Investment Thesis
International Seaways (NYSE:INSW) is a shipping services company that deals in the transportation of petroleum products and crude oil. The company has recently reported its quarterly results, which were impacted by the inflationary pressures. However, it has significant growth potential due to positive industry dynamics and its expanding fleet which can accelerate its growth.
About INSW
INSW deals in offering shipping services to customers through commercial pools, voyage charters, and time charters. It is the owner and operator of a fleet of vessels used to transport petroleum products and crude oil in the International Flag trade. As of December 2022, Its fleet includes 74 International Flag vessels (8.1 million dwt), including VLCC, Suezmax, Aframax, LR2, LR1, and MR product carriers. The company operates in two reportable segments: Crude Tankers and Product Carriers. The Crude Tankers segment consists of a fleet of Suezmaxes, VLCCs, and Aframaxes used in the global transportation of crude oil. This segment contributes 38.36% to the company’s total revenues. In its Product Carriers reportable business segment, the company operates MRs, LR1 product carriers, and LR2 product carriers that transport refined petroleum products. This segment earns 61.64% to the total annual revenues. After the firm and Diamond S Shipping merged on July 16, 2021, the company has a combined fleet capacity of 102 ships.
Financials
The crude oil market has been severely impacted in the past due to geopolitical issues. In addition, crude oil has also been replaced with renewable energy sources to promote clean transition. However, after analyzing the whole picture, it is observed that oil consumption sectors have increased significantly over the years including aviation, industry, petrochemicals, and residential. Also, the limited electrification options for commercial vehicles have significantly contributed to higher oil demand. As per the World Oil Outlook 2023, the global demand for energy is anticipated to rise by 23% up to FY2045, out of which global demand for oil can soar by 17% creating high growth opportunities for the participants in the industry. As per my analysis, these positive trends in the industry can lead to an increased need for oil transportation. Identifying these scenarios, the company signed agreements and announced plans to build four scrubber-equipped, dual-fuel (LNG) ready, LR1 vessels with K Shipbuilding in Korea for a total estimated cost of $231 million. In August 2023, two contracts were finalized, and in October 2023, two more options were exercised. It is anticipated that the vessels will be delivered between the second half of 2025 and Q1FY26. These vessels should arrive in its niche, the Panamax International Pool, which has continuously outperformed the market. I believe this fleet optimization program can act as a catalyst to boost the company’s growth in the future as it can help it to transport additional quantities of crude oil and petroleum products globally and increase its profit margins by catering to the growing demand in the industry.
The company has reported its quarterly results. It reported a revenue of $241.70 million, up 2.06% compared to $236.82 million in Q3FY22. This growth was mainly resisted due to adverse macroeconomic conditions. The Crude Tankers and Product Carriers segment revenues stood at $114.30 million and $127.50 million respectively. Net income declined by 13.65% YoY from $113.42 million to $97.37 million. It reported a diluted EPS of $1.99. INSW reported $138.97 million in liquidity and adjusted EBITDA stood at $150.94 million.
The results were impacted by the inflationary pressures that led to high expenses and lower net income. However, as the inflationary environment is cooling down and long-term industry growth is positive, I believe the company can make the most of this opportunity by increasing its fleet which can help it to transport additional petroleum products and crude oil and generate more revenues.
Ms. Zabrocky, President and CEO of INSW stated that they anticipate the tanker markets’ favorable supply and demand dynamics to sustain robust tanker earnings in the foreseeable future. She pointed out that the limited growth on the supply side was due to evolving regulations and restricted new build capacity in the near term at shipyards, while the world fleet continued to age. She mentioned that positive tanker demand fundamentals were being supported by rising oil demand and increased tanker utilization resulting from the shifting global energy trade. She also noted that geopolitical tensions were further emphasizing the importance of energy security.
Seeking Alpha estimates that INSW’s predicated revenue for FY2024 might be $1.01 billion. I believe Seeking Alpha’s estimates perfectly capture the impact of positive tanker demand in the market. The company’s net income margin last year was 45%. After considering the favorable supply and demand dynamics and cooling inflation, I think the company can maintain the net income margin of 45% in FY2024 which gives the EPS prediction of $9.17.
What is the Main Risk Faced by INSW?
The charter prices in the shipping industry are highly volatile and subject to cyclical fluctuations. Changes in the supply and demand of vessel capabilities, together with shifts in the demand for crude oil and petroleum products that are moved worldwide by water, all have an impact on the shifts in charter prices. The company finds it challenging to regulate all the factors that impact vessel supply and demand, and it is also unable to manage the nature, pace, direction, and intensity of changes in industrial conditions. The majority of its vessels are chartered on the cyclical spot market. If the charter rates decrease it could negatively impact the asset values of the company and can further reduce its profitability and cash flows.
Valuation
The oil industry tailwinds have created opportunities for the companies operating in the shipping sector. I believe the company is strongly positioned to capture the growing demand in the market as it has recently focused on a fleet optimization program which can help it to increase its market share and transport more quantities of crude oil by leveraging its increased fleet. After considering all the above factors and EPS calculation in the financial section of this article, I am estimating an EPS of $9.17 for FY2024 which gives the forward P/E ratio of 5.23x. After comparing the forward P/E ratio of 5.23x with the sector median of 9.96x, we can say that the company is undervalued. I believe the company might grow in the coming quarters as a result of positive demand in the industry and its alignment with its expansion of fleet which can help it to trade at its sector median P/E ratio. I estimate the company might trade at a P/E ratio of 9.96x in FY2024, giving the target price of $91.3, which is a 90.2% upside compared to the current share price of $47.98.
Conclusion
The company’s growth was resisted due to increased pressures from macroeconomic conditions. However, as the environment is improving and the industry is growing due to the significance of oil in various industries, I believe the company can make the most of this opportunity and cater to the additional demand as it has recently executed its plans for fleet optimization. Cyclicity can impact its profit margins in the short run. The stock is currently undervalued and we can expect a healthy 90% growth from the current price levels as a result of its recent fleet optimization program. After considering all the factors, I assign a buy rating to INSW.
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