Vessel Upgrades Will Attract Long-Term Charters Amid Market Uncertainties

Key Takeaways

• Stable future cash flows are ensured by a strong charter backlog with investment-grade customers, enhancing revenue stability and earnings visibility.
  
• Investments in vessel upgrades and successful refinancing increase operational efficiency and financial flexibility, supporting growth and profitability.
  
• Legal disputes, shipping market challenges, and operational costs create financial uncertainties and could impact SFL's revenue, margins, and financial health.

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 fixed-rate charter backlog stands at approximately $4.3 billion, with 2/3 tied to investment-grade customers, ensuring stable and predictable future cash flows, which could enhance revenue stability and earnings visibility.
  
• The company has made substantial investments in vessel upgrades, directed towards emission reductions and performance enhancements, likely to attract more long-term charters and increase profit margins by enhancing operational efficiencies and fuel cost savings.
  
• SFL's recent successful refinancing activities, including raising $1.3 billion and securing a $150 million sustainability-linked bond, demonstrate strengthened financial flexibility, which could be pivotal for future growth initiatives and managing debt costs.
  
• Ongoing and future vessel deliveries and upgrades to improve fleet efficiency and meet regulatory requirements will support SFL's ability to secure additional high-value contracts, driving revenue growth and potentially enhancing net margins.
  
• Expected proceeds from legal rulings, such as the $48 million Seadrill dispute, if successfully collected, could provide a one-time boost to cash flow and net earnings, while ongoing litigation suggests possible future financial uplifts if resolved favorably.

SFL Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SFL's revenue will decrease by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.6% today to 11.5% in 3 years time.
• Analysts expect earnings to reach $91.0 million (and earnings per share of $0.68) by about March 2028, down from $130.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.9x on those 2028 earnings, up from 8.4x today. This future PE is greater than the current PE for the US Oil and Gas industry at 13.1x.
• Analysts expect the number of shares outstanding to grow by 6.4% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

SFL Future Earnings Per Share Growth

Risks

• There are ongoing legal disputes with Seadrill that could take months or years to resolve, creating uncertainty around potential financial outcomes that could impact cash flow and earnings.
  
• The company has significant exposure to the container shipping market, which may face challenges due to a large order backlog of new container ships, potentially affecting long-term revenue and profitability.
  
• Idle periods for assets such as the Hercules rig introduce revenue volatility and could impact net margins, especially given the uncertainty around securing work contracts in a timely manner.
  
• Operating and general administrative expenses have increased, partly due to scheduled dry dockings and vessel upgrades. These costs may continue to impact net income margins if efficiency improvements do not generate anticipated savings.
  
• The company’s exposure to market fluctuations in the shipping and offshore sectors, coupled with heavy reliance on long-term charters, could impact revenue predictability and financial health if market conditions change.

Valuation

• The analysts have a consensus price target of $11.8 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 $14.0, 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 2028, revenues will be $793.0 million, earnings will come to $91.0 million, and it would be trading on a PE ratio of 28.9x, assuming you use a discount rate of 11.4%.
• Given the current share price of $8.18, the analyst price target of $11.8 is 30.7% 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.