Sovcomflot - Weak 4Q20 May Mark Trough

Sovcomflot (SCF) has disclosed weak 4Q20 IFRS results. We think the 1Q21 results will likely be weak too, though in March the spot tanker market has improved substantially, especially the Aframax segment, which is the most important for SCF. Below we show the sensitivity of SCF's EBITDA and bottom line to tanker rates in 2021. In our base case, we still expect net income to be well below last year's level. This means that while there is a fixed dividend tranche of $225 mln guided to be paid this year, next year's dividend should be smaller. We see May-June as a focal point when the oil and freight rate dynamics could cause a turnaround in the financials. Other things to look out for are the dividend cut-off date (expected in late May) and the release of the 1Q21 results (on the week starting May 17).> Freight rates have started to normalize... Late February and March brought some optimism back to the tanker market, with Aframax earnings rebounding to well above the average levels of 4Q20. Importantly for SCF, the North Sea and Baltic market was rather firm, supported by higher cargo volumes. > ... and there are several things to watch as 2H21 approaches. Low freight rates, higher scrap prices and regulatory pressure should support scrapping. Given that the order book for oil tankers remains low at 8.9% of the total fleet, no significant net fleet growth is expected for the next few years. The key to market recovery clearly lies in transport demand. > Oil demand recovery in 2H21 should help. The expected recovery of oil demand in 2H21 is likely to drive the rebound in freight rates. The OPEC+ decisions on supply over April-June will be in focus.> New contracts could provide new long-term growth opportunities. The company is considering several new tenders for industrial business contracts. The CEO mentioned that some new details could be presented in May-June. Total still has an option to take two vessels similar to the one it contracted with SCF in January.> Weak 1Q21 results likely priced in. By mid-May, the market should have digested the 1Q21 results, which we expect to be weak, as spot rates have been low and some of SCF's one-year time charters expired (its mix changed from 45% TC/55% spot in 3Q20 to 35%/65% in 4Q20).> BUY reiterated, target price cut. We have updated our SOTP valuation, cutting our target price to R120 per share. We reiterate our BUY. On our base-case forecasts, the stock trades at a 2022E EV/EBITDA of about 6, versus the 7.2 average for conventional tanker operators and more than 9.0 for purely industrial players, while SCF's revenues are split 50/50 between the conventional and industrial segments.