Kenon: Bullish Freight Rate Trends, Eyeing Momentum (NYSE:KEN)

Global shipping rates surged at the end of 2023. The Drewry World Container Index (WCI) jumped from under 1,500 to near 4,000 over just a handful of weeks. While there has been a pullback in the composite index of 6% to $3,287 per 40ft container this past week, the index increased by 82% when compared with the same week last year, according to Drewry.

That is a favorable setup for container liners able to charge higher rates. Still, ongoing tensions along the Gaza Strip remain headwinds for firms with assets and operations in that region. Longer term, companies positioned to offer infrastructure rebuild assistance in Israel may stand to benefit from Israeli-Hamas fighting.

I reiterate my hold rating on Kenon Holdings (NYSE:KEN) stock. I see shares of the non-profitable company as having potential upside, but I would like to see improved earnings materialize. There is, however, a bullish development on the chart.

Global Shipping Costs Jump

According to Seeking Alpha, Kenon Holdings Ltd., through its subsidiaries, operates as an owner, developer, and operator of power generation facilities in Israel, the United States, and internationally. It operates through OPC Power Plants, CPV Group, and ZIM segments. The company engages in the generation and supply of electricity and energy; development, construction, and management of solar and wind energy, and conventional natural gas-fired power plants; and provision of container liner shipping services. It also operates a fleet of 150 vessels.

The Singapore-based $1.4 billion market cap Independent Power and Renewable Electricity Producers industry company within the Utilities sector does not have positive trailing 12-month GAAP earnings and it last paid a dividend on April 19, 2023, in the amount of $2.79.

KEN issued a weak earnings report back in November. Normalized EPS of -$1.11 missed by $0.68 while GAAP per-share losses were -$2.08, a large $1.66 miss. Revenue was just $229 million, significantly below expectations, but above $163 million earned in the same period a year earlier. OPC’s Q3 2023 net profit included its share in profit of CPV of $21 million as compared to $37 million in Q3 2022. ZIM reported a net loss in Q3 2023 of $2.3 billion, as compared to a net profit of $1.2 billion in Q3 2022, which included a non-cash impairment of $2.1 billion, according to the company.

Kenon Q3 2023 Earnings Summary

Within the press release, the management team announced a favorable final arbitration award regarding its wholly-owned subsidiary IC Power. KEN was awarded $45 million in damages.

While KEN’s price-to-book ratio is modest, weak profitability figures are apparent given the stock’s high 29 EV/EBITDA ratio. Its gross margin is healthy but translating that to its net margin has been problematic. Finally, interest rates remain a key risk considering Kenon’s high $711 million in net debt. The stock has underperformed the S&P 500 across multiple timeframes, though there is an ongoing share repurchase program: “As at November 29, 2023, Kenon has repurchased approximately 1.1 million shares for total consideration of approximately $28 million since commencement of Kenon’s $50 million share repurchase plan announced in March 2023. Kenon now has approximately 53 million outstanding shares after giving effect to these repurchases.”

Kenon: Negative Earnings, Significant Debt

Seasonally, shares tend to struggle in March but then rally in April and May, according to the Seeking Alpha seasonality tool.

KEN: Bullish April-May Stretch Ahead

Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q4 2023 earnings date of Thursday, March 28 BMO. No other volatility catalysts are seen on the calendar.

Corporate Event Risk Calendar

The Technical Take

Without profitability and as industry trends have turned more bullish, the chart appears more constructive compared to late last year. Notice in the graph below that KEN made a low under $18 back in late October 2023. Shares surged to above $26 by the turn of the year as global freight rates rallied. Thus far in 2024, KEN has consolidated under that $26.46 peak. Taking a step back, a bullish inverse head and shoulders pattern appears in play.

I see key support around the $23 mark. With apparent resistance between $26 and $26, an upside measured move price objective to near $37 would be in play should shares break out above the high from two months ago.

I would like to see the long-term 200-day moving average turn positive in its slope along with an uptick in the RSI momentum gauge at the top of the graph. Still, a long-term bearish to bullish reversal could be in the works here, though a significant bearish overhead supply of shares is seen from the mid-$30s up to $44.

Overall, KEN has some promising technical attributes, but I’d like to see further evidence of a reversal.

KEN: Bullish Reverse Head and Shoulders In Play

The Bottom Line

I reiterate my hold rating on KEN. This unprofitable diversified industrials and utilities firm has benefitted from higher freight rates lately, but its earnings report later this month could offer important clues as to whether the company can produce profits and reward shareholders with another big dividend.