ASC - Ardmore Shipping Set To Benefit From Improving Spot Rates

2023-12-18 19:05:02 ET

Summary

• Ardmore Shipping's stock has been on a bit of a rollercoaster ride along with spot rates for MR vessels.
• ASC is well-positioned to benefit from an improving spot market for refined products and chemical tankers, with its entire fleet tied to the spot market.
• The stock looks like an attractive way to play the current market for clean product tankers.

While Ardmore Shipping ( ASC ) has returned about 15% since my last write-up in September , the stock is still breakeven since my initial write-up in April . At the time, I thought the company should benefit in the near and medium term from a robust spot market for refined products and chemical tankers as the market adjusted to longer routes as a result of the Ukraine-Russian conflict. Since then, spot rates have been quite volatile. Let's catch up on the name and how product tanker spot rates are holding up.

Company Profile

As a reminder, ASC operates a fleet of mid-sized refined products and chemical tankers. It owns 20 vessels and leases two with an average age of 9.3 years at the end of Q3. It also has four product vessels under time charter-in contracts and it manages one chemical tanker.

Nineteen of the vessels it owns and the two it leases are built with an eco-design to improve fuel efficiency. The other vessel it owns, which is its oldest owned vessel, was upgraded to an eco-mod design in 2014. The vessel it manages and the ones under time charter-in contracts also have mod-eco designs.

Q3 Results

For its most recent quarter reported last month , ASC reported a -39% decrease in revenue from $142.4 million a year ago to $86.9 million. The company operated one more vessel a year ago. Analysts were looking for revenue of only $55.9 million.

ASC recorded adjusted EPS of 49 cents, topping the consensus by 5 cents. Adjusted earnings were $1.52 in the prior year period.

Adjusted EBITDA for the quarter came in at $31.6 million, down from $74.1 million a year ago.

The average time charter equivalent (TCE) rate for the firm's fleet was $26,347 per day, down -35% from $40,308 per day a year ago. In Q1, the TCE rate was $33,958 per day, and in Q2 it was $26,541 per day. Cash breakeven is $14,000 a day.

The company's MR Eco-Design tankers earned $25,932 a day in Q3, down from $44,897 per day a year ago and $27,460 in Q2. Its MR Eco-Mod tankers earned $36,362 a day, down slightly from $37,607 per day a year ago and up from $26,240 in Q2. Its Chemical Eco-Design tankers earned $20,023 a day, down from $31,536 a year ago and $24,555 in Q2. On a capital-adjusted basis, it earned $22,100 a day in the quarter. The company noted that the gap between MR Econ-Design versus Eco-Mod was due to a small sample size on the Econ-Mod side and where the ships were fixed.

Turning to its balance sheet, ASC ended the quarter with a net debt of $82.9 million, which includes $37 million in preferred shares.

Looking ahead, ASC said that for Q3 it has fixed approximately 50% of its total MR tanker revenue days at an average TCE rate of approximately $30,100 per day. Its chemical tankers are 60% booked at a rate of $23,000, or $25,800 per day on a capital-adjusted basis.

Discussing the current state of the market on its Q3 earnings call , CEO Anthony Gurnee said:

“We believe we are now at a market inflection point with rates building into the winter period. In particular, we're seeing broad strength across all tanker sectors, including crude and chemicals, which is a very good sign. … Overall, we continue to focus on optimizing our spot trading performance while managing costs and maintaining and even lowering breakeven level, which now stands at $14,000 per day. And as a final point, our entire fleet is exposed to the spot market, including our time charter in vessels, allowing Ardmore to fully capture the benefits of the strengthening market. .. Our optimism is backed by some important near-term factors. The EU refined products embargo, which commenced in February of this year, is continuing to impact the market by creating additional tonne-mile demand. Also, as the winter market sets in, we expect to see, as always, weather delays, daylight transit restrictions and localized rate spikes driven, for example, by cold snaps, while constricting supply or boosting demand. … Global refined product inventory levels remain very low, leaving little margin for error in the oil product supply chain. Despite the significant levels of refinery maintenance in 2023 as compared to 2022, product tanker demand has remained very strong. And as we expect to see fewer refineries offline going forward, we should anticipate further incremental demand. As well as this, reduced Panama Canal transits for the next few months are likely to increase traffic by up to 40%, thereby extending voyage times and keeping ships out of the market."

Moving forward, ASC will continue to look to pay out a third of its adjusted earnings as a dividend. It said it currently doesn’t plan any share buybacks or special dividend in the near term.

While ASC saw a big drop in revenue and earnings year over year, the company handily topped analyst estimates for the quarter. The company was facing a very difficult year-over-year comp, as spot rates last year soared to record highs after the G-7 announced that it would impose a price cap on Russian oil that greatly impacted shipping routes.

The Ukraine-Russia conflict and subsequent sanctions continue to influence various maritime shipping markets, but there are a lot of other factors at play as well, including the difficulties of ships crossing the Panama Canal.

With its entire fleet currently tied to the spot market, ASC looks poised to benefit from a once again improving spot market for refined and chemical tankers. The Baltic Clean Index in fact has seen a nice spike this month.

Meanwhile, there have been a few outsized rates reported, including Scorpion Tankers ( STNG ) getting a rate on an MR from the Gulf to the west coast of Ecuador for $166,000 a day. There have also been some disruptions in the Red Sea that are impacting routes after Houthi rebels from Yemen attacked two container ships before more recently attacking one of ASC's vessels .

ASC estimates that for every $10,000 increase in dayrate, it equals about $95 million in annual free cash flow and $2.30 a share in earnings.

Valuation

ASC trades at 4.2x the 2023 EBITDA of $159.4 million and 4.3x the 2024 EBITDA consensus of $157.8 million.

On a PE basis, it trades at 5.3x EPS estimates of $2.71. Based on the 2024 consensus for EPS of $2.69, it trades at 5.3x.

ASC stock trades towards the lower end of other marine shipping companies.

Based on the strength of the product tanker market and where other marine shipping companies trade, I think the company can command between a 5-6.0x multiple on 2024 EBITDA, equal to a $17-$21 share price.

Conclusion

There are a number of disruptions in the product shipping market at the moment, all of which should bode well for dayrates. With all its ships currently in the spot market, ASC looks poised to benefit from these dynamics in both Q4 and into 2024.

While there is upside in the stock price, there is also upside in the variable dividend the stock pays. Expect a moderate dividend increase in Q4 compared to Q2-Q3 levels, then a potentially larger increase starting in 2024.

I continue to rate ASC a “Buy” rating. My target is $18.

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