When the toughest question a company management team gets on its quarterly earnings call is just how it is going to return all that capital to shareholders, it is a sure sign of good times.
That is the case at present for the clean products market, and it was for executives of Irish product tanker owner Ardmore Shipping as they faced equity analysts on Tuesday following another profitable quarter.
Ardmore chief executive Anthony Gurnee and chief financial officer Bart Kelleher were able to roll out some clear positives.
The New York-listed owner had just paid out a shareholder dividend of $0.19 per share, in line with its policy of paying out one-third of adjusted earnings.
It has sliced net debt to 18% at $110m, helping it to lower its cash breakeven to $14,000 per day.
And the company reported a net profit for the quarter of $23.7m, beating analyst estimates by a penny per share. That pushed first-half profits to $66.9m, trebling the total from 2022.
Enquiring minds
Still, Ardmore got questions, as Evercore ISI analyst Jonathan Chappell pressed on capital allocation.
“I don’t recall your leverage ever being this low, I don’t recall your liquidity ever being this high, and yet if we annualise the seasonally low dividend, you’re still in a single-digit yield and the stock is trading at one of the biggest discounts in the peer group,” Chappell said.
“It does feel like your shares are probably the best use of capital today. Does that ever become part of this capital allocation mix?”
Kelleher responded that while Ardmore set its capital allocation policy, the focus was on a dividend that would be sustainable through the cycle, not share repurchases.
“We see continued runway for delevering, to continue to bring down our breakeven and improve the quality of earnings, also to continue meaningfully investing in our fleet and always exploring accretive growth opportunities,” Kelleher said.
The CFO added that Ardmore has previously stated it is willing to return further cash to shareholders in the form of a special dividend at times when it has built a higher cash position.
Gurnee added that with one-third of earnings going to dividends and more than one-third going to capital expenditures on vessels, “what’s left is there to continue delevering — I don’t think we’ll continue to delever at the same rate as we did last year”.
Gurnee said: “It’s a good ongoing debate about dividends versus buybacks. But at the moment, we’re focused on dividends.”
Analyst Omar Nokta of Jefferies picked up the baton from Chappell, asking about what conditions would trigger payment of a special dividend.
“What does it take for the balance sheet, in terms of debt reduction, for you to feel comfortable to pay out a special [dividend]?” Nokta asked.
“If you have some banner quarter in 4Q, is that good enough for you to pay out a special or do you want to bring the debt down to a certain level before you entertain the idea of a special dividend?”
Gurnee said Ardmore is “taking it as it comes”, adding “the board would be very happy to pay a special under the right conditions, but we can’t predict that or give any guidance.”
The questions of share buybacks and special dividends aside, Nokta was, nonetheless, pleased with Ardmore’s quarter and rates guidance for the third quarter, which significantly exceeded Jefferies’ expectations.
In particular, Ardmore’s disclosure that it had fixed 45% of days at $26,100 per day for its MRs was well above Jefferies’ call of $21,000. Jefferies hiked earnings expectations to $0.41 from $0.31, with Wall Street consensus at $0.37.
Jefferies maintained a “buy” rating on the stock, but elevated its price target to $18 from $16.
The stock, nonetheless, was down almost 5% in midday trading to $13.40.
Tuesday’s discussion did not touch on a disclosure on Monday that private Scorpio Holdings — backer of product tanker giant Scorpio Tankers — had taken a 5.33% stake in Ardmore on a passive basis.
