Sovcomflot - 2022 Should Be Better

After updating our financial forecasts for SCF to incorporate the conventional segment's weak performance in 2021, we cut our target price by 7% to R112/share. In our view, SCF's current share price reflects a scenario in which tanker rates on average hold close to the depressed levels of 2021, fully ignoring the recent recovery in rates. Our new TP still implies 45% upside, so we reiterate our BUY rating.> Spot tanker rate trends were positive in 4Q21. After reaching a 30-year quarterly average low of $3.3k/day in 3Q21, spot Aframax tanker rates rebounded to $14.3k/day in mid-December. However, this is still far below the 1H20 average of $37.7k/day (prior to the IPO).> We expect the recovery to continue but aren't overly optimistic. OPEC expects global crude oil demand to surpass the pre-pandemic 2019 level in 2022 (+4.2 mln bpd or +4.3%). This, coupled with limited tanker capacity expansion (the global tanker order book as a percentage of the fleet size is the lowest in 25 years), gives us hope that the recovery in tanker rates will continue next year. However, the Omicron strain has curbed our optimism somewhat. We conservatively assume an average Aframax realized TCE rate of $17k/day for SCF in 2022, which is 55% above the 2021 level and near SCF's 10-year average. > Forecasts lowered for conventional segment. We now forecast a 26% y-o-y drop in adjusted EBITDA to $678 mln for 2021 (18% below our previous forecast), along with a 62% y-o-y drop in adjusted net income to $115 mln (40% below), which implies a dividend yield of just 2.4%. Our previous forecasts also implied a recovery in spot rates, but at a faster pace and to higher levels (to $20k/day by end-2021).> 2022 should be much better. We see the conventional segment's NEVT growing 81% in 2022, contributing to a 9% increase in SCF's total NEVT. This should translate into a 13% increase in SCF's total adjusted EBITDA and a 62% y-o-y jump in adjusted net income. > Earnings volatility to ease. We expect the conventional segment's share in SCF's total TCE revenues to rebound to 39% in 2022 after dropping to a record low of 31% in 2021 on the back of weak pricing. However, we think its contribution will fall to 30% by 2025 (or 26% including JVs) due to the removal of aging tankers and the expansion of the more predictable industrial segment (since the IPO, the segment's backlog has grown 24% to $24.8 bln).> BUY reiterated, target price cut. We have updated our SOTP valuation and cut our target price by 7% to R112 per share. The stock remains a BUY. On our forecasts, it trades at a 2022E EV/EBITDA of about 6.5, versus averages of 6.9 for conventional tanker operators and 8.4 for purely industrial players. For context, more than 60% of SCF's revenues over the next four years should come from the industrial segment.