Rating Update: Stock Rating B-Positive (9/23/19)-Golden Ocean Group Ltd (GOGL).

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BUSINESS

Golden Ocean Group Limited, a shipping company, engages in the transportation of bulk commodities worldwide. It owns and operates a fleet of dry bulk vessels, including Newcastlemax, Capesize, Panamax, and Ultramax vessels in the spot and time charter markets. The company transports bulk commodities, such as ores, coal, grains, and fertilizers. As of March 20, 2018, it owned 68 dry bulk vessels, as well as had 10 chartered-in vessels. The company is based in Hamilton, Bermuda.
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INVESTMENT RATING

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GOGL’s future returns on capital are forecasted to fall short of the cost of capital. Accordingly, the company is expected to be a modest Value Eraser.

Golden Ocean has a current Value Trend Rating of B (Positive).
This rating combines inconsistent signals from two proprietary PTR measures of a stock’s attractiveness. Golden Ocean has a good Appreciation Score of 73 but a neutral Power Rating of 47, triggering the Positive Value Trend Rating.

Golden Ocean’s stock is selling well below targeted value. The current stock price of $6.06 compares to targeted value 12 months forward of $10.
This high appreciation potential results in an appreciation score of 73 (only 27% of the universe has greater appreciation potential.)
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Golden Ocean has a Power Rating of 47. (This neutral Power Rating indicates that GOGL’s chances of enjoying favorable investment performance over the near to intermediate term are only average.)
Factors contributing to this neutral Power Rating include: the trend in GOGL’s earnings estimates has been unfavorable in recent months; and is in a slightly weakened position current. An offsetting factor is recent price action has been neutral.

INVESTMENT PROFILE

GOGL’s financial strength is low. Financial strength rating is 29.
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Relative to the S&P 500 Composite, Golden Ocean Group Ltd has significant Value characteristics; its appeal is likely to be to investors heavily oriented toward Income; the perception is that GOGL is extremely high risk. High expected growth is a positive for GOGL. Relative weaknesses include: low forecasted profitability, low historical profitability, low financial strength, high stock price volatility, low historical growth, and high earnings variability. GOGL’s valuation is low: high dividend yield, high P/E ratio, and low price/book ratio. GOGL has unusually low market capitalization.

CURRENT SIGNALS

Golden Ocean’s current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; and falling leverage.

Golden Ocean’s current technical position is mixed. The stock price is in a 1.2 month up move. The stock has appreciated 20.8% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average.

ALERTS

Golden Ocean Group Ltd (NASDAQ: GOGL). Significant negative changes in investment behavior have recently occurred: its shorter term price trend turned down.
The stock is currently rated B.
Golden Ocean Group Ltd (NASDAQ: GOGL) stock closed at $0.02 on 9/23/19 after a major increase of 17.0%. However, this advance was accompanied by unusually low trading volume at 56% of normal. The stock has performed in line with the market over the last nine months and has declined -7.6% during the last week.

CASH FLOW

In 2018, Golden Ocean experienced no change in cash of +$4.2 million (+1%). Sources of cash balanced uses. Cash generated from 2018 EBITDA totalled +$235.9 million. Non-operating sources contributed +$11.5 million (+5% of EBITDA). Cash taxes consumed -$0.2 million (-0% of EBITDA). Re-investment in the business amounted to -$173.6 million (-74% of EBITDA). On a net basis, debt investors withdrew -$14.2 million (-6% of EBITDA) while equity investors received -$55.1 million (-23% of EBITDA).
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Golden Ocean’s Non-operating Income, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by stability for the Golden Ocean Group Ltd Peer Group. (Since 2015 Non-operating Income, %EBITDA has experienced a very sharp decline.) In most years, Golden Ocean was in the second quartile and top quartile. Currently, Golden Ocean is above median at +5% of EBITDA (+$11.5 million).

Golden Ocean’s Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Golden Ocean Group Ltd Peer Group as well. In most years, Golden Ocean was in the top quartile and second quartile. Currently, Golden Ocean is at the upper quartile at -0% of EBITDA (-$0.2 million).

Golden Ocean’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Golden Ocean Group Ltd Peer Group. In most years, Golden Ocean was in the top quartile and lower quartile. Currently, Golden Ocean is below median at -74% of EBITDA (-$173.6 million).

Golden Ocean’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Golden Ocean Group Ltd Peer Group. In most years, Golden Ocean was in the top quartile and lower quartile. Currently, Golden Ocean is slightly above median at -6% of EBITDA (-$14.2 million).

Golden Ocean’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Golden Ocean Group Ltd Peer Group. In most years, Golden Ocean was in the top quartile and lower quartile. Currently, Golden Ocean is substantially below median at -23% of EBITDA (-$55.1 million).

Golden Ocean’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Golden Ocean Group Ltd Peer Group. In most years, Golden Ocean was in the top quartile and lower quartile. Currently, Golden Ocean is slightly above median at +2% of EBITDA (+$4.2 million).
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Golden Ocean’s Cash, %Revenue has experienced a downtrend over the period. This downtrend was accompanied by an opposite trend for the Golden Ocean Group Ltd Peer Group. (Since 2016 Cash, %Revenue has accelerated very sharply.) In most years, Golden Ocean was in the top quartile. Currently, Golden Ocean is at the upper quartile at +51%.

