Description

Following a solid 1H 24, the dry bulk shipping sector has experienced yet another summer slump.  Leading companies such as GNK, GOGL, and SBLK have seen their stock prices fall anywhere between 10-20% so far in Q3 24.  Yet, on a YTD basis this group is still flat to up 25% in the case of GOGL.  One company, however, that has badly lagged its peers is Diana Shipping (DSX), which is down 15%+ ytd and 30%+ over the past twelve months.  Amazingly, since Q3 21, it has paid a cumulative cash dividend of 1.60/sh, or roughly 2/3 of its current stock price.  More recently, DSX has been paying out a quarterly cash dividend of 0.075/sh, which equates to a hefty 12.3% dividend yield.  Given this juicy dividend yield coupled with its significant discount to net asset value, this latest pullback provides a compelling entry point.  

The dry bulk shipping industry is a notoriously volatile one.  It’s also a highly fragmented one and one with relatively lower barriers to entry as anyone can conceivably shell out $35-75 mil. for a new vessel and then begin chartering away on the high seas.  Further, it was plagued by a noticeable newbuild supply overhang following the late 2000s China-led commodities boom, which took nearly a decade to absorb.  For these reasons, many investors have continued to ignore this sector.  More recently, the pullback in port congestion from April 2024 ytd highs, weak 1H 24 Chinese steel production which was down 1.1% y/y, and the easing of drought-related restrictions in the Panama Canal have only provided further excuses for investors to remain on the sidelines.  In addition, guidance from peers such as GNK and GOGL indicate a slight sequential downtick in Q3 24 TCE day rates, which could pressure earnings.  Lastly, the recent exit of a high profile investor from SBLK’s BoD following the material reduction in its once 25% stake in the company has also weighed on near-term sentiment.

Despite these nearer-term headwinds, the medium- to longer-term outlook remains favorable for the sector.  First, the Baltic Dry Index (or BDI), a composite of the dry bulk time charter averages of Capesize, Panamax, and Supramax indices, remains well-above prior year levels.  This bodes well heading into the seasonally stronger Q4 holiday period.  Second, volumes through the Suez Canal are likely to remain depressed following the latest attack this week by Houthi rebels on a Greek oil tanker in the Red Sea.  In fact, traffic flow through the Suez Canal has been cut by more than half so far this year.  This has increased average voyage length and thus reduced overall fleet efficiency, a positive for shipping companies such as DSX.  Any further escalation of the ongoing Middle East conflict could lead to even more significant disruptions.  This sector has also seen some much-needed consolidation following the completion of SBLK’s takeover of Eagle Bulk (EGLE) in April.  With EGLE now out of the picture, DSX arguably becomes one of the next logical takeover targets.  Bottom line is that there’s plenty of upside optionality for the leading dry bulk shipping companies.  

Diana Shipping Inc. (NYSE: DSX) has done an admirable job of navigating dry bulk cycles in the past.  Unlike a number of its peers which filed for bankruptcy protection during the darkest days of the 2010s downcycle, DSX was able to remain afloat.  This is largely attributable to its strategic policy to limit its exposure to the spot market, which can experience tremendous volatility.  As of July 24, 2024, DSX had secured term contracts for 74% of its remaining ownership days in 2024 and 26% in 2025 with an average contract duration of 1.34 years.  After re-chartering 8 vessels YTD through July with an average charter rate increase of 11%, DSX more recently re-chartered an additional 3 vessels in August with an average charter rate increase of 20%.  Going forward, management remains committed to this disciplined and non-speculative chartering strategy, which provides both earnings visibility and enhanced resilience to market downturns.

As shown in the table below, DSX’s net debt (including its preferred debt) was $538 mil. as of Q2 24.  Its net debt-to-fleet value was 45%, above peer levels, but well within mgmt.’s 50% max threshold.  In July, DSX successfully extended its debt maturity profile following the issuance of $150 mil. of senior unsecured notes due in 2029.  The majority of the proceeds were used to fully repay the upcoming $125 mil. of senior bonds due in 2026.  DSX now has a minimal amount of debt maturities through 2028.  Going forward, DSX remains committed to its variable dividend along with steadily reducing its debt load.

DSX presently trades at a price of $2.44/sh and sports a market cap of slightly over $300 mil. along with a dividend yield of 12.3% (Q2 24 annualized).  Based on successful YTD re-chartering activities, DSX’s dividend appears sustainable in the near to medium term.  DSX’s adj EBITDA should slightly exceed $100 mil. in 2024, down from $129 mil. in 2023 and $181 mil. in 2022.  After averaging nearly $23k in 2022 and nearly $17k in 2023, DSX’s TCE day rates will likely average roughly $15.5k in 2024.  That is below mid-cycle level of $17k.  

The sector’s two largest companies, SBLK and GOGL are currently trading at 80% and 95% of NAV, respectively.  Secondhand vessel values have been steadily on the rise for the past year while newbuild costs have also experienced inflationary pressures.  Eagle Bulk, which levered up in 2023 to repurchase shares and was solely reliant on the Supramax segment (which focuses on grains and minor bulks instead of coal and iron ore), was acquired earlier this year at roughly 75% of NAV.  Despite its conservative chartering strategy, very manageable debt maturity profile, and diversified fleet of 38 vessels (12 Capesize/Newcastlemax, 9 Ultramax, and 17 Panamax/Kamsarmax), DSX is trading at only 46% of NAV.  This meaningful discount to NAV and larger peers is mostly unwarranted and presents an opportunity.

The supply-demand backdrop remains constructive as the dry bulk new build order book is under 10% of the existing fleet.  That effectively matches the percent of the fleet that is 20 years or older (9%).  Net fleet growth of 3.4% and 2.1% is expected in 2024 and 2025, respectively, according to BIMCO, the maritime industry’s global trade association.  Meanwhile, dry bulk demand is anticipated to increase a robust 5% in 2024 before declining 1.5% in 2025 assuming the Red Sea disruptions end and average sailing distances shorten.  From a pure cargo volume perspective, 2024 and 2025 should see growth of roughly 2% and 0.5%, respectively.  Increased port congestion, longer voyage routes, and slower sailing speeds remain other underappreciated catalysts.  With the limited threat of new supply over the medium term, a rapidly aging fleet, and reduced shipyard capacity, the risk/reward for TCE day rates skews to the upside.  

Conclusion:

DSX trades at a material discount to its net asset value and offers a 2x digit dividend yield.  This is a stock that should be trading a lot closer to $5/sh than $2.5/sh.  There’s more than 100% upside from current levels to my NAV/sh estimate.  Despite ytd re-chartering activity at positive spreads and an upward trend for secondhand vessel values, the stock price is down more than 30% over the past year.  This is a massive disconnect, but one that will not persist forever.  I see smoother sailing ahead for the company.

Catalyst

Value will out