Scorpio Tankers is the largest listed product tanker firm.
The company has had a colourful history, but more recently has turned the ship around.
Management is aligned with shareholders and buying back stock as fast as they can. Strong Buy.
Scorpio Tankers (STNG) is a product tanker firm, one of the largest listed product tankers in the world. They're an interesting company, with a somewhat patchy history. But recent management actions have made the direction of the firm very clear. As long as management continues to support the stock, it should be a strong buy.
I have previously written about Scorpio, which I’ve linked to here:
I don’t see any change to my previous thesis, except that management continues to buy back stock. I wanted to reiterate that this thesis is valid … as manage to continue to deliver on their promises.
Scorpio - the share
The below is a snippet of Scorpio Tanker's performance since listing on the stock market. By any metric, it doesn't paint a pretty picture.
Yahoo Finance
That said if you had purchased shares more recently, you would have done significantly better.
The share price over the last 12 months looks as below. It has traded over $60 per share on a few occasions in the last 12 months:
Yahoo Finance
Scorpio - the company
They are a product tanker company, with a little over 110 ships on the water. The market cap of the company is currently $2.7bn.
Their balance sheet looks as below. They currently have significant levels of current assets, which clearly is a great buffer for any company.
STNG company presentation
Current assets: $560 million
Total liabilities: $1.9 billion
So, at the current share price, the enterprise value of the firm (i.e. the valuation of their fleet of ships) is
Pareto has the following valuations for various shippers. They have a Price to Net Asset Value (P/NAV) of 0.74 for STNG:
Pareto
-> This means that every $0.74 you buy of Scorpio is worth $1 of invested assets. The price of Scorpio is currently $2.7bn; so the NAV is $2.7b/0.74 = $3.6billion.
Pareto are in effect saying that the market is valuing the fleet of ships at around $4.1 billion, but that this is incorrect. And that you need to increase that undervaluation by around $900 million to $5 billion.
Scorpio gave us an estimate of their fleet at 31/12/2022 as well, which agreed with Pareto’s figure:
Scorpio Tankers 2022 earnings
They estimated their fleet at $1.2bn + $3.8bn = $5bn…spot on with Pareto. Pareto AND management are both telling you the fleet, and the stock, are underpriced in the market. I tend to agree.
Q2 Earnings - Brief Review
From STNG's Q2 earnings presentation:
STNG Q2 presentation
Net income was $133 million in the quarter, or $2.41 per share. For a company that is currently trading at $2.7 billion, that would imply it is currently on a Price/Earnings ratio of about 5x. And I would note that they reduced debt in Q2 alone by $241 million.
To give a bit more detail on their recent earnings:
Scorpio Tankers Q2 earnings release
3 month earnings were $133mil.
Their total 3 months depreciation was a further $50million. Their earnings + depreciation were $183m for the last 3 months, and over $400 million for the last 6 months. For a stock with a market cap of $2.7 billion. That $400 million was 15% of their market cap in just a 6-month period alone!
Interest expense at $87 million for 6 months seems ok to me. It was certainly covered 4-5times but the cash flow over this period.
I haven't looked through their 2022 earnings releases in greater detail. But in 2022 they earned over $10 per diluted share. It's reasonably clear - to me - that STNG is trading on a low P/E multiple at present and is throwing off significant levels of cash.
Management actions
Knowing that STNG is under or overvalued is interesting. However it doesn't tell you the entire story. You have to see a path to realising that value (or not). This is where STNG's management actions are currently coming into focus.
During their Q2 earnings they provided the below. It shows they purchased $421.1 million of shares in the period Jan - June 2023.
STNG Q2 company presentation
And then in August they followed up with the below:
STNG investor relations
In 2023 so far, they have purchased $470 million of their own stock, and they have $164 million remaining which they can use under their securities program. $470 million is 17% of the current market cap. Purchased in around 8 months only! If they use the rest of the current buyback scope, they can buy an additional 5% of the company. These are huge buybacks management is putting through now, as they see huge value!
