SHansche/iStock via Getty Images

SHansche/iStock via Getty Images

Global Ship Lease, Inc. (NYSE:GSL ) recently reported earnings, which provided a reassuring view of the company’s finances and a dividend raise. The company was able to clean up its balance sheet throughout the quarter and still have the funds, thanks to strong charter rates and new vessels, to propose an attractive buyback plan and offer shareholders 50% more dividends. With the charter market going strong and existing recharters poised to trigger in quarter two, Global Ship Lease has some pretty clear upside from here.

Global Ship Lease reported earnings showing significant improvement year-over-year for the first quarter. The company’s net income rose from $4.2 million to $70.2 million. Normalized net income for the company rose from $17.8 million to $69.7 million—still an incredible leap. The majority of this increase comes from higher time charter revenues, which rose from $72.5 million to $140.8 million. This jump comes on the back of new vessels delivered and chartered out in 2021, as well as the accreditive rechartering of existing vessels at higher rates.

Global Ship Lease’s earnings have robust visibility going forward thanks to the company’s excellent contract coverage. Earnings should solidly increase in the second quarter of 2022, barring unforeseen rises in operating expenses, and then remain relatively stable until the second quarter of 2023.

Global Ship Lease Q1 Presentation

Global Ship Lease Q1 Presentation

Even after that, Global Ship Lease has contracts running through 2024 that provide a good backdrop of safety to the company’s income. We will likely see some action to fix new charters this year—good news as charter rates remain high.

Looking at the Harpex, even as rates have dipped some in recent weeks (and seem to be leveling off now), they remain near record highs and well above the levels fixed on some of Global Ship Lease’s vessels due to expire in the coming two years.

One of the largest risks to Global Ship Lease—and the container shipping market as a whole—is the level of new buildings slotted for 2023 and 2024 that have risen meaningfully from all-time lows in 2020. The orderbook this quarter has risen to around 15% of the fleet. Though this is cause for investors to pay attention and look out for any change in the orderbook, it is not near the boom levels of over 50% that we have seen that might cause me to sound a strong alarm on the industry.

Additionally, new environmental/emissions regulations are expected soon, which should take some older ships off the water. In any case, the current undersupply of ships and shortages suggest that even if these new ships hit the water, they won’t crater rates. We may see rates fall from present highs, but they will likely stay at immensely profitable levels for lessors like Global Ship Lease, Costamare (CMRE), Atlas Corp. (ATCO), and Danaos (DAC).

The market has turned upside down in recent weeks, driven by several macro factors, from inflation to the Fed raising interest rates to curb that same inflation, but also by the news of new lockdowns across China as the country deals with another wave of Covid. This lockdown has caused the number of ships waiting at ports across China to rise more than 50% since February to 412. It is estimated that nearly one-fifth of all container ships globally are currently waiting outside a congested port.

The downside of the lockdowns, as the market has indicated, is the complications for production and shipping out of China as well as the potential damper effect they may have on demand. On the supply side, congestion remains good for container lessors as it reduces available supply. For Global Ship Lease, this is good news, as the company looks to recharter some of its vessels.

Global Ship Lease’s balance sheet has remained fairly static during the first quarter, but the company has made good efforts overall to pay down debt. The company’s cash balance rose in quarter one to $88.5 million from $67.3 million at the end of 2021. The company’s debt for the same period decreased from $1.07 billion to $1.062 billion, or by $7.9 million dollars.

Global Ship Lease Q1 Presentation

Global Ship Lease Q1 Presentation

Global Ship Lease has had great success bringing down the cost of its debt to an average interest rate of 4.63%. With this level sitting well below the most recent US inflation rate of 8.3%, according to the CPI report, Global Ship Lease’s debt is very literally inflating away. Furthermore, looking at the CEO’s comments from the quarterly report, we can see that responsibly decreasing the company’s debt load and keeping a clean balance sheet remains a priority:

Alongside our success in chartering our fleet and increasing our earnings in a long-term sustainable manner, we have remained focused on utilizing our increased financial strength to enhance our balance sheet. We have continued to eliminate our more expensive legacy debt, resulting in a reduction in our cost of debt from nearly 8% at the start of 2019 to 4.63% now. Similarly, between late 2021 and the first quarter of this year, we have put in place interest rate caps for all of our debt, so we are now fully hedged against rising interest rates. With no debt maturities through mid-2024, our contracted cashflows provide us with highly reliable coverage for our debt service and our return of capital to shareholders, while also putting us in a position to continue acting opportunistically to further strengthen our balance sheet and financial flexibility.

The company has also stepped up its shareholder remuneration on the back of higher cash flow. In the first quarter, Global Ship Lease announced a fifty percent increase in its dividend payment, from $0.25 per quarter to $0.375 per quarter. This brings the company’s forward yield to 6.99%. Finally, the company has authorized $40 million for opportunistic share repurchases—representing five percent of the company’s market cap at today’s prices.

Global Ship Lease is looking at normalized income solidly upwards of $280 million for 2022 on an annualized basis, perhaps higher. That would put the company’s forward price to earnings ratio at around 2.83. The company’s current trailing price to earnings ratio is around 4.66, which is in line with its peers (Costamare is at 3.99, Danaos at 1.54, and Atlas Corp. at 8.30).

I think that the company’s higher earnings and cleaner balance sheet this year certainly justify, at the very least, maintenance of its current valuation. At 4.66 times $280 million, Global Ship Lease would be worth $1.3 billion, a 64% upside from current prices. With the company's shares having sold off nearly 50% amidst the turmoil in the broader market, now may present an attractive buying opportunity.

Global Ship Lease is clearly still holding strong amidst broader market instability and concerns over inflation. The company is well-positioned for the coming year, looking to bring down its debt, further enrich shareholders, and recharter vessels at higher rates. Additionally, with strong earnings visibility from existing charters, the downside risk to earnings is fairly minimal in the short term. Overall, Global Ship Lease is an attractive proposition for income and upside on the back of a still-strong container shipping environment.

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Disclosure: I/we have a beneficial long position in the shares of DAC either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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