Morgan Stanley Lays Out Ardmore Shipping's Bull, Bear Cases And Downgrades To Equal Weight

Morgan Stanley has downgraded Ardmore Shipping Corp ASC to Equal Weight from Overweight amid continued weak global refinery margins in the near term as product oversupply persist.

"Despite weak demand and low refinery margins, a low order book keeps rates above breakeven and ASC profitable," analyst Fotis Giannakoulis wrote in a note.

However, rates remain above break-even levels, as the order book is at an all-time low and fleet supply growth declines.

"As global product inventories decline and refinery margins recover, MR rates start gradually improving averaging $16kpd in 2017 and $17kpd in 2018, allowing ASC to generate solid profits and pay a dividend of ~$0.45 in 2017 and over $0.60 in 2018," Giannakoulis noted.

Further, new export-oriented refineries in the Middle East and Asia are expected to drive further growth in trade, in addition to ton-mile expansion through growing dislocation of refining capacity.

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However, Giannakoulis cut the price target on the stock to $8 from $9.5.

Meanwhile, the analyst's bull case calls for a price target of $13 based on assumption that global trade in refined product strengthens significantly as oil demand rises, benefiting from low oil prices and better macro.

The bull case also assumes MR2 vessels earn $22kpd, allowing ASC to generate $90 million of operating cash flow and about $2.30 EPS. Further, the thesis assumes ASC distributes 60 percent of its EPS and market sees about a $1.10 dividend.

On the other hand, Giannakoulis' bear case calls for a price target of $5 as "high new building deliveries in 2016 and a softer freight rate environment drive asset values 20 percent below our base case."

At time of writing, shares of Ardmore Shipping were at $7.11, down 6.63 percent on the day.

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