New Iron Ore Sources May Boost Freight Rates, Yet Profit Margins Expected To Shrink

Key Takeaways

• Simandou and Vale projects, combined with long-haul dynamics, are poised to boost revenue and profitability via strong time charter rates.
  
• Limited vessel supply and increased dry dock activity could raise freight rates, enhancing net margins and earnings growth.
  
• Volatile shipping markets and aging fleet challenges threaten revenue stability, operating expenses, and investor sentiment due to fluctuating rates and demand dynamics.

Catalysts

Owns and operates large dry bulk vessels worldwide.

• The commencement of the new Simandou iron ore mine in Guinea, along with additional output from Vale in Brazil, is expected to provide significant new volumes for the Capesize and Newcastlemax segments, potentially boosting future revenues for 2020 Bulkers.
  
• The increasing iron ore and bauxite volumes, combined with favorable ton-mile dynamics due to long-haul trade routes, are anticipated to support strong time charter rates, which can enhance earnings and profitability.
  
• The limited order book for Capesize and Newcastlemax vessels, coupled with yard constraints preventing significant new builds before 2028, could restrict supply, likely maintaining or increasing time charter rates and thus positively impacting net margins.
  
• The expected increase in dry dock activity in 2025 could reduce fleet availability and drive up freight rates, potentially resulting in higher revenues and improved earnings.
  
• The historical Q1 high season for bauxite exports and the forecasted increase in this trade due to dry weather conditions might contribute to revenue growth, as more favorable charter rates can be achieved during this period.

2020 Bulkers Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming 2020 Bulkers's revenue will decrease by -18.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 68.7% today to 50.2% in 3 years time.
• Analysts expect earnings to reach $34.1 million (and earnings per share of $1.22) by about January 2028, down from $86.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $75 million in earnings, and the most bearish expecting $30 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.2x on those 2028 earnings, up from 2.9x today. This future PE is greater than the current PE for the NO Shipping industry at 3.4x.
• Analysts expect the number of shares outstanding to grow by 6.97% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.76%, as per the Simply Wall St company report.

2020 Bulkers Future Earnings Per Share Growth

Risks

• The volatility and unpredictability of Forward Freight Agreements (FFAs) could impact 2020 Bulkers' ability to secure favorable future spot rates, potentially affecting revenue stability and cash flow from operations.
  
• The increasing Panamax sentiment interfering with Capesize volumes may persist, leading to diminished demand for the larger vessels 2020 Bulkers relies on, thereby impacting earnings and net margins.
  
• High levels of Chinese iron ore inventories and uncertainty regarding global steel demand could limit the need for further imports, affecting the anticipated ton-mile growth and leading to lower revenue.
  
• The capital-intensive nature of maintaining and dry docking an aging fleet, especially with a significant portion of vessels approaching mandatory dry docks, could increase operating expenses and reduce net margins.
  
• The reliance on market-driven spot rates without adequate coverage could expose the company to revenue fluctuations and impact its ability to sustain high dividend payouts, influencing investor sentiment and ultimately share price.

Valuation

• The analysts have a consensus price target of NOK178.22 for 2020 Bulkers based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK200.41, and the most bearish reporting a price target of just NOK127.87.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $67.9 million, earnings will come to $34.1 million, and it would be trading on a PE ratio of 15.2x, assuming you use a discount rate of 6.8%.
• Given the current share price of NOK125.1, the analyst's price target of NOK178.22 is 29.8% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.