Investment In LNG Dual-Fuel Vessels May Improve Fuel Efficiency, But Dependence On Maersk And Hapag-Lloyd Could Risk Future Revenues

Key Takeaways

• Investment in fleet upgrades and dual-fuel vessels is expected to improve fuel efficiency, boosting net margins through cost reductions.
  
• Expansion of charters and strategic refinancing strengthens revenue stability and supports future growth through enhanced financial flexibility.
  
• Reliance on a narrow client base and container shipping backlog risks revenue instability amid economic shifts, with high dividends straining growth capital allocation.

Catalysts

A maritime and offshore asset owning and chartering company, engages in the ownership, operation, and chartering out of vessels and offshore related assets on medium and long-term charters.

• SFL's investment in fleet upgrades, including the delivery of new LNG dual-fuel vessels and energy-saving enhancements, is likely to improve fuel efficiency and operational performance, potentially increasing net margins through cost reductions.
  
• The order of five large container vessels with long-term charters signifies substantial future revenue growth, supported by a $1.2 billion transaction, impacting long-term revenue stability and earnings.
  
• Expansion and renewal of charters with major companies such as Maersk and Hapag-Lloyd suggest a sustainable revenue stream and backlog growth, thereby supporting long-term revenue and earnings visibility.
  
• The company's strategic refinancing and strong liquidity position, including raising $100 million in gross proceeds, suggest enhanced financial flexibility that can capitalize on growth opportunities and optimize net margins.
  
• Significant long-term fixed charter backlog, with two-thirds backed by investment-grade customers, provides strong cash flow visibility, potentially enhancing revenue reliability and reducing earnings volatility.

SFL Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SFL's revenue will decrease by -1.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 16.2% today to 8.9% in 3 years time.
• Analysts expect earnings to reach $74.6 million (and earnings per share of $0.54) by about December 2027, down from $141.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $161.7 million in earnings, and the most bearish expecting $43.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.4x on those 2027 earnings, up from 9.3x today. This future PE is greater than the current PE for the US Oil and Gas industry at 10.9x.
• Analysts expect the number of shares outstanding to grow by 0.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.86%, as per the Simply Wall St company report.

SFL Future Earnings Per Share Growth

Risks

• The company's reliance on chartering to a concentrated pool of high-profile clients (e.g., Maersk, Hapag-Lloyd, Volkswagen) may expose it to risks if these clients face financial difficulties or decide to renegotiate or terminate contracts, impacting revenue and cash flow predictability.
  
• A significant portion of future revenues and backlog is tied up in container shipping, with 65% of the backlog in this segment. Changes in global trade patterns, supply chain issues, or downturns in the container market could negatively impact revenue.
  
• Ongoing investments in new vessels and upgrades, while necessary for maintaining competitiveness and meeting environmental regulations, require significant capital outlay, potentially affecting margins and cash flows if market conditions or financing terms change.
  
• The company's high dividend yield of 10% suggests it is distributing a large portion of its earnings, which might limit available capital for growth investments or debt reduction, possibly affecting long-term financial stability.
  
• SFL's financials show complex accounting practices with revenue treatments under U.S. GAAP, which may not clearly reflect underlying operational cash flows and might obscure true performance metrics. This could raise concerns about future earnings predictability.

Valuation

• The analysts have a consensus price target of $12.95 for SFL 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 $16.0, and the most bearish reporting a price target of just $10.8.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $842.1 million, earnings will come to $74.6 million, and it would be trading on a PE ratio of 32.4x, assuming you use a discount rate of 10.9%.
• Given the current share price of $9.86, the analyst's price target of $12.95 is 23.9% 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.