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Thursday, June 04, 2009

Genco Shipping: Coming Out of Hibernation

Thursday, 04 June 2009

It’s been some time since we have taken a look at the shipping industry. After all, the global economic slump has made the shipping business very difficult and stock prices in the sector have reflected the weakness. As international trade has slumped, the demand for shipping has declined with day rates reflecting the oversupply in the industry.
Genco Shipping & Trading Limited has recently seen its stock begin to move higher, breaking out of a base that has been setting up for the last six months. The move appears to be more a function of expectations for a recovering economy rather than stock specific news. But at the same time, there are some encouraging data points coming from Genco which gives me a bit of confidence in the long-term viability of the company and the growth of profits.
Looking back to the first quarter release, the most important news was an amendment to the company’s line of credit. At this point, the lender has agreed to wave a collateral maintenance requirement which had certainly caused the company (and investors) some serious concern. The new terms allow the line to remain open (including access to the undrawn portion) with the only requirement being that Genco suspend its dividend and share buyback programs until the covenant is back in compliance.
This is important because Genco is taking delivery of three additional ships in the second quarter which will require the company to pull a significant portion of the $191 million undrawn LOC. With delivery of these three new ships the company will have a fleet of 35 ships well diversified between Capesize, Panamax, Supramax, Handymax and Handysize vessels. The diversification is important because it allows the company to compete on different contracts where customers may need large ships for bulk transport, or smaller vessels to navigate particular straits.
Genco has survived the last year largely due to its strong customer base which management characterizes as “diverse reputable and high quality counter parties.” Most of the vessels are leased out on long-term charters which has allowed the company to continue recognizing a strong revenue stream despite industry weakness. As of the end of the first quarter, Genco claimed to have 60% of its available days for 2009 under contract.
Tuesday morning (June 2), Genco actually announced an agreement with Morgan Stanley Capital Group for a new time charter spanning 23 to 25 months at a rate of $36,000 per day. While this rate is far below some of the attractive rates shippers were negotiating at the end of 2007 and into 2008, $36k still allows Genco to realize an attractive profit on the new vessel and certainly helps the cash flow picture. During the first quarter the company had an average daily Time Charter Equivalent (TCE) of $33,203. This was a bit below the level realized the prior year but still relatively stable with only a 7.5% decline. It is unclear exactly how this new vessel stacks up on the TCE scale, but at first blush, it looks as if this agreement will be complementary to the established rates.
GNK has rallied more than 200% off its low posted in February - and posted an even larger gain when considering the $6.43 low from November 2008. Still, the stock is trading at less than 10 times expectations for 2010. There are still some concerns regarding the company’s leveraged balance sheet (with a total of $1.173 billion in debt) but strong cash flow levels should allow GNK to maintain its debt service and quickly get its covenants back in line. The 2010 estimates could turn out to be low as analysts habitually shoot too low during times of economic crisis (and conversely they are too optimistic during expansion periods).
If GNK is able to reinstate its dividend, there is a good chance that the stock will rally sharply. The dividend could be half of its former level and the stock would still have nearly an 8% yield. Investors will likely be looking for income in future quarters so this could be an attractive selling point. For GNK, the risk is still out there but aggressive traders may be able to make a nice return as the company participates in a potential recovery in shipping rates.
Source: Genco Shipping and Trading Ltd.