INSW - Ardmore Shipping: The 10% Dividend Yield Is Reliable

2023-07-03 00:47:28 ET

Summary

• Ardmore Shipping's stock price has decreased by over 30% in the past three months due to decreased MR tanker TCE rates.
• However, the company's strong financial position and Russian and U.S. Gulf refined product exports should prevent its quarterly dividend from dropping below $0.30.
• I estimate Ardmore's 2Q 2023 fleet TCE rate to be between $31500 to $33000 and its adjusted earnings to be between $41 million to $42 million.
• TCE rates for MR tankers may start to increase in the last months of the year.
• Compared to its peers, Ardmore's return on assets and equity ratios are better, and its P/B is lower, suggesting that the stock is in a good position.

As MR tanker TCE rates decreased, Ardmore Shipping's ( ASC ) stock price decreased by more than 30% in the past three months. For the first quarter of 2023, Ardmore reported an adjusted earnings of $43 million. I estimate Ardmore’s TCE revenues and adjusted earnings in 2Q 2023 to be lower than in 1Q 2023. Also, I estimate a second-quarter dividend of $0.33 per common share. According to the current market condition, I don’t expect Ardmore’s 3Q 2023 results to be better than 2Q 2023. However, TCE rates for MR tankers might start increasing in the last months of the year. The important point is that due to Russian refined product exports and refined products exports from U.S. Gulf, TCE rates are supported, and as Ardmore has a strong financial position, I don’t see its quarterly dividend dropping below $0.30 even in a more unfavorable market condition. As a result, the company’s 10% dividend yield is reliable, and with a better market condition in 4Q 2023, it might increase. The stock is a buy.

Estimation of 2Q 2023 results

In my article on Ardmore Shipping, published on 15 March 2023, mentioning lower TCE rates for MR tankers in January and February, I explained why the company’s 1Q 2023 financial results may be weaker than in 4Q 2022. As Ardmore’s fleet TCE per day decreased from $38861 per day in 4Q 2022 to $33958 in 1Q 2023 (driven by lower MR Eco-Design and MR Eco-Mod tanker rates) the company’s net revenue decreased from $133 million in 4Q 2022 to $118 million in 1Q 2023. Also, its net income decreased from $1.28 per diluted share in 4Q 2022 to $1.04 per diluted share in 1Q 2023. For the first quarter of 2023, as of 14 February, Ardmore had 55% of its total revenue days fixed with an average spot TCE rate of $39500 per day for its MR Eco-Design tankers. It is worth noting that in 4Q 2022, Ardmore’s MR Eco-Design tankers earned an average spot TCE rate of $43174 per day. For the first quarter of 2023, as of 14 February, Ardmore had 70% of its total revenue days fixed with an average spot TCE rate of $27750 per day for its chemical tankers. It is worth noting that in 4Q 2022, Ardmore’s chemical tankers earned an average spot TCE rate of $28544 per day.

As of 9 May 2023, based on approximately 50% of total revenue days fixed for the second quarter of 2023, Ardmore’s average spot TCE rate was $34,000 per day for MR Eco-Design tankers. Based on approximately 50% of revenue days fixed for the second quarter of 2023, Ardmore’s average TCE rate for chemical tankers was $33,600 per day. We can see that based on fixed days, Ardmore’s TCE revenue in 2Q 2023 is lower than in 1Q 2023.

Figure 1 shows that in the second quarter of 2023, on average, the 1-year wet time charter estimate for MR IMO is lower than in 1Q 2023. However, on average, the 1-year wet time charter estimate for Handysize tankers is higher than 1Q 2023. Overall, Handysize tankers range from 24000 dwt to 35000 dwt, and MR tankers range from 35000 dwt to 55000 dwt. As of 31 March 2023, Ardmore had 16 tankers with about 50000 dwt, two tankers with about 38000 dwt, and four tankers with about 25000 dwt. Thus, I expect the negative effect of lower MR tanker rates on Ardmore’s TCE revenue to fully offset the positive effect of higher Handysize rates. In a nutshell, I expect Ardmore’s fleet TCE revenue to be between $31500 to $33000 in 2Q 2023 (depending on the profitability level of Ardmore’s contract for non-fixed days (see Figure 2).

For the first quarter of 2023, the company’s Board of Directors declared a cash dividend of $0.35 per common share (based on the current policy of paying out dividends equal to a third of adjusted earnings. The company’s adjusted earnings in 1Q 2023 were $43 million. According to a fleet TCE per day of $32250 (the mid-point of my estimation) for 2Q 2023, I calculate Ardmore’s adjusted earnings to be between $41 million to $42 million, implying a dividend of $0.33 per common share. With this quarterly dividend, Ardmore has a 1-year forward dividend yield of 10.8% at its current price of $12.35 per share.

