Morgan Stanley Tethers Euronav, Downgrades To Equal Weight

Stock valuations in the maritime industry are discounting the softening rate environment, with most stock trading below their NAV.

Morgan Stanley’s Fotis Giannakoulis downgraded the rating on Euronav NV Ordinary Shares EURN to Equal Weight, with a price target of $9.50.

Dividend At Risk

Giannakoulis mentioned that while vessel values had declined 20 percent year-on-year, further downside was expected as earnings-linked dividends disappear and secondhand value see a further decline of 10–15 percent.

However, the analyst pointed out that Euronav was among the “best volatility trades in the space, combining market exposure & limited dilution risk,” while adding that “EURN's low debt and its large VLCC fleet and high trading liquidity make it a favorable trading stock to play the high volatility and seasonality of the crude tanker rates.”

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Weathering The Downturn

Giannakoulis also noted that Euronav was also one of the largest VLCC and Suezmax owners, globally, while being highly levered to tanker spot rates, given that 90 percent of the company’s vessels operate either in the spot market or in the low cost, owner-led VLCC Chartering tanker pool.

On the other hand, the analyst expressed caution, stating that the tanker space was entering a cyclical downturn that was likely to last through 2018. Also, the near-term market outlook for crude tankers was likely to remain weak as global oil production slowed down.

Cash Flow

Crude tanker demand is expected to lag fleet supply in 2017–2018. However, Giannakoulis pointed out that Euronav generated robust free cash flow due to its low leverage and cost structure, which allows the company to have below market cash breakeven.

“That makes it a favorable play among investors and allows it to trades at slight premium to NAV helped by its high liquidity in the stock,” the analyst added.

Full ratings data available on Benzinga Pro.