STNG - Scorpio Tankers: Accumulate At Current Price

2023-06-06 06:52:12 ET

Summary

• Scorpio Tankers is a good investment option for someone looking for exposure to the product tanker market.
• Company is trading at 2/3rds of current NAV, implying 50% upside from here.
• With a young fleet, reasonable market conditions, and management actively working to reduce debt & share count, STNG stock represents a compelling opportunity. BUY.

Scorpio Tankers ( STNG ) is one of the largest publicly listed tanker companies in the world. Their focus is on the product tanker space, and on newer ships. If you have an opinion that product tankers may do well over the next few quarters or years, then Scorpio Tankers is a good choice for you.

The stock

As at today (June 5th 2023), shares of STNG are trading at just over $46. The total market capitalisation is $2.55bn, making it definitely amongst the larger companies in this space.

You'll note they have a low enough dividend yield. And that over 1 year they've performed quite well, with a return of nearly +30%.

But this of course leaves the question...how will STNG perform in the future?

STNG: the fleet

You can see their fleet here:

Our Fleet of Vessels for On-Time Delivery | Scorpio Tankers

This is a summary of the ships as well:

In the main, they trade their ships on spot - and not on time-charter.

STNG has given an estimate of the valuation of their fleet. At 31/12/2022 the give the carrying value as $3.78bn, and they estimate the market value to be $1.2bn over this. Giving the fleet an estimated value of approximately $5bn.

STNG: the balance sheet

The market cap is $2.55bn.

For this you get their fleet (of over 100 ships) and

- their current assets, of $870 million; and take on

- their liabilities, of $2.14 billion.

Clearly STNG is sporting a lot of debt. But in aggregate you pay just over $3.8bn for their fleet.

Is this worthwhile? We can see above that the fleet is valued around $5bn. So the answer here is yes. But it's important to consider if STNG what STNG is doing with its money.

Clearly in the recent past STNG has shown the ability to reduce its debt considerably (see below).

This debt is reasonably well termed out.

They did, however, pay $44 million in interest in Q1 alone. So although their interest rates are competitive, reducing debt should still be a good lever for them to pull.

And what NAV could we ascribe to the company?

Their $5bn fleet + $870m of current assets, less $2.14bn of liabilities gives a NAV of $3.73bn. Which is 50% higher than their current market cap.

If STNG was to trade at NAV, you could see growth of +50% in their share price. This looks very compelling to me.

STNG: recent earnings

We know that STNG trades on spot (99 or their ships are on spot or short term contract; 8 are on longer term contract). And we know that shipping is volatile.

Q1 2023: Diluted earnings per share of $3.27. This was $193m in net income.

Depreciation in Q1 was $50m; and interest costs were $44m. So - in aggregate - STNG took in $287m in Q1.

We need to compare that figure of $287m (EBITDA) to their Enterprise Value above of $3.8bn. At an EV of $3.8bn, it would take just13 quarters (or just 3.25 years) to purchase the entire company.

If Q1 is representative of the future, then STNG is a very compelling investment.

This was their Q1 TCE:

And this is how Q2 looks so far:

It's reasonably apparent that Q2 2023 is very much in line with Q1. So, for now, it seems as if current market conditions are set to continue; and we can expect to see diluted earnings of ~ $3 once again.

Going back and looking at Full Year 2022 for additional context - for Q4 2022, their diluted earnings were $4.24/share (Which would give an annualised PE ratio of about 3). For the full year: $10.34 per diluted share. (Which would give a PE ratio of between 4 and 5.)

And using Q1 as a guide, STNG trades close a PE ratio of 4.

So on a PE basis, or EBITDA/EV basis, STNG looks very compelling.

Market Conditions

The below is an extract from a Poten & Partners, on June 5th.

I think it's logical to use time charters over spot rates, as spot rates can go very quickly up or down.

LR2s at $49k/day; MRs at $29k/day; and Handymax at $25k are all nice and profitable for STNG. They are marginally lower than STNG earned in Q1 (or expect to earn in Q2). That said, they are not far off those rates.

In a typical year, dirty & clean rates tend to be higher in H2 than in H1. So we could reasonably expect STNG to perform somewhat better in the second half of 2023 than the first half.

And finally orderbooks as a % of the fleet look very low indeed.

Market conditions look benign for STNG. The order-book doesn't present a risk to STNG's prospects at present. Overall market conditions look to be positive.

STNG: management actions - rewarding shareholders

Scorpio's management is clearly trying to grow the share price. And they've taken a number of actions to do that. However one item does stand out as well - shares granted to management.

Share count

We can see here that - over the last few years - STNG has increased its share count.

If we look more closely at 2022, however, 5.76 million shares issued related to the conversion of convertible notes into stock.

I don't think - for a minute - that issuing over 1 million shares to management is "good". However, STNG is now reducing its share count.

It currently has 55.2m shares outstanding. This is actively reducing the share count aggressively. And it has another $250m authorised now. Their most recent press release confirming both of these numbers can be found here .

STNG started the year with just over 61 million shares, and it has just over 55 million shares today. In 2023 - so far - it has reduced share-count by about 6m. And the increase that we saw last year was largely related to convertibles being repurchased with stock. STNG is actively reducing the share count now.

In addition to that number there are about 4 million shares that will vest to management, over time. This is not "good" behaviour. 4 million shares represents $200m! However this is over the next few years. And is allowed for in any PE figures I have used above.

Dividends

STNG has a low payout of $0.25 per quarter, giving an annualised yield of ~ 2%. Personally, I think this is a good thing. Of all the tanker companies, STNG is using its funds to reduce share count and to reduce its debt.

New builds

No new buildings on the way. Limited cap-ex as a result.

Debt repayments

On May 11th, STNG bought back 5 leases, reducing debt by $119m.

In April in bought back 6 leases, reducing debt by $147m.

I could continue, but I'm sure you get the picture!

In aggregate, management is using all available cash to now reduce debt and reduce the share count. In any industry we should view this as very positive!

Risks

There are risks to an investment in any tanker company. The primary risks that I see for STNG include:

Global recession: If there's a reduction in demand for refined oil, demand will lessen for STNG's ships. And rates would fall in tandem.

OPEC: OPEC could, of course, impact the global supply of oil if they so decide. In turn, this could impact on the rates STNG can achieve for its ships.

Management actions: In the even that STNG's management decides to act "in bad faith" - well - that is a risk. However, this doesn't appear likely, given their recent positive actions.

Summary

Scorpio Tankers is not for the faint of heart. It's a leveraged shipping company. If rates fall dramatically, STNG will be hit, and hit hard. However, I think:

- rates are holding up well;

- STNG trades at a PE of ~ 3;

- it has an excellent and young fleet; and

- management is taking actions to reduce the share count and increase the price.

My Conclusion: buy.

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