“With our robust balance sheet, low breakeven levels, and high operating leverage to this strong charter market, we are generating a materially heightened level of free cash flow, enabling us to simultaneously pursue all of our capital allocation priorities: continued investment in performance-enhancing technology across our fleet; ongoing debt reduction; maintaining our capacity for well-timed, accretive growth; and the payment of an attractive quarterly dividend with an annualized yield of approximately 10%,” the CEO commented .

Figure 1 - Wet time charter estimates ($/pdpr)

Figure 2 – Ardmore’s 2Q 2023 TCE rates estimation

The market outlook

In the past three months, stock prices of product tanker shipping companies decreased. Scorpio Tankers ( STNG ) stock price decreased from $60.18 on 1 March to $47.23 on 30 June, down 22%. Scorpio’s fleet consists of 113 vessels, including 39 LR2 tankers, 60 MR tankers, and 14 handymax tankers, with a weighted average age of 7.2 years. TORM plc ( TRMD ) stock price decreased from $36.22 on 1 March to $24.16 on 30 June, down 33%. TORM’s wholly owned fleet of around 80 vessels is specifically configured to move energy and clean petroleum products from refineries to end users. International Seaways ( INSW ) stock price decreased from $47.20 on 1 March to $38.24 on 30 June 2023, down 19%. INSW’s product carriers' TCE revenues account for about 45% of its total TCE revenues. Ardmore’s stock price decreased by 33% from $18.53 on 1 March to $12.35 on 30 June. There are still some concerns about China’s economic recovery that directly affect the demand for refined products and chemicals.

Also, due to the potential financial instabilities in the Western countries (due to high interest rates), and OPEC+ production cuts to support oil prices, the market outlook for refined products seems to not get on the path of improvement. It is important to know that in the next few months, refined product demand may decrease due to seasonal weakness. However, the changed trading flows as a result of the war in Ukraine still have a specific positive effect on the product tanker shipping market as it has increased the ton-mile demand. Due to Russian refined products exports on long-haul routes, and record exports from the US Gulf, tanker TCE rates are supported. Thus, TCE rates for Handysize and MR tanker vessels may not decrease further significantly in the next few months. Furthermore, India’s refined product imports from Russia may increase further. Overall, according to World Bank, Word’s real GDP growth in 2024 is expected to be higher than in 2022, and in 2025, the World’s real GDP growth is expected to be 3.0%. Thus, demand for refined products may start increasing in the fourth quarter of 2023, and TCE rates may bounce back.

Thus, Ardmore’s TCE revenues and adjusted earnings in 3Q 2023 are not expected to be better than in 2Q 2023, and even may impair slightly. However, I expect Ardmore’s 4Q 2023, 1Q 2024, and 2Q 2024 to be better than in 2Q 2023. As a result, the company’s quarterly dividend may increase. Even without an improving market condition, as I don’t see tanker TCE rates decreasing further in a significant way (in my unfavorable market condition scenario), I don’t expect Ardmore’s quarterly dividend to drop below $0.30 per share. Assuming a 1-year forward dividend yield of more than 10% at its current price is reasonable.

Comparison with the peers

Ardmore’s return on assets ratio and return on equity ratio are better than International Seaways and Scorpio Tankers’. Ardmore has a return on assets ratio of 26.27%, which is significantly higher than STNG’s of 19.69%, and INSW’s of 23.17%. Also, Ardmore has a return on equity of 47.29%, which is higher than STNG’s ROE of 42.07%, and INSW’s ROE of 42.36%. However, Ardmore’s ROA and ROE are not as strong as TORM’s (see Figure 3). On the other hand, Ardmore’s P/B is lower than its peers. Ardmore has a P/B of 1.029, compared with STNG’s P/B of 1.100, INSW's P/B of 1.029, and TRMD’s P/B of 1.224.

Figure 3 – Ardmore’s return on assets and return on equity vs. peers

Figure 4 – Ardmore’s P/B vs. peers

Overall, Ardmore’s ROA, ROE, and P/B suggest that compared to its peers, the stock is in a good position, and with a better market condition, Ardmore's stock price has a good potential to rise, even faster than International Seaways and Scorpio Tankers. It is worth noting that the company’s short-interest position can support my statement about its stock price potential. Ardmore has a short percent of float of 3.57%, lower than STNG’s 5.92%, and INSW’s 4.94%. However, be mindful that TRMD’s short percent of float is significantly lower than Ardmore’s (see Figure 5).

Figure 5 – Ardmore’s short interest vs. peers

End note

Ardmore Shipping’s 2Q 2023 results are expected to be weaker than in 1Q 2023. However, the stock price has already dropped by 30% within the past three months, and I don’t see the stock’s price decreasing further once the 2Q 2023 results are published. In the fourth quarter of the year, TCE rates might start increasing, and I expect Ardmore’s financial results to improve in 4Q 2023. Meantime, I expect Ardmore’s quarterly dividend to be $0.33 per share for 2Q 2023, and not less than $0.30 per share for 3Q 2023, which makes its 10% dividend yield reliable. ASC stock is a buy.

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