ASCJF - AMSC: Going Into 2024 With A 35% Upside Since September But No Jones Act

2024-01-12 07:48:54 ET

Summary

• AMSC ASA, a ship financing company, has seen a significant bounce in its stock price and offers a 16%+ yield.
• However, there is no such thing as a "safe 16% yield" and investing in AMSC ASA comes with elevated risk.
• The company recently divested its Jones Act businesses and its future dividend capacity is uncertain, making it a risky investment.

Dear readers/followers,

High-yield shipping is a sector where I've been both burned and where I've made significant amounts of profit. I wish I could say that I forecasted the recent bounce in this specific company's upside - namely AMSC ASA ( ASCJF ) - but the fact is, I did not. I'm not even invested. My investment into the company is ancillary, through one of their owners, which has gone up as well, but nowhere as much.

I've received a question regarding the company - if this now means that the company is suddenly worth investing in, given the sheer amount of returns that we've seen.

This is a follow-up piece to the following article that I published around 4 months back. I'll change my price target in this article - at least somewhat, but I won't change my rating for the company. If I did that without a good reason, and I don't think there is a (good) reason for this, then I wouldn't be the sort of investor most of you likely are subscribing to me for being.

So let's see what we have here, why the company has outperformed, and what we can expect during this year.

AMSC ASA - Upside after the latest quarter and results

I want to remind you at the initial stage, that my initial thesis of holding and not purchasing this business was actually the correct way to go - the company declined quite a bit during the first two articles.

Now, however, we've obviously seen the company revert with a vengeance, and due to the 16%+ yield, this calls out to some income-oriented investors who believe that perhaps there is some sort of "safe 16% yield" to find here.

Well, first off , I would say with a certain degree of personal conviction - that there is nothing like a 'safe 16% yield'. Any sentence that includes "safe 16% yield" should include a number of caveats as the wording of "safe", because every single 9%+ yield that I've covered has come with multiple facts that, in hindsight, were crucial to know, and I've actually invested in quite a few from them.

AMSC ASA is a ship financing company. This means that it owns so-called bareboat charters for maritime assets and leases them to various companies around the globe, in what can be compared to a triple-net lease structure for REITs. This is not in itself inherently a poor or risky business model, but it does come at what I consider to be an elevated amount of overall risk.

This is especially true when considering that AMSC ASA is a downright minimally small sort of business because it owns less than 20 vessels - even Ocean Yield, which I owned for some time, owned more than twice this number and was still considered to be smaller.

The only saving grace in terms of the company's size-related considerations here is the fact that AMSC is owned by a company many, many times the size of itself - which is also my indirect ownership stake of this business, namely Aker ASA (AKAAF). This conglomerate is a long-term owner of many businesses and overall is a very good allocator of capital in the Nordics.

But AMSC itself, that's barely over $230M worth of market cap.

The largest argument that investors continually make, beyond the supposed safety of its shipping portfolio, is the Jones Act, which I've described more in detail in this specific article.

To summarize it, the Jones Act limits how cargo is transported by sea, and specifically cargo shipped between U.S parts can only be carried by certain ships and certain crews - American ones. And that law is not some new arcane invention, it's been around for over 123 years.

The drawback is of course, that AMSC recently colored outside the safe lines of the Jones Act.

The latest results we have are in November, specifically the end of November for 3Q23. Part of the reason the company shot up was related to an extraordinary dividend of $170M divided among shareholders. This was far from the only relevant set of news though.

The company also announced the sale of 100% of the shares in the ATHC, or the American Tanker Holding Company, which owns all of the company's Jones act businesses, or 10 tankers and corresponding charters, debt, and corporate structure.

This transaction closed on October 18th, and that's where the dividends came from. At the same time, the company also announced a new agreement with Solstad, where the vessel CVS Normand Maximus was refinanced to a subsidiary of Solstad Offshore in return for shares and ownership in the parent company of the new corporate structure.

In essence, what the company has done here are two transformative decisions for the company's future.

• First, leaving the Jones Act and its advantages behind. That business is now sold off.
• Secondly, a conversion of ownership in the vessel Normand Maximus towards common shares in a new Solstad company.
• The company decided on dividend payments of $0.05/share for 4Q and 3Q of this year, in December and march respectively. This would come, based on the native NOK dividend payments, to a yield of about 8%, and a reduction in the quarterly dividend of about 50% from the typical previous level of about 1.1-1.3 NOK per quarter.

