BUY OR SELL-Is Nordic American a good bet in weak rate scenario?
By Sakthi Prasad
BANGALORE, May 18 (Reuters) - Nordic American Tanker Shipping Ltd's (NAT.N) risky spot market strategy has paid dividends to its shareholders so far, helped by the prevalence of high spot freight rates.
But lately, with a fall in Suezmax time-charter equivalent rates .BASZMX, the big question is, will the company's chartering strategy of operating in the spot market succeed in a period of weak freight rate environment?
A shipping company can either rent out its fleet on a day-to-day basis, known as a spot-charter, or sign long-term contracts called time-charters, which is relatively a safer bet. Spot charters boast of lucrative rates in boom time, but may lead to an uneven revenue stream.
Of the 13 analysts covering the stock, no one has a "buy" rating according to Reuters data. Six analysts have "hold" ratings, while seven analysts have "sell" rating.
SELL ON SPOT EXPOSURE
"This (spot market) has been their strategy all along and I don't think they are going to change it," analyst Natasha Boyden of Cantor Fitzgerald said by phone.
"Coming to the second and third quarters, yes their earnings are going to come down -- rates are coming down pretty dramatically," she said.
Boyden added that the company's significant exposure to spot market can be a headwind.
"Obviously they are going to be exposed to the vagaries of the spot market. They are going to be exposed dramatically to the volatility of the spot market," Boyden said.
She also said as the freight rates go down, the company's dividend will also come down dramatically and added it is tough to forecast spot rates.
"The current spot rate is showing around $20,000 and our forecast for the full year is around $29,000," she said.
"But given the current environment and the downward pressure on spot rates there is a good chance that they could come down off those rates," Boyden said.
The analyst said without the protection of time charter coverage in a very volatile market, the company faces lot of downward pressure to its dividend and earnings.
"Given the fact that they are so exposed to spot rates right now and the rates are going to come down -- we expect the dividend to be significantly lower, and we think the company is significantly overvalued," she said.
HOLD ON VALUATION
"Their strategy has led to good stock performance -- you really cannot argue against that," Oppenheimer & Co analyst Scott Burk said by phone.
"However, certainly spot oriented strategy in a time of decreasing day rates is going to mean lower earnings and dividend potential -- and that is clearly the risk people face," Burk said.
Burk estimates the company's quarterly dividend to go down to 52 cents, implying an annualized dividend rate of $2 dividend for the year.
"So that would imply the stock would have pretty significant amount of downside, if that is the kind of dividend they would give for the next few quarters," Burk said.
"Why don't we have a "buy" rating? Because the valuation is very expensive, relative to the rest of the group. High valuation and high spot exposure is a potential negatitve for the stock," Burk said.
"Why don't we have a "sell" rating? There are two reasons. One, the stock has consistently outperformed the peers and if it continues it may do well -- even if its got a high valuation," he said.
"Secondly, oil prices have been moving up and that has been typically supportive for tanker stocks. So, if oil prices are moving up, you don't want to short the tankers," Burk said. (Reporting by Sakthi Prasad in Bangalore, Editing by Dinesh Nair) ((sakthi.prasad@thomsonreuters.com; within U.S. +1 646 223 8780; outside U.S. +91 80 4135 5800; Reuters Messaging: sakthi.prasad.reuters.com@reuters.net))
