Ardmore Shipping: A Bet On The MR Tanker Market For Income-Minded Investors

seekingalpha04-04

MR tankers market is expected to remain strong in 2024 due to limited vessel supply and growing tonne-mile demand for petrol products.Ardmore Shipping is a niche bet on the growing deficit of MR ...

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The company has an MR-focused fleet with an average age of 9.6 years.FY23 revenue and net income declined despite the strong day rates. However, ASC delivered strong cash flow growth YoY. ASC pays dividends with a 5.43% yield at a 33% payout.The company maintains a conservative balance sheet with 16.9% total liabilities/total assets.Compared to its peers, ASC trades at a reasonable discount. The company has a 94% P/NAV and 13% gross LTV.Suriyapong Thongsawang Note: I previously covered Ardmore Shipping Corporation (NYSE:ASC). In my previous article, I discussed the product tankers market and the company's merits (conservative balance sheet, MR-only fleet, and reasonable valuation). In today's take on ASC, I will review the MRs market, FY23 results, and ASC's valuation. MR tankers market preview The MR market is picking up, as seen in the chart below. Fearnley's 2024 rates are higher than the seasonal 2019-2023 average (Pacific and Atlantic baskets). I expect the MR market to remain strong in 2024. The reason is the deficit of MR tankers, caused by limited vessel supply and growing tonne-mile demand for petrol products. The supply side of MR tankers is shown in the table below from the 4Q23 presentation. ASC presentation The left chart illustrates the fleet's age profile compared to the current order book. In 2023, the average age of the MR fleet was 13.1Y, while the order book is about 8%. However, 47% of the fleet is older than 20 years, so those ships must be replaced in the coming years. The right graph shows the development of MR's order book. The current order book has been at historic low levels for the last 28 years. In conclusion, the MR global fleet is aging faster than its renewal rate. Let's look at the other side of the equation: the demand for CPP (clean petrol products). ASC presentation This chart summarizes all factors impacting the CPP demand: shifting refinery capacity, growing demand driven by China and India, low inventories in the EU, and disrupted supply chains. YoY tonne-mile demand grew by 11% in 2023. All the factors mentioned above are still present, so we have a recipe for resilient MR TCE rates in 2024. Ardmore remains an excellent way to play that theme. Ardmore fleet Unlike the big three in the product tankers game, Scorpio Tankers Inc. (STNG), TORM plc (TRMD), and Hafnia Limited (OTCQX:HAFNF), which have diverse fleets, Ardmore is focused on MR (Mid-Range) tankers and Handysize tankers. ASC owns 1 product MR tanker (49,500 - 49,999 dwt), 17 product/chemical MR tankers (37,791 - 49,999 dwt), and 4 product/chemical Handysize tankers with 25,217 dwt capacity. Besides its own vessels, the company operates four chartered-in product tankers. The average age of the ASC fleet is 9.6 years. In 2023, the company installed scrubbers on four vessels. The plan for FY24 is to retrofit five more MRs with scrubbers. Having scrubbers puts the ASC fleet in an advantageous position in the market due to higher TCE rates for scrubber-equipped vessels. Based on IMO (International Maritime Organization) data, discussed in the ASC 2023 annual report, 19.8% of the global tanker fleet (including only vessels with a capacity above 10,000 dwt) have installed scrubbers. ASC fleet has about one quarter of its ships with scrubbers and plans to continue with the updates. 2023 financial results The chart below shows the rates realized by ASC over the last few quarters. ASC presentation MR Eco rates gradually increased from $27,460/day in 2Q23 to $35,400/day in 1Q24. Chemical TCE growth was not smooth, though it reached 15% between 2Q23 and 1Q24. Fleet average TCE increased by 23% over the same period. The cash break-even cost is $13,900/day FY23. The following table shows ASC's last income statement. ASC 2023 annual report Despite the strong day rates, ASC realized lower revenues and profits in 2023. The company achieved $398 million in net revenue and $155.9 million in EBITDA FY23. Voyage expenses and OPEX decreased YoY, reaching $131 million and $59 million in 2023, respectively. FY23 EPS (diluted) is $2.71 vs. $3.52 FY22. The company scored impressive cash flow performance in 2023. FY23, ASC delivered $159 million in operating cash flow and $134 million in FCF. FY22, it generated $124 million in operating cash flow and $120 million in FCF. The following table shows EPS and FCF sensitivity to TCE rates. ASC presentation At $30,000/day, ASC scores a $3.1/share EPS. If the rates increase by 30% from $30,000/day to $40,000/day, the EPS will grow by 73%. Looking at the FCF becomes more interesting. Any $10,000/day growth in TCE adds $95 million to ASC's FCF. This means a 79% increase in FCF based on FY23 numbers. Dividends Strong cash flow generation means safer dividends. ASC pays dividends with attractive yields, although they are way lower than those of its peers, TRMD and HAFNF. Seeking Alpha Ardmore TTM yields are 5.43%, and the payout ratio is 33.3%. Given the payout ratio below 50%, the dividends are beyond safe. ASC announced a $0.21/share quarterly dividend, 30% higher than the previous quarter's distribution. The FY23 TTM dividend rate is $0.91/share. ASC is not actively repurchasing its shares like STNG. The company's $50 million buyback program was approved in September 2023 (an extension of the old one from 2020), but no shares were repurchased in 2023. Balance sheet ASC's balance sheet is one of the most conservative in the industry. The company has 16% total debt/equity and 16.9% total liabilities/total assets. On December 31, 2023, ASC reported $46.8 million cash, $39.6 million long-term debt, and $94.0 million total debt (including $42 million lease agreements). Low debt comes with low service costs; FY23 ASC incurred $9.6 million in net interest expenses while delivering $128 million in operating income and $159 operating cash flow. Valuation The following chart compares ASC with the other three competitors in the clean tanker market. I added INSW because it also operates a fleet of product tankers (1 LR2 tanker, 11 LR1 tankers, 35 MR tankers). Based on EV/Sales and EV/EBITDA, ASC is relatively cheap. All figures are LTM. Koyfin All companies have distinct fleets (age, size, and scrubber availability). Besides that, they return value to their shareholders in various ways. INSW pays generous special dividends, TRMD and HANF have regular dividends, and STNG bets on systematic share buybacks. The next step is to evaluate ASC's fleet quality PNAV (Prive to NAV) and gross LTV (Loan to Value) vs its peers. Author's data ASC score 94% PNAV and 13% gross LTV. Its fleet is slightly older than STNG and HAFNF, though younger than TRMD. ASC has progressed with scrubber installation. Investors Takeaway Due to its mostly MR-only fleet, ASC does not have a direct competitor in the product tanker market scene. It is a niche stock for investors seeking exposure only to the MR segment. As with every thesis, ASC has its risks. The company-specific financial and operational risks are relatively low, given ASC's conservative balance sheet and relatively young fleet. The main risk for ASC is the declining demand for MR vessels. The reasons could be a sudden supply glut and/or declining CPP demand. The supply side in shipping is inelastic due to the extended time it takes to build a ship. Adding the limited shipyard capacity, I do not expect an oversupply of MRs, at least in the next 18-24 months. On the other hand, the demand for MRs follows the global hunger for refined petrol products and chemicals. As pointed out earlier, the stars are aligned for growing CPP demand in the coming months. Of course, a deep recession could dump my hypothesis in the bin. Nevertheless, for now, I do not expect economic contraction on a global scale.  ASC remains attractive for those who bet on a strong MR market. Despite YoY slightly lower revenues and EBITDA, ASC achieved sizeable cash flow growth. A 5.4% TTM yield at a 33% payout ratio adds another reason to consider ASC. 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