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Genco operates 44 dry-bulk ships, which are used to transport large quantities of raw commodities across the globe.
Prashanth Vishwanathan/Bloomberg
It has been a boom time for the shipping industry since the onset of the Covid-19 pandemic, which snarled supply chains, lengthened shipping times, and caused rates to soar. Dry-bulk shipper
Genco Shipping & Trading
’s
second-quarter results on Wednesday showed that while the current cycle might be past its highest peak, the good times are far from over.
Genco (ticker: GNK) reported $47.4 million in net income in the second quarter, which translates to earnings per share of $1.10. Analysts on average had been expecting $1.17 in per-share earnings, according to FactSet. Genco’s revenue came in at $100.9 million, also short of the $109.1 million consensus estimate. Adjusted Ebitda—short for earnings before interest, taxes, depreciation, and amortization—was $64.2 million, while Wall Street had been forecasting $67.4 million.
Those are slight misses across the board, driven largely by higher-than-expected operating costs and ships remaining in dry dock for longer during the quarter.
Genco operates 44 dry-bulk ships, which are used to transport large quantities of raw commodities across the globe: 17 are of the massive Capesize variety, focused on carrying iron ore and coal, and 27 are smaller Ultramax and Supramax vessels used for transporting grains, cement, fertilizers, and other bulk commodities.
Genco’s ships commanded an average rate of $28,756 a day in the second quarter, versus the company’s break-even cost of around $8,500 a day. That’s a big gap, and means plenty of cash flow for the company for debt repayment, dividends, and capital expenditures.
Since the start of 2021, Genco has paid down more than half of its borrowings, and is on track to be net debt neutral by the end of 2023. That has helped bring down the break-even cost of running its fleet. Starting earlier this year, the company started a variable dividend policy which ties quarterly payouts to cash flow. That will mean higher dividends in boom times and lower dividends in bad times, but should allow Genco to continue paying out cash to shareholders throughout the shipping cycle.
Genco declared its second-quarter dividend on Wednesday, which will be 50 cents per share. That’s down from 79 cents for the first quarter and up from 10 cents in the year-ago period.
“We saw continued good freight rates in the second quarter and we purposely front-loaded our dry dockings,” Genco CEO John Wobensmith told Barron’s on Wednesday. “Looking forward, we’re set up really well and we think the third quarter is going to be substantially higher on the dividend front.”
Analysts are forecasting dividends per share of $1.13 and $1.24 in the third and fourth quarters, respectively—which would be good for a total dividend payment of $3.49 per share in 2022, or an annual yield of about 18% at the stock’s recent $19.25.
In the first half of the year, Genco had 11 ships in dry dock—including most of its larger Capesize vessels—undergoing scheduled maintenance and installing energy-saving and emissions-reducing devices required by the IMO 2023 regulations coming into effect next year. In the second half of the year, Genco has only six ships scheduled for dry docking, which are mostly smaller Ultramax vessels. That will mean more revenue, cash flow, and dividend payments in the second half of the year compared with the second quarter.
For the third quarter, Genco said Wednesday that it has already booked 79% of its available days at rates exceeding $25,000 a day. That locks in high shipping rates and provides plenty of visibility for the coming quarter.
The lifting of Covid-19 lockdowns in China and government stimulus could boost steel demand, while Brazil’s Vale (VALE) has told investors to expect higher iron-ore production in the second half of the year. That should be bullish for Capesize dry-bulk demand. Rates for smaller vessels could get a boost when U.S. grain season arrives in the fall, Wobensmith says. Meanwhile, there is little overall global dry-bulk fleet growth, keeping supply about constant.
A United Nations and Turkey-brokered deal to restart grain shipments from Ukrainian ports kicked off this week. A dry-bulk vessel transporting several tons of corn left Odessa on Monday headed for Lebanon, for the first time since Russia’s invasion of Ukraine.
Wobensmith says Genco would typically have around a half-dozen of its ships operating in the Black Sea this time of year, but won’t be rushing back into the region just yet. Instead, Genco is taking a wait-and-see approach and could begin returning to Ukrainian ports later. The company’s insurance policies cover war-related risk, Wobensmith says.
Barron’s recommended buying Genco stock in May, citing the company’s cleaned-up balance sheet and the new dividend policy. Shares have lost about 5% after dividends since then, versus a 7% return for the Russell 2000 index of small-cap stocks. Over the past year, Genco has returned 19% while the Russell 2000 has lost 14%.
Genco management will host a call with analysts on Thursday at 8:30 a.m. ET to discuss the results.
Write to Nicholas Jasinski at [email protected]
