ASC - Why I Continue To Include Ardmore Shipping In My Value Portfolio

2023-11-16 19:04:37 ET

Summary

• Ardmore Shipping Corp has been generating positive cash flows and experiencing its best quarters ever.
• The company is optimistic about its future outlook due to seasonal effects, trading restrictions, limited new tankers, and congestion at the Panama Canal.
• ASC has a strong financial position, low debt, and more cash on hand than current liabilities, making it an appealing investment option.

I first wrote about Ardmore Shipping Corp ( ASC ) on June 2 of this year, when I explained why I was adding the company to my value portfolio. So far the pick has performed well enough, but it is time to review the company to see if still belongs in the value basket.

Performance

As can be seen from the chart below, historically ASC has always generated positive (or breakeven) cash flows from operations (which greatly de-risks holding the stock in my opinion), but the most recent quarters have been the best the company has ever experienced.

Current Outlook

And in listening to the most recent earnings call and presentation the company is quite optimistic that this recent trend can continue. There are several reasons given, including seasonal effects, the inefficiencies produced by trading restrictions stemming from the Ukraine war (which I discussed in my first article), limited number of new tankers coming on line, and congestion at the Panama Canal causing longer transit times. This last item made international news when recently a shipper paid to jump the line. From the TT News (with my emphasis):

A shipper has paid nearly $4 million to jump to the front of the line at the congested Panama Canal waterway, a record high.

Japan’s Eneos Group paid $3.975 million in an auction Nov. 8 to secure the crossing, bidding documents show. That comes on top of the regular transit fees companies pay, which can be hundreds of thousands of dollars more.

“You are getting close to $4.5 million to use the canal, so that is pricing out a lot of ships,” Oystein Kalleklev, CEO of Flex LNG Ltd. and Avance Gas Holding Ltd., said during a conference call Nov. 8 when asked about the state of the canal.

[...]

A queue of ships waiting to use the canal has been growing in recent months amid a deep drought. To manage the situation, the canal’s managing authority has announced increasingly drastic restrictions for the depleted thoroughfare. It also lets companies bid on the chance to speed things up and move to the front of the line. Last month, the Panama Canal Authority held 140 auctions, it said. Three of those came in above $1 million.

And here is the company slide highlighting the reasons for the company's optimistic outlook.

I think the point about limited supply of new tankers is important, as it will likely allow pricing power for the foreseeable future. Here's a slide showing that the global tanker order book isn't sufficient to renew the fleet of 20+ year old tankers.

Another focus of the company is to reduce debt. One way to look at this is to use the custom ratio calculator provided by Seeking Alpha to plot the company's total debt per share over time. It currently is the lowest it's ever been and the company continues to reduce it. Again I believe this represents fiscal prudence on the part of the company and it de-risks the stock.

Cash on Hand

The company's cash on hand is also comforting, as it has more cash on hand than current liabilities.

Valuation

Obviously, the main reason that I bought ASC initially was due to its valuation (and prospects). We've confirmed that the company's prospects continue to be appealing, so now let's review the current valuation.

With the stock trading at $13.20 here are the valuation metrics from one of Seeking Alpha's very convenient summary tabs. In this case I highlight not only the overall exemplary valuation metrics, but that in many cases they are at half (or double in the case of yield) of their sector median's. This on its own is reason to be optimistic, with a possible price target of 2x$13 = $26 just to get to median valuation.

Dividends / Yield

ASC aims to pay out about a third of its earnings as dividends. This means there are substantial fluctuations quarter to quarter, but overall it results in a decent yield. And the debt reduction discussed above should produce higher dividends in the future. Here's what the company had to say in this regard on the latest earnings call (with my emphasis):

As a result of our strong financial position and low breakeven levels, we're now able to pursue all of our priorities simultaneously, namely: maintaining our fleet over time by investing in our ships to optimize performance, thus boosting earnings and cash flow; sustaining low leverage through the market cycle, which, of course, improves the quality of earnings and provides the company with the financial strength needed for well-timed growth; evaluating growth opportunities while maintaining a patient and disciplined approach; and returning capital to shareholders, where at present we're paying out 1/3 of adjusted earnings.

And as an aside, with the current market outlook and our significant operating leverage, we see the potential for much higher earnings, and thus, dividends in the coming quarters . The essence of our policy is an acknowledgment that this is a cyclical business, where financial strength can pay off hugely if it permits well-timed investment. But we must balance that with returning capital to shareholders, consisting of a portion of earnings in a manner that's conventional across industries. While we don't rule out special dividends or share repurchases, at the moment, neither are part of our near-term plan.

And here are the historical dividend payouts for reference:

Quant Ratings

When evaluating stocks, I always check the Seeking Alpha quant ratings as an independent yardstick. In this case, SA has a hold on the stock, but the factor grades that I most care about (in order) are valuation, profitability and growth, and all of these are rated in the A's.

Options

ASC has listed options which trade with limited volume. I have used them to sell out of the money covered calls whenever the stock pops, which I think of as simply increasing yield (the premiums are never large).

Risks

The biggest risk for ASC is that it operates in a very cyclical industry. And no maneuvering by an individual company can overcome macro events in the short term. (In the long term, the company should be judged by how well it navigates the entire business cycle.). This means that an investor's full capital is potentially at risk when buying the stock, and hence positions should be sized accordingly.

I believe that the cash on hand and valuation metrics (particularly relative to the sector itself) somewhat mitigate this macro risk, but they certainly don't eliminate it.

Summary

I believe that ASC has been executing very well, that its deleveraging will result in larger payouts to investors in the future, and that the macro environment looks positive, at least for the next 18 months (but this is something that has to be closely monitored as it can change quickly). As a result I continue to hold a full long position in the stock.

For further details see: