Eight months after first calling a rebound in trough tanker markets that he now admits was “far” too early, Evercore ISI analyst Jonathan Chappell has insisted that the fundamentals are still intact for that rebound to materialise.
It just may take a while, as the veteran researcher has revised 2022 earnings estimates on the eight tanker stocks under his coverage to project all losing money, except for Danish product tanker owner Torm, which should squeeze out a $0.06 per share profit.
Yet with the equities sitting at an average 40% discount to their net asset values, Chappell is also cautiously advising investors that there is upside to be had even in another loss-making year, ahead of a 2023 that is projected to return the sector to pre-Covid-19 health.
“Tonne-mile demand growth is set to easily surpass capacity increases in each of the next two years,” Chappell told clients in his latest tanker market update.
“All told, although our spot rate forecasts fall short of ‘bullish’ territory, sustainable improvements going forward are likely to bring the industry back into the black, and, more importantly, convince investors that the downturn is ending.”
Chappell acknowledged that 2022 not only is dawning with horrid tanker rates but with a volatile stock market roiled by inflation fears and the reality of a higher interest-rates climate as the US Federal Reserve tightens monetary policy.
Combined with the approach of fourth-quarter earnings season that will reveal more deep losses for the tanker peers, “the impetus to get off the sidelines is de-minimus”, he conceded.
Still, he finds reason to start buying.
“We believe in the fundamentals, even if timing is becoming increasingly difficult to pinpoint, thus we recommend adding exposure to those tanker stocks with material upside and nothing remotely close to liquidity risk,” Chappell wrote, citing crude powerhouse Euronav, Teekay Tankers and clean-products owner Ardmore Shipping as choices.
For those with more risk appetite, “a hint of an upturn can quickly turbocharge the stocks…with tremendous operating, but also financial, leverage once the worst case is off the table”, he added, citing Scorpio Tankers in clean products and Frontline in crude.
Yet Chappell threw a bone to those who aren’t ready to bite just yet.
“If you want to wait until rates are already off to the races, we don’t blame you,” he wrote.
Current trading sees Frontline, which historically has often won a premium valuation to NAV, leading the tanker group at 88% of NAV. VLCC owners DHT Holdings and Euronav are at 75% and 70%, respectively, with the group laggards being Teekay Tankers at 52% and Ardmore at 43%.
While Evercore has reduced year-end price targets, he still sees Teekay Tankers increasing share value by 99%, Torm by 95%, Scorpio Tankers by 93% and Ardmore 89%. The least-promising is Herbjorn Hansson’s Nordic American Tankers (NAT) at 32%.
NAT is Evercore’s only “hold”-rated tanker stocks, with “buys” on all the others.
While the recovery has been more stubborn than Chappell imagined, he was the first major analyst to call an end to the tanker-market boom cycle in May 2020.
