Scorpio Bulkers Inc. (SALT, Financial), the $540 million international shipping company reported its first-half 2017 results last month. The company registered an impressive 162% revenue growth to $72.5 million while having delivered (-)$48 million in losses compared to an (-)$83 million loss in the prior-year period.
As observed, total operational expenses rose 5.5% year over year to $103.4 million while financial expenses climbed 37% to $17.5 million, resulting in a smaller loss in the recent period compared to the prior year.
Valuations
Scorpio Bulkers has recorded losses since fiscal year 2014, including the recent 10 quarters, therefore leading to no trailing price-earnings (P/E) ratio. Meanwhile, the company trades less than its book value at 0.59 times versus the industry median of 1.24 times and a price-sales (P/S) ratio of 4.16 times versus 1.14 times.
Average 2017 revenue and earnings per share estimates indicated forward multiples of 3.48 times and (-)10.8 times.
Total returns
Despite the continuous losses in recent years, Morningstar data reveals Scorpio Bulkers has outperformed the broader S&P 500 index so far this year, having generated 41.6% total returns while the index provided 11.7%.
Scorpio Bulkers
According to filings, Scorpio Bulkers is an international shipping company that was incorporated in the Marshall Islands pursuant to the Business Corporations Act on March 20, 2013.
The company owns and operates the latest generation of new building dry-bulk carriers with fuel-efficient specifications and carrying capacities of greater than 30,000 dead weight tons (dwt).
All of the company-owned vessels have carrying capacities of greater than 60,000 dwt. Its vessels transport a broad range of major and minor bulk commodities, including ores, coal, grains and fertilizers, along worldwide shipping routes and are employed primarily in the spot market or in spot market-oriented pools of similarly sized vessels.
As of its recent annual report, Scorpio Bulkers had an operating fleet of 48 vessels, which consisted of 47 wholly-owned dry-bulk vessels and one chartered-in dry-bulk vessel. Upon delivery of an expected vessel in the second quarter of 2017, the company’s owned fleet is expected to have a total carrying capacity of approximately 3.4 million dwt.
Scorpio Bulkers had two segments: Kamsarmax and Ultramax.
Kamsarmax
Kamsarmax includes vessels ranging from approximately 77,500 dwt to 98,700 dwt.
In the first half of the year, Kamsarmax's time charter equivalent (TCE) revenue shot up by 160% year over year to $31.2 million (1). In review, TCE revenue in Kamsarmax dropped (-)8.7% in the same period last year.
Ultramax
Ultramax includes vessels ranging from approximately 60,200 dwt to 64,000 dwt.
In the first half, TCE revenue in Ultramax rose 164% to $41 million. The recent growth rate is stronger than what Ultramax had in the prior-year period when it was at 60%.
Sales and profits
In the past two fiscal years, Scorpio Bulkers registered a revenue growth rate average of 26.5%.
Cash, debt and book value
As of June, Scorpio Bulkers had $149.3 million in cash and cash equivalents and $606.3 million in debt with a debt-equity ratio of 0.66 times versus 0.53 times in the year-ago quarter. Overall debt climbed 16% year over year, or $82.9 million, while equity declined by (-)$72.8 million.
No blue sky elements were observed among the company’s $1.53 billion in assets, while book value decreased (-)7.4% year over year to $916 million.
Cash flow
In the first half, Scorpio Bulkers’ cash flow from operations rose to $789,000 compared to (-)$46 million in the prior-year period. As observed, increased cash flow came from the company’s vessel depreciation, deferred financing costs amortization and loss or write down on assets held for sale.
Capital expenditures were $23 million, leaving Scorpio Bulkers with (-)$22.6 million in free cash outflow versus (-)$264 million the year before. In the first half, the company also raised $25.9 million in debt net repayments.
The cash flow summary
Over the past three years, Scorpio Bulkers allocated $1.94 billion to capital expenditures, raised $546 million in debt (net repayments and other financing activities) and raised $534 million in share issuances.
Conclusion
There appears to be a strong turnaround in business operations as the company recorded a significant rise in revenue as of the recent half. Meanwhile, operating expenses are very high (about 1.4 times revenue), resulting in significant losses for the shipping company.
Interestingly, the company has kept afloat and demonstrated a moderately leveraged (at 0.66 times) balance sheet. Scorpio Bulkers, nonetheless, needs debt and possible further share issuances to sustain this high expenditure business.
Ten analysts have an average price target of $9.87 a share versus $7.25 at the time of writing. Applying two-year revenue growth, P/S multiple averages and a 25% margin indicated a per-share figure of $3.
Meanwhile, asking a 30% discount from the company’s book value indicated $8.6 a share.
In summary, Scorpio Bulkers is a speculative buy with $9 a share target.
Notes
- Company filings: Time charter equivalent (TCE) revenue, a non-GAAP financial measure, is vessel revenues less voyage expenses (including bunkers, port charges, broker fees and other miscellaneous expenses that we are unable to recoup under time charter and pool arrangements).
TCE revenue is included because it is a standard shipping industry performance measure used primarily to compare period-to-period changes in a shipping company’s performance irrespective of changes in the mix of charter types (i.e., spot charters, time charters and pool charters), and it provides useful information to investors and management.
Disclosure: I have Scorpio Bulkers common and preferred shares.
