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Deutsche Reiterates Scorpio Tankers As Top Pick After 'One Of The Most Bullish' Conference Calls They've 'Heard In Over A Year'

ASC, STNG | August 1, 2016

Deutsche Bank reiterated its Buy rating on Scorpio Tankers Inc. (NYSE: STNG) after the company's second-quarter results and "one of the most bullish conference call[s] we've heard in over a year."

The brokerage said, "Management communicated significant confidence in product tanker fundamentals [...] and reaffirmed its commitment and confidence in its dividend (10 percent yield)."

"Net/net STNG continues to be our top pick and we see shares re-rating back to our $9 price target on greater confidence in the outlook," analyst Amit Mehrotra wrote in a note.

Scorpio Tankers underlying second-quarter EPS of $0.04 matched Deutsche Bank's estimate and was consistent with the "sharply lowered expectations over the past month."

The company disclosed that roughly half its third quarter days came in around 15 percent lower rates versus those in the second quarter, implying a potential for an even lower EPS sequentially.

"This should not be a surprise and we note expectations are largely already there," Mehrotra noted.

Financially, Scorpio reported $165 million in cash, $2 billion in debt and $280 million in contracted capex, as of July 27.

"Importantly we think the company is currently active in add'l repurchase activity, providing another source of return above-and-beyond 10 precent dividend yield," Mehrotra continued.

Further, Scorpio noted a 75–95 percent confidence "that rates will inflect higher in the seasonally strong back half of this year." The analyst expects "rates to remain elevated in 2017, largely on lower supply growth which should translate to higher utilization."

In addition, Mehrotra sees total product tanker capacity to increase 1.9 percent by year-end 2016 and 2.7 percent in 2017, "making the product tanker market one of the few (if not only) bright spots in shipping."

Mehrota added that this is positive for the Buy-rated Ardmore Shipping Corp (NYSE: ASC), although the analyst prefers Scorpio given its relative market cap and liquidity.

Shares of Scorpio Tankers closed Friday's regular trading at $4.76. Based on Friday's close, the price target of $9 represents a potential upside of 89 percent.

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