Sovcomflot - Secured Contracts First

SCF is a key transporter of liquid energy through harsh seas, a segment that will become all the more important as Russia expands its LNG projects in the Arctic. Though conventional rates, in our view, could soften from 2020 levels through 2021, SCF's medium- and long-term charters, together with its relatively low leverage, reduce its sensitivity to volatility in spot rates. In addition, the increasing share of long-term time charter contracts, with revenues set over the useful life of the vessel, ensures higher cash flow predictability and cheaper funding.> Focus on transporting liquid energy. Almost all of the SCF fleet is devoted to either transporting crude oil, oil products and LNG, or servicing offshore production platforms. Thus, SCF generally has a top-tier client base, which helps to protect it from payment arrears and to keep its working capital low.> Repositioning from conventional freight toward "industrial" projects. The company's business model is increasingly focused on so-called "industrial" exposure - vessels chartered on long-term, fixed-rate contracts for specific projects. These include LNG and LPG tankers, as well as shuttle vessels and platform supply vessels involved in specific offshore energy projects. These revenue sources are less volatile than conventional shipping. Their share in TCE revenues was already 50% in 2019 and we expect them to grow to 70% by 2025.> Repositioning into LNG transport. Russian gas companies have a comparative advantage in global LNG markets, as they are able to sell LNG at low prices on a full-cost basis. We believe that SCF has the specialized expertise in operating in harsh environments required to service these projects, while further repositioning away from oil and into gas seems like a reasonable strategy given global energy market trends.> SCF less sensitive to lower conventional rates than pure conventional operators. Though conventional rates look set to fall in 2H20 and 2021 - meaning lower revenues in the oil and oil product segments - we believe SCF should be quite resilient. Only 50% of its overall TCE revenues come from the conventional fleet, and within the conventional business only around 55% of TCE revenues are based on spot prices.> Dividends of at least $225 mln guided for 2020, 50% payout thereafter. The company guides a dividend payment from the 2020 results (to be paid in 2021) of $225 mln, subject to BoD and shareholder approval. Thereafter, it will target a 50% payout ratio.> Initiate with a BUY. Our sum-of-the parts approach yields a target price of R127 per share, and we initiate coverage with a BUY recommendation.