Belships – HOLD NOK 22 (prev. BUY 19) – It is not the 4Q results we are worried about

Belships reported its 4Q21 results last week. While we were expecting the main Shipping segment to show record-high figures, as they eventually did, the Lighthouse Navigation segment was guided by the company to be lower QoQ, yet, the segment’s results were surprisingly higher. With dividends of NOK 0.9/sh proposed, extraordinary dividends for 1Q22 planned and a very high contract coverage for 2022, the single thing that can stop Belships now seems to be an armed conflict in Ukraine, as everything else points to very strong 2022-1H23 ahead. After a strong report, the estimates were raised, however, we acknowledge the highly increased risk due to uncertainties in the grain market following the war in Ukraine and, despite increasing the Target Price by more than 15%, downgrade the recommendation to Hold after the share rally.

Variations in rates, but the level remains strong

We have seen variations among the rates during the quarter, peaking towards the end of October, then sliding by the end of the year, primarily caused by China’s intervention in the coal markets by capping prices and increasing domestic production, while the 1Q22 has presented yet another recovery. Overall, 2021 averaged USD 27,406 per day for Supramaxes recording the best year in a decade. Even when we expected the record-high shipping segment’s figures to be reported, the posted figures were significantly stronger than predicted with EBITDA of USD 47.9m vs. our anticipated USD 37.4m. But once again the Lighthouse Navigation segment was the game changer, with guided markedly lower performance due to the drop of the spot rates, but record-high operating income reported and with an extreme EBITDA level of USD 23m, in line QoQ. All this led to NOK 0.9/sh ordinary quarterly dividends, while the company also announced plans for extraordinary dividends for 1Q22. Not sure about this, we included a conservative NOK 1/sh as an extraordinary dividend, in addition to almost NOK 0.5/sh ordinary quarterly dividend for 1Q.

Contract coverage solid until 1H23, estimates for LHN raised

Recently the sentiment in the market significantly improved and continued solid drybulk markets are expected in the near term. While the high contract coverage signals for a continuously impressive shipping performance at least in 2022 and 1H23, the Lighthouse Navigation was said to have had a strong start of 2022 as well. Thus, we did not hold back the sentiment for LHN and strongly increased our estimates.

The war in Ukraine can change the situation

The Ukraine-Russia armed conflict is the one thing that might stop Belships’ growth with Ukraine being one of the top grain exporters and Russia being stripped of a significant amount of international cargo following all the sanctions. Although the grain volumes from Ukraine might be compensated by the U.S. or Australia, distances would shorten, while the additional impact of higher oil, meaning higher bunker prices, will build up the burden. Also, we should not forget that Russian vessels are or in the nearest future will not be welcome in a number of international ports. Although only 0.8% of bulkers belong to Russian companies (VesselsValue data), and adjusted for the distances the cargo travels, we see that 0.2% of the global trade is carried on “at risk” bulkers, we should be also looking at the percentage of a global seaborne trade from Russia, which is 3.7% for bulkers. Shipping brokers Arrow suggested the most exposed vessel class is the handysize sector of which around 16% of trade either loads or discharges in Russia or Ukraine, 10% being just Black Sea. A third of this trade is coal, but the rest is mainly split across grains, steel and fertilisers.

The drybulk shipping rates, however, proved to be somewhat resilient towards the news from the warzone, as can be seen in the chart below. Yet, we are following the development of the war in Ukraine extremely closely and suggest that the risk towards the case has increased significantly. The share continues its growth as well, and, despite increasing our Target Price to NOK 22/sh (NOK 19/sh previously) we downgrade our recommendation to Hold.

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Source: Norne Research