This year, we’ve seen suprising strength in the drybulk side of the market. What are the implications for investors in[ds_preview] shipping shares?
Amid Mehrotra: Equity values are discounting a more benign outlook. To this point the dramatic and sustained recovery in dry bulk equities is more reflective of recovering asset values, in our view, given we estimate a 1-to-3 relationship between changes in gross asset prices and net equity values (i.e. a 10% move in asset values equates to a 30% change in equity, given still-large net debt positions). In this sense we still see potential for significant additional upside in dry bulk shares, given our view that asset values are still well below mid-cycle levels.
What about individual companies?
Mehrotra: From a stock standpoint our top dry bulk pick is Star Bulk, given its significant leverage to these recovering asset values. Its equity value is up 2,200% over the last year on a share count adjusted basis. This translates into US $700M of additional shareholder value.
Tankers were the rage until early last year, what about that sector?
Mehrotra: It’s true that tanker rates are lackluster and asset values continue to be relatively weak – translating to tanker shares down 16% on average over the last 1yr compared to +18% for the S&P 500 index. But in Shipping, periods of weakness are typically followed by periods of strength (and vice versa). Increasing our confidence in this view are balance sheets that are marked-to-market, reflecting disciplined capital allocation strategies in some cases (Euronav and Ardmore Shipping, for example), and painful actions in other instances (Scorpio Tankers dividend cut).
Do you have any tanker stock recommendations?
Mehrotra: We see strong potential for a Tanker catch-up trade over the next 12months, with most upside potential at Scorpio Tankers, reflecting that company’s higher net debt (we estimate 80% loan to value) – which gives it more leverage to inflections in asset values. We also see upside in shares of Euronav and Ardmore Shipping, both of which we view as well positioned to capitalize of the Shipping industry’s return to growth.
