2020 Bulkers: Attractive Dividends But I’m Moving To The Sidelines (OTCMKTS:TTBKF)

Introduction

2020 Bulkers (OTCPK:TTBKF) is a Norwegian company focusing on operating bulk vessels. The stock is up by approximately 67% since my previous article on 2020 Bulkers was published. Additionally, the company has gone ex-dividend on a cumulative total of $0.67/share in dividends which would add another 8% to the total return. Plenty of reason to check up on the company as it recently published its full-year results.

I recommend to trade in 2020 Bulkers’ shares through the facilities of the Oslo Stock Exchange where the company is trading with 2020 as its ticker symbol. There are currently 22.9M shares outstanding resulting in a market capitalization of 3.5B NOK. That’s around $330M using the current exchange rate of approximately 10.50 NOK per USD.

The fourth quarter was much stronger than I had expected

During the fourth quarter of 2023, 2020 Bulkers achieved an average TCE of $36,300/day on a gross basis and this allowed 2020 Bulkers to report a Q4 revenue of $26.3M. The total operating costs remain relatively low at $4.5M for the quarter with an additional $0.3M that has been spent on voyage expenses and commission. The G&A expenses of the company remain pretty low with just $0.8M for the fourth quarter while there are no surprises whatsoever when it comes to the depreciation and amortization expenses: those remained roughly stable at $2.8M.

This resulted in an operating profit of $17.9M for the quarter and after deducting the $2.5M in net finance expenses, the pre-tax income was $15.4M. Although 2020 Bulkers has an Oslo listing, it has a tax domicile in Bermuda which means it pays very little income taxes. Looking at the Q4 income statement, there were just $0.6M in taxes payable resulting in a net income of $14.8M or $0.65 per share.

This allowed the company to end the year on a very strong note as the company generated approximately 57% of its full-year net profit of $25.6M in the final quarter of the year. While the FY 2023 EPS of $1.13 per share was definitely weaker than the FY 2022 EPS of $1.44, shareholders don’t really have any reason to complain given the company’s strong finish. Using the current exchange rate, the $1.13 in earnings per share represents approximately 11.9 NOK per share.

This result also was backed up by the cash flow result. 2020 Bulkers reported a positive operating cash flow of $41.2M which includes a $2.6M contribution from working capital changes. There were no capital expenditures as the company operates a modern fleet.

As you can see in the cash flow statement, the company spent $14.8M on debt repayment (there is a fixed debt repayment schedule) and spent $14.5M on dividends (but keep in mind that some of the dividends that were payable during FY 2023 were based on 2022 results and not all of the 2023 dividends were actually payable in 2023).

At the end of 2023, 2020 Bulkers had approximately $31M in cash and restricted cash while it had approximately $204M in debt. The net debt position was approximately $173M and is backed by the $337M book value of the vessels.

Keep in mind the book value of the vessels doesn’t tell the whole story. Subsequent to the end of 2023, the company sold two Newcastlemax vessels for $127.5M in total, resulting in a book gain of approximately $40M. This indicates the fair value of the vessels is currently almost 50% higher than the book value and that obviously also has positive implications for the loan to value ratio of the vessels and the book value of the company.

Applying a 40% premium to the current book value of the vessels would imply a fair value of $472M which results in a loan to value ratio of approximately 37%. Meanwhile the book value of $7 per share would be understating the current NAV of the assets, which would be closer to $13/share or approximately 137 NOK.

What does this mean for the dividend?

2020 Bulkers definitely focuses on paying a dividend and in its full-year presentation, it shows the total expected free cash flow based on different realized charter rates. This sensitivity analysis allows its shareholders to fine tune their dividend expectations as they will for sure be substantially lower than what the company paid out during the fourth quarter. The dividend payable for January was “just” $0.10 per share, down from $0.21 per share for the performance in December. Hardly a surprise as the company obviously has to deal with lower charter rates.

As you can see above, at an average charter rate of $30,000/day for capesize vessels, 2020 Bulkers is anticipating a free cash flow of approximately 36 NOK per share. That’s approximately $3.43 USD using the current exchange rate. 2020 Bulkers already confirmed a charter rate of just over $27,000/day in January and the forward curve for capesize pricing is $23,800/day which means we should predominantly focus on the 25,000/day scenario. Even in that scenario the free cash flow result would be approximately 27 NOK/share.

The dividend policy is to pay out the majority of the cash flow after debt servicing. Which means that based on the $25,000/day scenario, shareholders of 2020 Bulkers can expect a dividend of 21-22 NOK per share using a payout ratio of 80% of the free cash flow. Of course the sale of the two Newcastlemax vessels will have a negative impact on the free cash flow projections although the interest expenses will decrease as well.

Investment thesis

2020 Bulkers had an amazing run in the past six months and unfortunately I only had a very small starter position. Although I like the company’s outsized dividends, I’d like to deploy the cash elsewhere. Meanwhile, I retain some exposure (but definitely not “pure” exposure) to the bulk shipping segment through my position in Pyxis Tankers (PXS) an its preferred shares (PXSAP) as Pyxis has recently sold some of its product tankers and used the proceeds to enter the bulk shipping market.

I still like the company as having a modern fleet is a major advantage but even if you’d apply the current fair value of the vessels, the stock is trading at about 1.1 times NAV. That’s not a disaster as the company is generating plenty of free cash flow, but as I see other investment opportunities I have decided to sell my entire (small) position in 2020 Bulkers. That’s a personal opinion as I think the current valuation still warrants a “hold” for the common shares.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.