Modern Fleet And LNG Capabilities Will Drive Long-Term Maritime Earnings Power

Catalysts

About SFL

SFL is a maritime infrastructure company that owns, operates and charters a diversified fleet of ships and offshore assets on long term contracts to blue chip counterparties.

What are the underlying business or industry changes driving this perspective?

• Ongoing fleet renewal into younger, more fuel efficient vessels, supported by divestment of older ships and roughly $25 million of targeted efficiency upgrades, positions SFL to pursue higher quality charters and potentially maintain stronger net margins as operating costs and downtime decline.
• Growing demand from leading shippers for low emission, dual fuel and LNG capable tonnage, where SFL already has 11 LNG capable vessels and 5 large newbuild container ships on order, may support premium day rates and long duration contracts that increase revenue visibility and earnings quality.
• Rising regulatory pressure on emissions and fuel efficiency across global shipping increases the relative value of SFL’s modernized, scrubber and energy efficiency equipped fleet, improving competitive positioning and supporting higher renewal rates that may affect EBITDA and cash flow margins over time.
• The approximately $4 billion fixed rate charter backlog, with two thirds contracted to investment grade counterparties, combined with $320 million of liquidity and unlevered vessels, gives SFL flexibility to consider additional transactions in selected segments, which may influence long term revenue trends and support the stability of its dividend and earnings profile.
• Improving market conditions for harsh environment offshore drilling, together with Hercules’ upgrades for development drilling and ability to be mobilized on short notice, create potential for a step up in contribution from energy assets that could add incremental EBITDA and affect earnings when contracted.

Assumptions

This narrative explores a more optimistic perspective on SFL compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming SFL's revenue will remain fairly flat over the next 3 years.
• The bullish analysts assume that profit margins will increase from -0.2% today to 31.2% in 3 years time.
• The bullish analysts expect earnings to reach $240.5 million (and earnings per share of $1.8) by about December 2028, up from $-1.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $8.2 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 7.8x on those 2028 earnings, up from -651.4x today. This future PE is lower than the current PE for the US Oil and Gas industry at 13.3x.
• The bullish analysts expect the number of shares outstanding to decline by 0.87% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.8%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Global shipping and offshore cycles remain volatile, and a downturn in container, tanker, car carrier or harsh environment drilling demand would pressure charter renewal terms and utilization across SFL's 59 asset fleet. This could reduce revenue and weaken earnings.
• The Hercules drilling rig continues to be idle with no clear timing for new employment. Prolonged warm stacking or a weaker than expected harsh environment rig market would turn this asset into a drag on cash flows, negatively impacting EBITDA and net margins.
• SFL has committed to approximately $850 million in capex for container newbuilds and about $25 million for efficiency upgrades. If financing conditions tighten or charterers do not support economics as expected, higher interest costs or refinancing risk could strain liquidity and ultimately pressure net income.
• Regulatory and customer pressure for cleaner, more energy efficient tonnage is accelerating. If technological standards or preferred fuels shift faster than SFL can adapt, even with its $100 million of upgrades and LNG capable vessels, the residual value and competitiveness of parts of the fleet could erode, weighing on revenue and long term earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for SFL is $11.0, which represents up to two standard deviations above the consensus price target of $9.43. This valuation is based on what can be assumed as the expectations of SFL's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $11.0, and the most bearish reporting a price target of just $8.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $771.3 million, earnings will come to $240.5 million, and it would be trading on a PE ratio of 7.8x, assuming you use a discount rate of 9.8%.
  
• Given the current share price of $7.75, the analyst price target of $11.0 is 29.5% higher.
  
• 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.