PROFITABILITY

Golden Ocean Group’s return on equity has eroded very significantly since 2009.
This very significant erosion was due to very strong negative trend in pretax operating return and little change in non-operating factors.
The productivity of Golden Ocean Group’s assets rose over the full period 2009-2019: asset turnover has exhibited a volatile overall uptrend that accelerated very sharply after the 2014 level.
Non-operating factors (income taxes and financial leverage) had little influence on return on equity.
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Golden Ocean Group’s return on equity is substantially below median (1.2%) for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is below median (0.6%) reflecting asset turnover that is below median (0.21X) and below median pretax margin (3.1%).
Tax “keep” rate (income tax management) is at median (98.5%) resulting in after tax return on assets that is substantially below median.
Financial leverage (leverage) is at the lower quartile (1.97X).

GROWTH RATES

There are no significant differences between Golden Ocean Group’s longer term growth and growth in recent years.
Golden Ocean Group’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been 0.9% per year. (More recently it has been 41.4%.)

Total asset growth has been -0.3% per year.

Annual E.P.S. growth has been -19.7% per year.

Equity growth has been -4.0% per year.
No consensus growth rate forecast is available for Golden Ocean Group.
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Relative to the Golden Ocean Group Ltd Peer Group, Golden Ocean’s historical growth measures are erratic. Revenue growth (0.9%) has been above median. Total asset growth (-0.3%) has been below median. Equity growth (-4.0%) has been below median. E.P.S. growth (-19.7%) has been lower quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Golden Ocean Group’s stock price performance has been variable and significantly below market. Between November, 2008 and September, 2019, Golden Ocean Group’s stock price fell -92%; relative to the market, this was a -98% loss. Significant price moves during the period: 1) September, 2018 – March, 2019: -52%; 2) June, 2016 – March, 2017: +130%; 3) March, 2015 – February, 2016: -88%; 4) June, 2014 – January, 2015: -72%; and 5) March, 2011 – December, 2012: -79%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -31.7% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through July, 2019 of -31.7% is below median relative to Golden Ocean Group Ltd Peer Group.

Current 5-year total return performance of -34.8% is lower quartile relative to the S&P 500 Composite.
Through July, 2019, with lower quartile current 5-year total return of -34.8% relative to S&P 500 Composite, Golden Ocean’s total return performance is lower quartile relative to Golden Ocean Group Ltd Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, GOGL’s overall valuation is normal. The highest factor, the price/earnings ratio, is upper quartile. Ratio of enterprise value/earnings before interest and taxes is above median. Ratio of enterprise value/revenue is slightly above median. Ratio of enterprise value/assets is lower quartile. The lowest factor, the price/equity ratio, is lower quartile.
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Golden Ocean has a major value gap compared to the median. For GOGL to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 3.45X to 2.52X. If GOGL’s ratio of enterprise value/revenue were to fall to 2.52X, its stock price would be lower by $-4 to $2.
For GOGL to achieve upper quartile valuation relative to the Golden Ocean Group Ltd Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 3.45X to 3.73X. If GOGL’s ratio of enterprise value/revenue were to rise to 3.73X, its stock price would increase by $1 from the current level of $6.06.

VALUE TARGETS

GOGL’s future returns on capital are forecasted to fall short of the cost of capital. Accordingly, the company is expected to be a modest Value Eraser.
Golden Ocean Group’s current Price Target of $11 represents a +75% change from the current price of $6.06.
This high appreciation potential results in an appreciation score of 73 (only 27% of the universe has greater appreciation potential.)
With this high Appreciation Score of 73, the neutral Power Rating of 47 results in an Value Trend Rating of B.
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Golden Ocean Group’s current Price Target is $11 (-55% from the 2018 Target of $23 but +75% from the 09/23/19 price of $6.06). This dramatic fall in the Target is the result of a +18% increase in the equity base and a -62% decrease in the price/equity multiple. The forecasted decline in return on equity has a very large negative impact on the price/equity multiple and the forecasted increase in cost of equity has a very slight negative impact as well. Partially offsetting these Drivers, the forecasted increase in growth has a slight positive impact.
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PTR’s return on equity forecast is 4.6% — below our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is significantly below the 2010 peak of 59%.

PTR’s growth forecast is 12.0% — in line with our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is significantly above the 2013 low of 1%.

PTR’s cost of equity forecast is 7.2% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, erratic decline between 2010 and 2018. The current forecast is well below the 2011 peak of 12.2%.
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At Golden Ocean Group’s current price of $6.06, investors are placing a negative value of $-2 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 10.0% per year, and a return on equity of 10.0% versus a cost of equity of 7.1%.
PTR’s 2020 Price Target of $11 is based on these forecasts and reflects an estimated value of existing assets of $12 and a value of future investments of $-2.

About John Lafferty 57444 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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