An analyst who has been a thorn in the side of Scorpio management for years has notably come to its defence over a recent intra-group investment that has drawn governance criticism from others.
Deutsche Bank’s Amit Mehrotra is the unlikely defender of the recent deal, which saw Scorpio Tankers raise $300m in fresh equity, including $100m from its sister public company, Scorpio Bulkers.
The related-party investment has drawn fire even from analysts who acknowledge that Scorpio Tankers needed the money to get through the remainder of a trough in the products market.
Mehrotra has been a persistent Scorpio critic, especially over related-party management fees for vessel buys, sales and management that since have either been eliminated or reduced by the companies.
But in a client note today, he set out on a point-by-point dismantlement of the arguments against Scorpio Bulkers’ investment.
Mehrotra makes reference to the companies’ stock ticker symbols: SALT for Scorpio Bulkers and STNG for Scorpio Tankers.
“From an unemotional and objective perspective, SALT’s investment in STNG makes significant economic sense to us, and could be the best investment management has made to date,” Mehrotra argues.
The Deutsche analyst asserts that Scorpio Bulkers is not the mammoth dry-bulk owner the company had envisaged prior to its 2013 IPO owing to market timing and the need to sell off much of its fleet, particularly its capesize vessels.
“It’s reasonable to question SALT’s existence as an independent shipping company other than evolving into effectively an investment fund with significant ships, low leverage and plenty of cash to deploy however management chooses,” he writes.
“From this perspective, SALT management has traded in cash — which is a depreciating asset, and increasingly so — for product tankers at highly distressed valuations, which we think will pay off handsomely for shareholders over the course of 2019.”
Scorpio Tankers sold its shares well below its net asset value, with some estimates around 60% of NAV.
Mehrotra takes issue with comparisons between Scorpio and the Navios group, which drew fire for a controversial loan from Navios Acquisition Corp to Navios Holdings in 2016.
“We think this comparison is not correct,” Mehrotra writes, noting that Navios Holdings had an older fleet and a negative NAV.
“STNG has one of the youngest fleets in the industry and a positive net asset value — these are critical differences…and as such makes the comparison null and void.”
Finally, the Deutsche man dismisses the notion that Scorpio Bulkers is no longer a “pure play” bulker company just because it has invested in products tankers. It has merely invested cash, and has not physically acquired tankers, he reasons.
“We feel the negative criticism on SALT’s investment in STNG is misguided and more reflective of emotion than economics,” he concludes.
Mehrotra retains a “buy” rating on both companies.
