Star Bulk Carriers Corp. (NASDAQ: SBLK) the stock price has fallen 8% over the past month as global iron ore shipment volumes have declined. Due to weaker dry bulk market conditions, SBLK’s second half financial and operational results the year will not be as strong as in 2H 2022. However, even with the current market situation, which is supported by the increase in coal demand from European countries, environmental regulations and low growth rates of fleet, SBLK will remain profitable. The stock is a hold.
H2 2022 earnings outlook
The company’s cumulative adjusted EBITDA decreased from $278 million in 3Q 2021 to $1,117 million in 2Q 2022. Additionally, the company’s adjusted net debt decreased from $1,407 million as of June 30, 2021 to 1,005 million as of June 30, 2022. In addition, its cash and liquidity increased from $283 million as of June 31, 2021 to $386 million as of June 30, 2022.
SBLK is the largest listed dry bulk company in the United States with 128 high quality vessels. “94% of Star Bulk’s fleet is equipped with scrubbers, providing increased fuel price differentials and a strong competitive advantage in a downturn,” the company announced in its September 2022 presentation. , despite the significant financial and operational results for the first half of 2022, I expect weaker results for the second half. According to MMI, China’s port steel shipments through domestic trade fell 27% WoW to 6.28 million tonnes in the week ending October 7, 2022 (see Figure 1). Additionally, Chinese shipments through ports outside China fell 7% to 1.69 million tonnes in the week ending October 7.
According to figure 2, worldwide iron ore shipments declined by 4.6% WoW to 30.47 million tonnes in the week ending October 9, 2022, due to lower shipments from Australia to China (down 8.8% WoW). During the week ending October 9, 2022, total iron ore shipments decreased by 1.09 million tonnes WoW and 5.68 million tonnes YoY (see Figure 3).
Figure 1 – Port shipments of steel in China as part of internal trade
Figure 2 – World shipments of iron ore
Figure 3 – Overseas shipments of iron ore by variety
Thus, the company’s 2H 2022 results will not be as strong as in the first half. However, even under current market conditions, SBLK can remain profitable. In addition, it is important to know that China’s domestic stainless steel production increased 21% month-on-month and 30% year-on-year to reach 2.76 million tons in September. MMI expects global stainless steel supply and demand to increase in the coming weeks. In September 2022, daily steel production in China increased by 2.73% MoM to 3.87 million tons.
The Baltic Dry Index fell from 5526 on October 4, 2021 to 1082 on August 22, 2022, down 80%. However, in recent weeks the index has bounced back above 1900. In the long term, the dry bulk market will not be as strong as it was a year ago. On the one hand, on the demand side, due to high commodity prices, high inflation and global economic challenges, and on the supply side, due to less port congestion, the transport market bulk freight in 2023 will not be promising for dry bulk transport. companies. On the other hand, environmental regulations and weak fleet growth will support TCE rates. The global dry bulk newbuild order book of around 7% is at its lowest level in 25 years as a percentage of the global fleet (see Figure 4).
According to the Managing Director of Maritime Strategies International (MSI), the dry bulk shipping market may see some recovery in the next six months due to increased steel consumption. In addition, demand for coal remains high, as natural gas prices in the European Union have increased following the war in Ukraine. Figure 5 shows that coal prices have skyrocketed in 2022 due to increased demand. The war in Ukraine is still ongoing and therefore due to high natural gas prices the demand for coal will remain high. Recently, some European countries have announced their intention to reactivate old coal-fired power stations. Thus, the dry bulk transportation market is supported by the increased demand for coal.
Figure 4 – Fleet growth rates are low
Figure 5 – Coal price
SBLK Performance Outlook
I looked at Star Bulk Carriers’ profitability ratios in this in-depth article to assess how well the company can generate profits and use its assets to earn money for its investors. I looked at profitability ratios (margin and return ratios) to provide useful insights into the financial health of the business.
In general, margin ratios assess a company’s ability to turn revenue into profit in several ways. It is clear that this dry bulk transportation company had lower gross profit and EBITDA margins than at the end of 2021, by 11% and 15% respectively. However, compared to its level of 0.62 in the second quarter of 2021, its gross profit margin improved slightly and stood at 0.64 in 2Q 2022.
Additionally, SBLK’s EBITDA margin increased year-over-year from its level of 0.59 in the same period in 2021 to 0.61 in the second quarter of 2022. EBITDA margin has the advantage of excluding fluctuating costs and providing a clear view of business performance. In summary, despite declining margin ratios in recent quarters, the business is expected to grow revenue, which will result in stronger margins, due to growing demand for dry bulk shipping after the slowdown in the COVID-19 pandemic (see Figure 6).
Figure 6- SBLK margin ratios
I looked at SBLK’s return on equity and return on assets ratios to show how well the company can tailor returns to its shareholders. The ROA ratio illustrates the amount of profit an organization can produce for every dollar of its assets. Star Bulk Carriers’ ROA ratio has increased over the past year, a testament to the breadth of the company’s recoverability. Star Bulk’s return on assets in the second quarter of 2022 was 5.5% year-over-year compared to its value of 4.6% in the first quarter of 2022.
Moreover, its return on equity of 9.5% in the 2nd quarter of 2022 is higher than the ROE level of 7.07% in the same period in 2021. This ratio shows the company’s net income compared to shareholders’ equity. and is important because it calculates the rate of return on the capital invested in the business. This means that Star Bulk’s performance ratios could indicate that the company has improved its performance conditions (see Figure 7).
Figure 7- SBLK rate of return
Valuation of SBLK shares
Updating the company’s valuation with closest peers and using comparable company analysis (CCA) indicates that SBLK stock is still attractive. Comparing Star Bulk Carriers with other dry bulk competitors like Genco Shipping (GNK), Golden Ocean Group (GOGL), Eagle Bulk Shipping (EGLE), Navios Maritime (NM) and Grindrod Shipping (GRIN), I believe that the fair value of the stock is around $20. This method reflects actual market data and is a suitable way to analyze SBLK for the sake of business stability. To choose my peers, I considered dry bulk companies of similar sizes and financial conditions. Data was collected from the most recent quarterly and TTM data (see Table 1).
Table 1 – Financial data of SBLK compared to its peers
Looking at SBLK’s valuation ratios and comparing them with peers, we can see that Star Bulk is relatively attractive but I recommend to wait before making new decisions. The company’s EV/EBIT ratio is 3.26x, 11% lower than the 3.67x average of its peers. This means that the stock price is lower than its potential value. Additionally, SBLK’s EV/EBITDA ratio is 13% lower than the 3.24x average. Meanwhile, the company’s P/E ratio is 2.3x, which is about above the 2.24x average. Ultimately, I assess SBLK’s fair value to be between $19 and $20 per share (see Table 2).
Table 2 – Valuation of SBLK stocks
Ultimately, based on previous remarks, the company’s profitability performance and global demand for dry bulk carriers, I believe that Star Bulk Carriers stock will not see an upward trend anytime soon. . Thus, a sustain rating would be appropriate for the SBLK action. With better economic sentiments, which increase the demand for iron ore, the market situation for dry bulk shipping companies will improve.