Jefferies has started coverage of US bulker owner Eagle Bulk (EGLE) with a buy rating.
Analyst Randy Giveans has slapped a target price of $6 on the stock, against $4.60 now.
The rating is based on the "attractive" outlook for the sector, the owner's strong balance sheet, significant operating leverage, in-house management strategy, and substantial financial leverage to improving asset values, he said.
"Additionally, EGLE has a leading scrubber programme, with the company planning to install 41 scrubbers on its fleet of 50 ultramax/supramax vessels by 1Q 20," Giveans added.
Jefferies sees demand for vessels improving rapidly.
"We believe dry bulk shipping demand will strengthen through at least 2020 as significant Vale iron ore production is restored over the next 18 months while coal demand growth remains steady," Giveans said.
"More important for EGLE, after a weak 1H 19 due to US-China tensions and swine fever in Asia, we believe demand for grain, soybeans, and minor bulks will increase 3-4% in 2H 19 and 2020."
Fleet growth is restrained
The analyst is expecting minimal fleet growth through at least 2020.
The sector saw more than 10% annual fleet expansion between 2009 and 2014, but this has slowed significantly since 2015 as rates have fallen, leading to fewer newbuilding orders and increased scrapping.
The current dry bulk orderbook-to-fleet ratio is only 10%, the lowest since 2003, and the current ultramax/supramax orderbook-to-fleet ratio is only 8%, the lowest since 1999.
In terms of scrapping, 8% of the fleet is over 20 years of age and there are many vessels that are scrapping candidates ahead of pending IMO 2020 and ballast water treatment regulations, Giveans said.
He is pegging fleet growth at between 2% and 3% for this year and next.
Eagle Bulk finished the second quarter with $65m in cash, $70m in un-drawn availability, and a net debt-to-cap of only 35%.
Since 2016, the company has sold 14 of its oldest supramax vessels and will soon acquire six modern ultramaxes.
"We believe EGLE shares are attractively valued, trading at a 25% discount to our estimated NAV of $5.95/share, as we believe the shares have reached oversold levels in recent weeks due to US-China trade concerns and fears surrounding a global recession," Giveans said.
