Diana Shipping (DSX) was down in the low-single-digits at the midway point of 2023. The latest results saw revenue up 10.2%, but net income declined 12.8% on lower daily time charter profits. Still, the outlook seems bullish, writes Philip MacKellar, editor of Contra the Heard.

Debt remains much higher than a year ago, at $630.8 million versus $463.4 million. The additional borrowing is somewhat understandable, as the fleet has expanded from 35 ships to 41 over the same period. The average age of the vessels declined somewhat, too, from 10.2 years to 10.0 years.

Since the end of the quarter, the Baltic Dry Index has been volatile, but that is typical. It ended the quarter at 1,091 points, a far cry from both the 5,500 it reached in late 2021 and the bottom around 400 in mid-2020.

A large red container ship  Description automatically generated

The new order book for the industry, which measures the projected future supply of ships, stands at a 20-year low: Around 7% of the existing fleet. Anything under 15% is generally considered bullish.

Still, demand could dry up, a recession could hit, and global shipping could see huge disruptions if there is another Covid lockdown cycle or conflict in the Taiwan Strait. This said, the outlook for the remainder of the year is good, and if demand does dry up, it would presumably push older ships to the scrap heap sooner, thereby reducing the size of the existing armada.

Prior to 2022, Diana delivered a lot of value to owners through tender offers, and since then, CEO Semiramis Paliou has pursued an aggressive dividend and OceanPal stock strategy. In the past year, for example, owners have received $0.65 in dividends — a trailing-12-month yield of 21.6%.

While this distribution and the addition of OP stock are welcomed, it does mean cash flows are being diverted away from building the fleet, paying down debt, and maximizing the organization’s future revenue-generating potential. It also means value is less likely to be realized via capital gains than by way of dividends and OceanPal spin-offs.

Over time, the organization’s valuation profile has changed, and it does not appear reasonable to assume the multiples will revert to where they were when the initial sell range was generated. Given these factors, the sell target is being lowered to a range between $7.00 and $10.00. Despite the haircut, DSX is rated a “Buy.”

Recommended Action: Buy DSX.

Subscribe to Contra the Heard here...