From the above we can see that their cash flow - in 6 months - was over $400 million. They are not risking their balance sheet to buy back these shares.
It is worth noting that management pays themselves well, and often enough they do so via stock. I don’t love this, nobody does. But this is reflected in the declared earnings and their PE ratio is low. This is not a big additional risk to the company, providing they continue to re-purchase stock.
Net Asset Value per share - and the Stock Price
We understand that the company is trading at 0.74 x NAV; and that management are acting accordingly. They have bought back $470 million of stock so far this year leaving 53.5 million shares outstanding. So how will share repurchases impact the stock price?
Every time the company purchases back stock valued significantly under NAV, it is reducing cash...but increasing NAV per share.
So if the discount to NAV continues...then by doing nothing else except buying back its own stock, t he share price should increase.
This is a company generating cash, using that cash to buy back under-valued shares!
Risks
The primary risk to this approach is simple. The valuation of STNG's ships could fall. If this happens, STNG's NAV per share will not increase as you could otherwise expect. That said, the market for STNG's assets remains very buoyant.
The stock price is a little north of $50 at present. In Q2 they earned $2.41 per diluted share. That would imply a low (or attractive!) Price/Earnings ratio.
Let's look at the tables below:
STNG Q2 earnings presentation
Q3 from above should certainly work out as worse than Q2. But STNG will remain earning strong levels of cash at these rates. They may decide to slow their buy-backs, but they do have healthy cash levels, so there’s no compelling reason not to follow their plan.
More recently the spot rates for STNG's fleet of ships have strengthened again:
Broker estimates
Scorpio present a good slide in their regular earnings call on the overall product tanker market.
All segments they operate in are over 10 years older. There is 2% expected growth in the total fleet this year, in the whole market. Compared with 11.9% growth in tonne miles. That divergence is very compelling. Demand for product tankers continues to outstrip supply of ships.
Scorpio Tankers Q2 Presentation
The underlying product tanker market certainly looks healthy. It's not clear to me that product tanker rates should fall in the near term. Which would imply STNG can continue to earn significant levels of cash. Which it is using to de-lever and - more importantly - to buy back its own stock.
There are other risks to the thesis as well:
Global recession: will hammer STNG and most companies hard.
Interest rates: in general, will increase debt costs and should hamper PE multiples. I don’t see a specific impact on STNG from higher interest rates.
Equity market volatility: STNG is a medium/small company. If markets catch a cold, then STNG could well suffer as well.
Overall summary
STNG is:
- earning cash from their large fleet of product tankers
- using this cash to buy their own shares
Management clearly feels their shares are SIGNIFICANTLY undervalued. They are buying back shares as quickly as they can. But they are not stretching the balance sheet to do so. And the underlying product-tanker market has basically never been healthier. E very time management buy shares valued under NAV, they are increasing the NAV per share for all STNG stock owners.
As long as management continues with this as a course of action, STNG represents a clear buy.
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MONACO, July 17, 2024 (GLOBE NEWSWIRE) -- Scorpio Tankers Inc. (NYSE: STNG ) (“Scorpio Tankers,” or the “Company”) announced today that on Tuesday, July 30, 2024, the Company plans to issue its second quarter 2024 earnings press release in the morning (Eastern ...
MONACO, July 15, 2024 (GLOBE NEWSWIRE) -- Scorpio Tankers Inc. (NYSE:STNG) (“Scorpio Tankers,” or the “Company”) announced that it recently repurchased 756,312 of its common shares in the open market at an average price of $78.07 per share under the 2023 Securities Rep...
2024-06-24 21:06:00 ET Stock Traders Daily has produced this trading report using a proprietary method. This methodology seeks to optimize the entry and exit levels to maximize results and limit risk, and it is also applied to Index options, ETFs, and futures for our subscribers. This...
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