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Golden Ocean: I Double Upgraded The Stock To Buy

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On 24 February 2022, I published an article on Golden Ocean Group (NASDAQ:GOGL) and explained the stock is a sell at prices around $12. Now, I am bullish on the stock as I revised my calculations of the company’s fair value. GOGL is worth between $15 to $32 based on three different scenarios. I estimate full-year 2022 total operating revenues of $1089 million for Golden Ocean, down 9.5% YoY. However, compared with 2020 and 2019, GOGL’s estimated 2022 operating revenues are remarkable. In a word, GOGL is a buy.

2021 Financial Results

According to GOGL’s full-year 2021 annual report, the total operating revenues of the company increased from $608 million in 2020 to $1203 million in 2021, up 98%. GOGL’s total operating expenses increased by 4% (YoY) to $697 million in 2021. Golden Ocean reported a full-year 2021 net income of $572 million, or $2.73 per diluted share, compared with a full-year 2020 net loss of $138 million, or $0.96 per diluted share. GOGL reported a 2021 time charter equivalent income and time charter equivalent rate of $949 million (up 123% YoY) and $27582 (up 105% YoY), respectively. “Looking into 2022, we have a considerable amount of fixed profitable charter cover for the first quarter, which will protect our dividend capacity and build a bridge into what we expect to be a much more attractive second half of the year,” the CEO said.

GOGL’s Full-Year 2022 Revenue Estimate

Table 1 shows that from 2019 to 2021, GOGL’s TCE income to total operating revenues ratio was between 0.70 to 0.79. Also, the company’s TCE rate to total operating revenues ratio was between 0.22 to 0.24. GOGL’s total assets to total operating expenses ratio was between 0.20 to 0.23. Furthermore, the company’s TCE rate to TCE income ratio was between 0.29 to 0.32. Using the data provided in Table 1, I calculate GOGL’s full-year 2022 total operating revenues, total operating expenses, net operating (loss) income, and TCE income based on 5 scenarios for the company’s 2022 TCE rate.

Table 1 – Estimation of GOGL’s operating revenues and net operating income

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Figure 1 shows 1Q 2022 and 2Q 2022 TCE rates for GOGL’s Capesize and Panamax vessels (according to contracted days). GOGL’s Capesize vessels TCE per day increased from $26100 (for 75% of the available days) in 1Q 2022 to $31400 (for 25% of the available days) in 2Q 2022. Also, GOGL’s Panamax vessels TCE per day increased from $21100 (for 72% of the available days) in 1Q 2022 to $22700 (for 22% of the available days) in 2Q 2022.

Figure 1 – 1Q 2022 and 2Q 2022 TCE rates for GOGL’s Capesize and Panamax vessels

GOGL’s 2021 presentation

Figure 2 shows weekly dry time charter estimates as of 4 May 2022. Based on the data provided in Figures 1 and 2, I calculate a full-year 2022 Capesize TCE per day of $29500 for Golden Ocean. Also, I calculate full-year 2022 Panamax TCE per day of $23950 for the company. Thus, in Table 1, scenario 4 is the most probable one. I estimate full-year 2022 total operating revenues and net operating income of $1089 million and $406 million, respectively, for Golden Ocean.

Figure 2 – Weekly dry time charter estimates as of 4 May 2022

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Golden Ocean expects strong dry bulk markets for years to come as the company expects the global economy to grow by 4.4% in 2022 and 3.8% in 2023 (see Figure 3). Also, Golden Ocean expects the global net fleet growth to decrease by 230 bps from 3.4% in 2021 to 1.1% in 2023 due to increasing prices, limited availability of financing, and new emissions regulations (see Figure 4). On the other hand, Golden Ocean will receive 6 new Panamax 85 dwt vessels by 2023 and 1 new Panamax 85 dwt vessel by 2024, increasing its Panamax vessel capacity by 22%. Thus, the company expects freight rates to increase in the upcoming quarters as it expects dry bulk fleet demand to outpace dry bulk fleet supply (see Figure 5).

Figure 3 – Global economy outlook

GOGL’s 2021 presentation

Figure 4 – Net fleet growth

GOGL’s 2021 presentation

Figure 5 – Dry bulk fleet demand and supply

GOGL’s 2021 presentation

Performance Outlook

Golden Ocean Group’s cash generation increased by 28%, from $153 million in 2020 to $197 million in 2021. Following the improvements in the company’s cash balance and EBITDA, GOGL is expected to see its leverage and liquidity in good positions. Regarding GOGL’s leverage performance, the company’s 2021 debt-to-EBITDA and debt-to-equity ratios decreased to 2.24 and 0.74, respectively (see Figure 6). GOGL’s 2021 debt-to-EBITDA and debt-to-equity are significantly lower than in 2019 when the COVID-19 pandemic started.

Figure 6 – GOGL’s leverage ratios

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Moreover, comparing Golden Ocean’s leverage ratios with some peers indicate that the company has a healthy and low leverage condition. GOGL’s quarterly debt-to-equity ratio is 0.68x, which is in line with the peer group’s average of 0.66x. Also, its quarterly debt-to-assets ratio is 36.55%, which is 235 bps higher than the average of 34.2% (see Figure 7).

Figure 7 – GOGL’s leverage ratios vs. its peers

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Analyzing GOGL’s liquidity condition represents that its liquidity is not a big concern, so it gives the company the ability to generate free cash flow or focus on shareholders’ dividend payments in 2022. Golden Ocean’s cash ratio is 0.79x in 2021, which is 25% higher than its amount at the end of 2020 (see Figure 8). Also, comparing Golden Ocean’s liquidity ratios with its peers shows that the company is in a healthy position and is providing liquidity and the ability to refinance debt maturities if required (see Figure 9).

Figure 8 – GOGL’s liquidity ratios

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Figure 9 – GOGL’s liquidity ratios vs. peers

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Valuation

To estimate Golden Ocean’s fair value, I investigated its EBITDA growth during the last five years. The company’s EBITDA grew impressively in recent years. Meanwhile, its net debt increased by 6.2%, on average, in the previous five years. GOGL’s adjusted EBITDA in the fourth quarter of 2021 was $243.5 million compared with $229.7 million in the third quarter of 2021. Also, its adjusted EBITDA for FY 2021 was $658 million. GOGL’s forward EV/EBITDA is announced to be 6.61x. Based on the company’s adjusted EBITDA, there are different scenarios for GOGL stock price (see Table 1).

Scenario 1: based on the 2021 adjusted annual EBITDA of $658 million and the company’s net debt, I evaluate that GOGL’s price is around $18 per share.

Scenario 2: based on GOGL’s forward EV/EBITDA and the company’s adjusted EBITDA, the stock is worth $15.6 per share.

Scenario 3: If GOGL’s forward EV/EBITDA reaches 6.61x, and its EBITDA and net debt grow by their average 5-year growth rate, the company’s fair value is $32 per share.

In a nutshell, I think the second scenario is the most probable one based on GOGL’s financial performance.

Table 1 – GOGL stock valuation

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Summary

Golden Ocean expects strong dry bulk markets for years to come. The company expects the global net fleet growth to decrease to 1.1% in 2023. However, GOGL’s Panamax vessel capacity will increase by 22% through 2024. I estimate a full-year net operating income of $406 million for Golden Ocean. GOGL is a buy as I calculate a fair value of between $15 to $18 for the stock based on my most probable scenarios.