Home / Shipping News / International Shipping News / Scorpio Bulkers (SALT US, Attractive, USD 11) – Earnings recovery gains momentum; reiterate Attractive view
Scorpio Bulkers (SALT US, Attractive, USD 11) – Earnings recovery gains momentum; reiterate Attractive view
in International Shipping News 25/04/2017
Better-than-expected quarterly earnings; revise fair value to USD 11: SALT reported TCE revenue of USD 34m in 1Q17 which was up 29% quarter on quarter and slightly higher than our estimate of USD 31m. Higher revenue resulted from the improved vessel earnings of USD 8,608pd in 1Q17, up from USD 7,303pd in 4Q16. Revenue days also increased from 3,672 days in 4Q16 to 4,021 days 1Q17 as five newbuilds were delivered in 1Q17. SALT has brought down its cash break-even cost excluding debt amortisation to USD 7,800pd in 1Q17 from USD 8,100pd in 4Q16. The cash break-even cost includes cash operating cost, cash general & administrative expense and interest cost. SALT incurred one-time loss of USD 17m for write down of assets held for sale. The increase in topline and operational efficiency turned the company’s adjusted EBITDA positive to USD 3m, higher than our estimate of USD 0.3m. In view of better-than-expected quarterly earnings and continued recovery in the dry bulk sector, we have revised our fair value to USD 11 from USD 9 earlier and reiterate our Attractive view.
Earnings to accelerate on the back of higher daily rates: Average daily earnings for the company’s Kamsarmax fleet was USD 9,164pd in 1Q17 compared with USD 7,401 in 4Q16, significantly higher than USD 3,331pd in 1Q16 when the dry bulk market was at an all-time low. Similarly, the company’s Ultramax vessels earned USD 8,230pd in 1Q17 compared with USD 7,238 in 4Q16 and USD 3,462pd in 1Q16. More importantly, the company contracted ~59% of the Kamsarmax vessel days in 2Q17 at USD 9,914pd and ~57% of the Ultramax vessels days at USD 8,852 in 2Q17. These rates are better than the rates in 1Q17, and almost half the revenue days in 2Q17 are now covered, which will translate into stronger operational earnings. We expect the earnings to accelerate further in second-quarter 2017.
Supply-side developments are encouraging: Orderbook-to-fleet ratio has declined further to 8.5% in March 2017 from 10.8% in 2016. This lower ratio will ensure that the incremental supply remains restrained in 2017 and 2018. Supply growth in 2017-18 is expected to be in the 1-2% range as risk appetite of financial institutions to fund new ships remains low. Fewer vessels will be scrapped in 2017 than in 2016, but will remain substantial on improving steel prices and lower demolition age. Overall, we remain positive on the dry bulk market and believe restricted fleet growth along with better demand from China will support the ongoing recovery in freight rates; which will continue to be reflected in the asset prices.
Lower debt after the sale of two Kamsarmaxes: Encouraged by firming asset prices, the company entered into an agreement during the first quarter to sell two Kamsarmax vessels for USD 45m, even though it recorded a loss of USD 17.1m. Management believes that it has taken advantage of the improvement in vessel prices as the price of a five-year old 95,000dwt ship is up by 12.5% y/y to USD 24m at the end of March 2017. As a result of the sale, the company will reduce its debt by USD 20m – the total outstanding debt for two vessels sold.
No future capital obligation; collateral coverage intact: SALT took delivery of five newbuild vessels in 1Q17 and one vessel in 2Q17. Three Kamsarmax and two Ultramax vessels were delivered in 1Q17 whereas one Kamsarmax was delivered in April 2017. After taking delivery of the all the newbuilds, the company does not have any future obligation due to shipyards. Meanwhile, SALT has a robust collateral coverage for its debt of USD 645m as the coverage ratio for all facilities is comfortably higher than required, according to management. In terms of debt repayment, the company has principal repayment of USD 35m and USD 25m in FY17 and FY18 respectively, which we believe is not a concern as cash flow from operations is improving and cash in hand was USD 155m at the end 1Q17.
Value and Risk: We retain our Attractive rating on SALT and revise our fair value to USD 11 per share from USD 9 per share, in view of the earnings recovery and firming asset markets. We expect the earnings recovery to strengthen in the next quarter, which should assist the share price further. The key risk is the reversal in commodity demand, which will lead the rates to trend downwards.
Source: Drewry Financial Research
