Noble Capital Markets Inc has maintained an Outperform rating and $8.50 per share price target on Scorpio Bulkers Inc (NYSE:SALT) following recent second-quarter results, highlighting upside to dry bulk market optionality, fleet age profile, and a strong performance from the Scorpio Tankers (NYSE:STNG) investment.
In a note to clients, Noble analyst Poe Fratt pointed out that while SALT’s 2Q2019 results were slightly below his expectations, its Scorpio Tankers (STNG) investment performed well and non-cash gain of $53.1 million was recognized.
He said SALT’s adjusted underlying earnings (EBITDA) of $16.9 million missed his estimate of $19.7 million mainly due to lower TCE (time charter equivalent) rates, which drove a $3.0 million revenue variance, and higher general and administrative (G&A) expenses.
However, the analyst added, he has increased the 2019 EBTDA estimate to $103.0 million to reflect a recent strong dry bulk market rebound, and has introduced a 2020 EBITDA estimate of $150.4 million, which is based on TCE rates of $13,856/day.
Financial flexibility for SALT
The Noble analyst noted that recent financings have boosted liquidity and enhanced SALT’s financial flexibility. Adding: “Once all of the financings close, financial flexibility will materially improve, and we hope that stock buybacks are more active.”
The analyst also pointed out that the Scorpio Tankers investment is adding value and is currently close to 52% in the black, so the question for the firm will be whether to monetize the investment or not.
He concluded: “While SALT has begun to recover and is up strongly over the past four months (up 17% in 2Q2019 and 49% so far in 3Q2019), we remain convinced that SALT will continue to benefit from a firmer dry bulk market.
“We also like the stock price leverage that the STNG investment adds. As result, we are maintaining our outperform rating due to the favorable risk/reward profile even after recent strong stock price performance.”
Recent scrubber orders
Earlier this month, Scorpio Group acquired a further 23 scrubber units for $33.3m from Pacific Green Technologies Inc (OTCMKTS:PGTK) to be installed on its bulker and tanker fleets as it continues to equip its vessels to meet the requirements of the IMO 2020 sulphur cap.
Scorpio Tankers has ordered a further 14 ENVI-Marine systems from Pacific Green for $20.3m, bringing its total number of scrubbers contracted from the company to 66 following a 52 systems order announced in December 2018.
Meanwhile Scorpio Bulkers added a further nine scrubber systems from Pacific Green for $13m bringing its total number of exhaust gas cleaning systems ordered from the manufacturer to 37.
Until the latter half of 2018 Scorpio was reportedly against installing scrubbers to meet the requirements of IMO 2020 but did a volte face in October 2018 announcing it would fit the exhaust gas cleaning systems to all 146 vessels in its listed bulker and tanker fleets.
In a statement on the firm's website, Pacific Green Technologies executive director Scott Poulter commented: "Scorpio Bulkers has invested in the latest generation of fuel-efficient vessels and the hybrid-ready ENVI-Marine system will give the company the return-on-investment and flexibility it needs to face the complexities of IMO 2020.”
He added: “We are one of the few marine scrubbing companies with the scale to fulfil major orders. We now have an order book in excess of $200m and the technical know-how, the people and the facilities to manufacture our Systems on a large scale.”