2023-05-18 15:14:26 ET
Summary
- ASC stock is down, despite a strong quarter and analysts raising EBITDA and EPS estimates for this year and next.
- The near to medium term dynamics are still favorable to the niche part of the shipping industry it is in.
- The stock looks attractive following its recent pullback.
With Ardmore Shipping ( ASC ) down a quick -20% since my initial write-up , I wanted to take a closer look at the company's recent Q1 earnings.
Q1 Results
For the quarter, the company reported an 86% increase in revenue from $63.4 million a year ago to $118.2 million. Analysts were looking for revenue of $83.6 million.
ASC recorded adjusted EPS of $1.04, topping the consensus by 4 cents. Adjusted earnings were a loss of -3 cents in the prior-year period.
Adjusted EBITDA for the quarter came in at $54.8 million, up more than 4x the $12.5 million recorded in Q1 2022.
The average time charter equivalent (TCE) rate for the firm's fleet was $33,958 per day. That was more than double the TCE rate of $15,155 per day a year ago. In Q4, the TCE rate was $38,861, nearly 13% higher than in Q1.
The average spot TCE rate in the quarter for MR Eco-design tankers was $37,506 per day, while its MR Eco-Mod tankers earned an average TCE rate of $30,932 per day. The company owns 15 MR Eco-Design tankers and six MR Eco-Mod tankers. Chemical tankers rates in the quarter were $27,984 per day for its six vessels.
The average number of operating vessels for the quarter was 26.7 compared to 27 a year ago. ASC had eight drydocking days in the quarter.
Voyage expenses were up 35% to $36.6 million. Higher bunker prices accounted for 62% of the increase, while more spot revenue days accounted for the rest.
ASC generated $56.8 million in operating cash flow in the quarter. It ended the quarter with $144.9 million in debt and $52.6 million in cash and equivalents. Its net debt of $144.9 million was -17% lower than it was at the end of 2022.
The company announced a quarterly dividend of 35 cents per share. Its policy is to pay out a third of its adjusted earnings as dividends, which it thinks will be sustainable through the shipping cycle. The dividend will be paid on June 15th to shareholders of record on May 31st.
Overall, ASC posted a strong quarter, as the company continues to benefit from management's earlier decision to move its vessels to the spot market. While the refined product market wasn't as robust as Q3 or Q4 of 2022, rates still remain attractive and well above recent historical norms. Given the dynamics of the market, I would expect rates to remain strong moving forward, although below the peak seen in Q3 and Q4.
Outlook
ASC noted that for Q2 it has fixed approximately 50% of its total MR tanker revenue days at an average TCE rate of approximately $32,700 per day. MR Eco-Design tanker rates are fixed at $34,000 per day, while MR Eco-Mod tanker rates are at $30,000 per day.
For its six Eco-Design IMO 2 product / chemical tankers, the company is seeing a nice boost in spot rates in Q2 compared to Q1. It has fixed approximately 50% of these vessels at an average TCE rate of approximately $33,600 per day, a 20% increase over Q1 rates.
Commenting on the current market outlook on its Q1 call , CEO Anthony Gurnee said:
"The outlook for product and chemical tankers remains very compelling in a tightly balanced market. The EU refined product embargo, which came into effect on February 5, has resulted in a bifurcation of the product tanker fleet, driving route inefficiencies and thus higher ton-mile demand. Notably, the number of product tankers in the Russian trade increased by 50% to over 330 and it is worth emphasizing that there is a stickiness to this trade with these tankers typically not being able to reenter the global fleet, at least not easily. We're also seeing China's economic recovery gaining strength with GDP growing by 4.5% in the first quarter and expected to accelerate further through the year. In fact, China is forecast to be more than 1/2 of the projected 2% increase in global oil demand in 2023. Meanwhile, chemical tanker demand is forecasted to grow by 7.5% in 2023 on the back of strengthening economic activity.
"We believe the impact of the EU embargo is yet to fully play out and there could be a potential coiled spring effect leading to further ton-mile demand growth. Ton miles relating to European imports are only up 15% year-on-year in contrast to the 114% increase in Russian export ton miles. The reason is the European inventory build prior to the embargo. As inventories are drawn down, we expect to see European refined product imports increase. Of note, diesel inventories are already down 10% since February. So, [our three] highlights the expected differential in European product and port voyage lengths and suggest that there is another leg of ton-mile demand yet to be realized from the embargo once inventory drawdowns give way to higher imports."
While there is some inventory destocking in Europe in the near term, the overall market dynamics for the refined product and chemical shipping markets remain attractive. The low ship order book and an aging fleet are two big positives that other marine shipping markets aren't seeing. It's also something that cannot be reversed quickly, as it would take a few years for newbuilds to get to market if and when more ships do get ordered. At the same time, scrapping could begin as ships get older.
Meanwhile, a re-opening China and the continued disruptions due to the Russian embargo bode well for shipping rates to remain strong. China has a lot of pent-up demand as COVID restrictions in the country ease and its economic machine starts moving again. Meanwhile, the Russian-Ukraine war continues to rage on, and the Russian embargo is likely to have a lasting impact on various marine shipping markets.
Valuation
ASC trades at 3.7x the 2023 EBITDA of $177.6 million and 4.7x the 2024 EBITDA consensus of $142 million.
On a PE basis, it trades at 4x EPS estimates of $3.03. Based on the 2024 consensus for EPS of $2.46, it trades at 5x.
Note that analyst estimates are higher for both 2023 and 2024 since my earlier write-up.
The stock trades at one of the lower valuations among marine shipping companies, despite what I think is being in a bit more attractive niche compared to its peers at the moment. This should allow for some multiple expansion from here.
Conclusion
It's pretty rare when I look at a stock and see that analyst estimates have moved nicely higher, but the stock price has moved materially lower since the last time I looked at it. However, this is exactly the case that has played out with ASC. I think recessionary fears are likely the biggest reason behind this.
However, I do think that the current market dynamics should more than make up this, barring a large global recession. China re-opening and its impact on refined product and chemical demand should not be underappreciated in my view. At the same time, it does not seem like the Russian embargo will end anytime soon, keeping ton-mileage demand elevated.
I continue to rate ASC a "Buy" based on the current trends in the market and think that the refined product and chemical tanker space is one of the best places to be in terms of the shipping industry at the moment.
For further details see:
Ardmore Shipping: The Stock Is Down, But Estimates Are Up