bond proceeds? SB has been busy with fleet renewal, divesting the oldest vessels while ordering several newbuilds. Is management happy with the company’s current fleet positioning? Is management willing to divest the oldest portion of the fleet at current pricing? Regarding the bond issued in the Greek capital markets, any further commentary regarding where the proceeds will be deployed?
Q1-22 Answer: SB has continued with fleet renewal, taking delivery of the first newbuild while also acquiring two middle-aged Capesizes at firm pricing (plus a third mid-aged Capesize whose acquisition was announced shortly after). Recent bond proceeds were mostly used to finance recent acquisitions, to lower secured debt levels, and to repurchase $38.1M worth of preferred (which looks like a no-brainer given the instrument was yielding 8% compared to the Bond’s 2.95% coupon). Going forward, management remains constructive on the overall market outlook, and we expect additional transactions (acquisitions centered on Capesizes) in the near/medium-term, whereas the disposal of the oldest vessels also seems likely if valuations continue to rise.
Commentary on shareholder returns? SB has been clear they will prioritize strengthening the balance sheet before boosting shareholder returns, but the company declared a $0.05/sh dividend on Q4 earnings. What kind of dividend will the company declare on Q1 earnings? Is management willing to institute a share repurchase program to repurchase shares at the current discount to NAV?
Q1-22 Answer: Management’s previous commentary still stands: they will continue to reduce leverage levels and will continue to look at potential acquisition opportunities. The dividend declaration was the same as in Q4 (still representing a negligible amount of operating cash flows). Management wants the dividend to have a fixed, long-term nature, and they do not seem willing to pursue a variable dividend policy as most peers have done (which would have otherwise went a long way in pushing the stock higher). We expect SB will eventually raise the dividend to the $0.10-$0.15 range in coming quarters as leverage is reduced and earnings increase.
Why is SB Cheaper than Comps?
We believe SB is attractive on a standalone basis, with an end-22 target of $7-$8 (up to 63% upside in six month) and a current ‘fair value estimate’ of $6.00 (22% immediate upside). However, SB is even cheaper yet when compared against peer valuations.
SB’s closest direct comps are Diana Shipping (DSX), with a P/NAV of 1.2x, and Eagle Bulk (EGLE), with a P/NAV of 1.05x. Star Bulk Carriers (SBLK) is the bellwether of the sector as well, with a P/NAV of roughly 1.1x.
The average P/NAV of these 3 comps is 1.12x, whereas SB trades at 0.72x even after including the $60M below market charter discount (which will mostly be gone by August). If SB traded to the peer average of 1.12x NAV, it would trade around $7.65 now and roughly $8.20 by August.
Why does this huge disparity exist? We have followed SB for over a decade and normally this has been one of the firms which trades at the highest valuation. We believe SB’s lower fixed dividend vs. peers rushing to pump out higher-ticket variable cash payouts has led to this performance. Over time, we expect valuations will once again normalize and SB will likely outperform. Furthermore, some investors have complained about SB adding discounted second-hand tonnage or pursuing some selective newbuilds. If investors are truly bullish about the sector prospects and/or concerned about inflation, then adding selective assets is the superior move at this juncture. The ships SB ordered in 2021 are now already valued more than $5M higher apiece and SB controls some of the extremely few remaining slots for 2023-2024 deliveries.
Fair Value Estimate: $6.00 Now, $8.00 by End-22
SB reported in-line earnings for Q1-22, and the company’s operational performance continued to be strong especially given the sizable below-market legacy charterbook (which has weighed significantly against performance over the past few quarters). Most of the below-market charters will roll off between June and August of this year, providing a decent tailwind through Q3 if dry bulk market rates continue to improve.
The market has been volatile throughout the first half of the year, but rates have held up remarkably well. As China reopens, iron ore demand is expected to increase noticeably, which should drive additional upside. The war in Ukraine continues to upend bulker trade, and although overall grain volumes will be under severe pressure, rerouting of cargoes should add to ton miles (especially in coal markets), which should ease the impact.
We have recently raised our ‘fair value estimate’ from $5.50/sh to $6.00/sh, which is nearly a 10% discount to NAV and also includes a $60M charter discount due to the handful of far below-market Panamaxes (expiring between June and August) and one Kamsarmax (expires in November). This discount will amortize through our models throughout the rest of 2022. Without this discount and including quarter-to-date cash flow, unadjusted NAV is roughly $7.30/sh at this point, which means SB is trading at a P/NAV of around 67%. Given the ongoing discount, prudent management, and SB’s historical trading range of over 100% NAV, SB is now one of our top picks in dry bulk, and in shipping overall.
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