Pangaea Logistics: Despite Discouraging Q4 2023 Results, It Is Still A Buy (NASDAQ:PANL)

Note: I previously covered Pangaea Logistics Solutions (NASDAQ:PANL). In my previous take on PANL, I pointed out the company’s strengths: its ice-class fleet and port operations and its healthy financials. In today’s article, I discuss the last earnings report and valuation.

Shipping investing is tough. Volatility is not optional but guaranteed. The last PANL report reminded us of the validity of that statement. PANL delivered disappointing figures, causing a sell-off. In my opinion, investors’ panic was an overreaction, providing an opportunity to buy at a better price.

PANL FY23 results

PANL owns a fleet with one distinct advantage. Twelve of its ships are ice class. Another specific is the company’s revenue structure. Let’s look at the FY23 numbers.

In FY23, the company realized 35% lower TCE rates compared to 2022, $15,849/day and $24,434/day, respectively. The dry bulk market declined by 43% over the same period. PANL employs most of its vessels under COA (contract of affreightment) and voyage charters.

This type of freight agreement is similar to the voyage charter, with a few distinct characteristics. The contract stipulates the shipowner’s obligation to carry specific cargoes in a fixed time frame and specified route. The charterer (cargo owner) is not responsible for delays during the cargo handling operations in the port, meaning he is not obliged to pay demurrage to the shipowner. FY23, the company’s COA rates exceeded the average market rates by 39%.

Fleet earning days declined YoY, from 17,715 days FY22 to 16,711 days FY23. Lower TCE and decreased earning days resulted in declining revenue. FY23 PANL generated $499 million in revenue, $200 million lower than in 2022. A dominant part of the company’s revenue comes from voyage charters. FY23 PANL generated $468 million in voyage revenue and $23.7 million in TC revenue. Voyage and TC revenues dropped YoY by 26% and 60%, respectively. The third revenue source is stevedoring services. FY23 PANL realized $7.0 million revenue from its port services.

Since PANL operates most of its vessels under COA, so voyage expenses (bunker costs, stevedoring and port fees, and canal transit tolls) represent approximately half of its expenses. In FY23, PANL had $227 million in voyage expenses vs $262 million in FY22. The main reason for this was declining bunker costs YoY due to lower fuel prices. However, on a quarterly basis, voyage expenses reached $57 million in 4Q23 from $54 million in 4Q22. One reason is higher canal transit tolls due to the Panama Canal drought.

Another significant expense is charter hire, which represents 25% to 30% of total expenses. Charter hire expenses increased 18% compared to 4Q22, reaching $33.8 million 4Q23. However, looking at the big picture, charter hire expenses shrunk from $222 million FY22 to $111 million FY23 due to lower TCE rates. Vessel operating expenses declined annually and quarterly by 2% and 4%, respectively.

FY23 PANL delivered adj. EBITDA is $79.7 million, compared to $140.8 million in FY22. EPS dropped from $1.76/share FY22 to $0.58/share FY23. The declining revenues impacted PANL’s profit margins. PANL’s gross profit margin dropped from 22% in FY22 to 19% in FY23 but remains higher than in 2021 and 2020. The picture is similar to the EBITDA margin. Though it declined in 2023 (15.3%) compared to 2022 (19.7%), it is higher than in 2021 (14.2%).

PANL dividends

PANL is attractive for income-minded investors. The company distributes dividends with a 5.9% TTM yield and a payout ratio of 57.9%.

Compared to bulker companies with smaller market cap, PANL doesn’t offer the best yields. Diana Shipping (DSX) pays dividends with a 12.5% TTM yield. However, the DSX payout ratio is too high, at 154%, challenging dividend safety. PANL has consistently allocated capital and gradually increased distribution while maintaining an adequate coverage ratio. Since 2020, the dividend grew from $0.02/share to $0.40/share, while the payout ratio as a percentage of Adjusted Net Income remained below 75%.

PANL balance sheet

Despite the disappointing results PANL keeps its balance sheet healthy. The company has $99 million cash, $68 million long-term debt, and $264 million total debt (including $143 million lease agreements). PANL maintains a prudent capital structure with 71.4% Total Debt/Equity and 47.5% Total Assets/Total Liabilities. FY23 PANL generated $46 million operating income and $53.8 million operating cash flow. Over the same period, the net interest expenses were $13.5 million.

64% of the long-term debt has a 3.38% interest rate and will mature in June 2027. The remaining debt comes with interest between 2.9%-6.2%. FY23 PANL reduced its debt by $30 million. A more significant portion of the company’s liabilities are lease agreements, totaling $143 million. 65% of the lease agreements are contracted at a 7.06% interest rate, and the remaining have an interest rate between 3.9% and 4.3%. FY24 PANL must cover $34.9 million of its lease obligations.

Valuation

I picked similar-sized bulk carrier companies to estimate how cheap or expensive PANL is. I chose Diana Shipping, Grindrod Shipping (GRIN), and Safe Bulkers (SB). The table below compares PANL, DSX, GRIN, and SB based on their fleets, PNAV, and LTV. The data to estimate fleet replacement costs were taken from Compass Maritime Weekly and Fearnley’s Weekly.

All companies have similar fleet age at 10Y. However, they have distinct compositions: DSX and SB fleets are more diversified, while GRIN is focused on smaller vessels. PANL’s edge is hidden in its ice-class vessels. PANL trades at a 40% discount to its current stock price, offering a balance between price, fleet quality, and leverage.

Looking at TTM EV multiples, PANL is relatively cheaper than its peers.

The company trades at 1.06 EV/Sales and 6.94 EV/EBITDA. Based on FWD multiples, PANL trades at the highest EV/EBITDA. However, looking at FWD EV/Sales, PANL is cheap.

Investors takeaway

I believe Capesize/Newcastlemax TCE rates will achieve a higher growth rate than TCE rates for mid-size and small bulk carriers. However, PANL ice-class vessels provide the company with a moat, which is evident by its TCE premium over the market. With more robust day rates for mid-size and small bulk carriers, PANL’s profitability will recover, attracting investors’ attention again.

PANL has an advantage over shipping companies focused on Newcastlemax/Capesize fleets. The demand for the largest bulk carriers depends heavily on China. If the Chinese economy expands, commodity demand grows, boosting the demand for large bulk carriers and vice versa. On the other hand, smaller vessels carry not only major bulk (iron ore, coal, bauxite) but minor bulk (steel, copper, fertilizer, pet coke, etc), so they do not depend that heavily on the Chinese economy.

Besides the uncertainties of the Chinese economy, another risk is a global recession. It will impact all shipping segments. However, I rank such a scenario as possible but not probable. The Chinese government has been proactive with fiscal stimulus to boost its economy. Similar is the situation in the US. The source of liquidity in the economy has shifted from FED’s loose monetary policy to an exuberant fiscal policy led by the Treasury.

Company-specific risks are financial and operational. PANL maintains excellent solvency and liquidity metrics, so I am confident the company can weather the storm in the worst-case scenario, a global recession. The operation risk derives from the vessel’s age. In PANL’s peer group, the average fleet age is around 10Y. The aging fleet leads to higher maintenance and repair costs. On average, the operational costs are around 18% until the fifth year of the vessel’s life. Approaching the tenth year, they climb to 22%; at the end of the vessel’s life, they top 31%. PANL ships are, on average, 9.4Y years old, meaning the operational costs are close to 22%.

I still hold PANL shares and used the steep pullback to add more. I like its robust dividend policy, adequate leverage, and distinct fleet. In my previous take, I gave PANL a buy rating. Considering the company’s merits, I keep the rating unchanged.