SFL Corporation (SFL) is a diversified maritime and offshore company specializing in chartering its assets under long-term contracts. The majority of shipping companies usually focus on a single sub-industry class, whether it is containerships, LNG Carriers, oil tankers, or dry bulk carriers, amongst other more niche types of vessels. However, SFL’s diversified feel includes multiple asset classes. Specifically, the company owns 16 oil tankers, 15 dry bulk carriers, 34 container vessels, 6 car carriers, and 2 ultra-deepwater drilling units.
SFL currently features a sizable backlog, which along with favorable charter rates for container and dry bulk vessels these days, should keep yielding strong results moving forward. The company’s ever-improving performance during the current favorable environment in shipping is reflected in its two latest sequential dividend hikes.
I am neutral on the stock.
Recent Performance & Market Environment
SFL stepped into fiscal 2022 on a high note, with its results reflecting the continuous improvements in industry rates. In Q1, the company recorded total revenues of $152.4 million, an increase of $0.3 million when compared to the previous quarter. This marks the highest quarterly revenues the company has recorded since Q3 of 2006. Note that this figure is lower than the operating cash flows as it excludes roughly $13.0 million of charter hire, which is not recognized as operating revenues pursuant to U.S. GAAP.
Net income was $47 million, or $0.37 per share, against $80.1 million, or $0.63 per share, in the previous quarter. Normally, based on the company’s record revenues and relatively stable expenses, Q1 should have marked a record quarter of profitably as well. The decline in net income quarter-over-quarter was only the result of the previous quarter’s numbers being uplifted by a one-off $39.3 million gain on asset sales, again pursuant to U.S. GAAP.
At the end of the quarter, and adjusted for subsequent transactions, the estimated fixed rate charter backlog from SFL’s fleet of 71 vessels (excludes the two drilling units) and new buildings under construction was about $3.6 billion. In fact, SFL features a weighted remaining charter term of 7.1 years, which means that, more or less, the company should enjoy quite predictable cash flow for around seven years.
With containership and dry bulk rates currently on very favorable levels (especially containership rates), it’s more than likely that results will keep improving as the older charters roll into the newer, more elevated ones. For context, even with containership rates slightly correcting from February’s highs, they are still 5X higher than their historical average levels. Dry bulk rates have also notably corrected from their last October’s highs. Yet, they are still more than double their 5-year average. Tanker rates remain relatively soft.
However, tankers make for a great hedge over the long term for the company. In five or six years, for instance, tanker rates could be substantially higher, and containership and dry bulk rates could be notably weaker. In such a scenario, SFL’s tanker would then contribute increasingly to what would otherwise be a weakening charter backlog without them.
While the company does not disclose its individual charters, based on its most recent results, fleet composition, and market rates, I estimate SFL can deliver EPS close to $1.20 for fiscal 2022.
Dividends & Valuation
As the below bar chart illustrates, SFL chose to slash its dividend in the midst of the pandemic to preserve liquidity against an unprecedented market environment. However, with containership and dry bulk skyrocketing since then amid port congestion and supply chain bottlenecks (that still persist), and a growing charter backlog (i.e., improving cash flow visibility), dividends are back on the rise.
Along with its Q1 results, SFL also declared its 73rd consecutive quarterly dividend, which it hiked by another 10% to $0.22, on top of the previous quarter’s quarter’s 11.1% hike. At the current annualized rate of $0.88 per share, it implies a yield north of 7.7% at the stock’s current price levels, while payouts should also be well-covered by the underlying EPS. Note that even if the payout ratio was to grow at rather worrying levels, dividends could still be, in reality, well-covered, as the company reports high amounts of depreciation and amortization (non-cash items).
As far as its valuation goes, assuming the company delivers EPS close to $1.00 in fiscal 2022, shares are trading at a P/E close to 11.40. I believe this is a fair multiple considering that excluding any one-off adjustments, earnings should grow notably in the coming years as the older charters roll into the new ones over time. The current 7.7% yield also points towards shares being rather fairly valued, as it is rich enough to compensate investors for the risks attached to the shipping industry, even though there is still room for further dividend hikes ahead.
Wall Street’s Take
Turning to Wall Street, SFL Corporation has a Moderate Buy consensus rating based on two Buys and one Hold assigned in the past three months. At $12.17, the average SFL Corporation price target implies a 6.75% upside potential.
With shares currently yielding just over 7.7%, income-oriented investors are likely to find SFL an attractive pick in the industry. That is especially the case considering the company’s extended track record of dividend payments and relatively predictable cash flows over the next several years.
However, the shipping industry can be wildly cyclical, resulting in fluctuating results over the long term, and thus potentially fluctuating dividend payments. Thus, while the company’s diversified fleet and long-term chartering strategy should smooth out a part of the market’s variations, investors should still expect some uncertainty when it comes to future dividends and total return potential overall.
With SFL trading at a rather fair valuation, the company appears to be offering an enticing investment case in the shipping industry, nonetheless.
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