The company has stated its intention to find new investments to boost its dividend capacity with.

I see a few problems with this.

First off, this sort of move is exactly why these sorts of small companies can be both very advantageous investments, but also great deteriorations in the "wrong" sort of situations, as we've seen before.

Secondly, I don't view a sans-jones portfolio AMSC as anything sort of "safe" to invest in, especially with exactly zero concrete indications as to how they're going to replace the lost dividend-basing income. This is the exact verbiage used in the quarterly report.

We are also proactively looking for new investments in the maritime space to add to our dividend capacity going forward. We are excited about the developments over the past few months and are looking forward to continue creating shareholder value.

(Source: AMSC 3Q23)

Of course, the company might not be able to convey all that much in terms of concrete plans just yet, but the move that we've seen here, while short-term positive, still has the company needing to prove itself going forward.

So overall, as we close 3Q23 and look at going into 2024 and ending 2023, I don't see AMSC in a materially improved position of being able to provide any sort of safe dividend upside or equal cash flow to how they've been able to operate previously.

Because this company was risky to begin with, and now has taken yet another step to where I view it as even riskier than before (unless we see some changes as we go forward to where it can be argued that it's actually equal or comparable to the Jones-sort of safety we saw before), I view this as a reason for materially changing my price target down here to account for this increase in risk.

Here is my current valuation outlook for the company as it currently stands.

AMSC Valuation - A lower PT after the divestment of the Jones portfolio

When I previously covered AMCS, I considered the company a "HOLD", fulfilling only 2 out of 5 of my investment criteria despite a significant, 12%+ yield. The native P/E at the time was over 15x, which I did not consider cheap or even appealing. There were cheaper and better shipping companies out there, and opportunities to get in on a high yield. I also considered the size prohibitive. Then the company did this in 3Q23, and now it's hard to even use the same metrics to evaluate the business here.

A roughly 8%-yielding income investment is not in any way an attractive income investment. Some insurance companies are about 100x this size and with an A-rating in terms of credit trade at similar levels of yield. If you're willing to go to a 6-7% yield, you can literally get some of the best telcos in certain geographies out there at such a yield.

So why would you, in a situation where you want yield, invest in a company like this above that?

No reason that I can think of.

AMSC still holds a 5-year RoR of negative 18.7% even with the recent sort of upside we've seen following the extraordinary dividend. With an annual profit level of 1.42, though that's trailing, not even this latest dividend level if we annualize it, is covered by that profit, coming closer to 2 NOK/share.

The company is neither conservative in terms of leverage, and I don't see it as having any particular specific outlying sort of argument as to why it should be considered more of a "BUY" here.

Analysts have the company at a target range of around 20 NOK, lowered from around 45-50 NOK back in September. So most analysts would agree with the assessment that the company is worth around half now that this latest set of measures has gone through.

I would impair the company further and put this down to 18 NOK/share - no higher than that, until I see where the company's future plans take it. That corresponds to roughly 1x the book value of the company's tangibles, which I still can consider is somewhat high - but a price I would accept, with a historical average closer to 1.6x or 1.8x.

Here is my renewed thesis for 2024 for the company.

Thesis

• AMSC is a recently transformed company, once a play on the conservative US-based Jones Act, now your standard shipping leasing company with a fleet of potentially attractive vessels with a hopeful upside generating a dividend yield of about 8%.
• For that reason, I'm careful here. I wouldn't buy the company at today's valuation but would wait, if interested, for a bit of a drop.
• My PT for the company now comes to 18 NOK/share, which is where I move my 2024E coverage here.
• The likelihood of the company dropping to this level without macro impacts is potentially low - but this signifies just what I'm looking for before I would be willing to "BUY" a spec stock like this here. Especially one that as of 3Q23 has materially changed its risk/reward factor, and not for the better, as I currently see it.

Remember, I'm all about:

• Buying undervalued - even if that undervaluation is slight and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
• If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
• If the company doesn't go into overvaluation but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
• I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

Here are my criteria and how the company fulfills them ( italicized ).

• This company is overall qualitative.
• This company is fundamentally safe/conservative & well-run.
• This company pays a well-covered dividend.
• This company is currently cheap.
• This company has a realistic upside based on earnings growth or multiple expansion/reversion.

The company fulfills 2 out of my 5 criteria, making it a "Hold" here.

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.

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