Michael Webber of Wells Fargo Securities hiked the New York-listed tanker owner’s grade to “market perform” from “underperform” a day after it posted a loss, which prompted a sell-off that saw the stock plummet 14%.
With a negative net asset value estimate of $3.29 per share, the researcher says the John Fredriksen-backed company is “significantly overvalued” at current levels of around $3.15 but believes the risk/reward profile is “relatively balanced”
“We expect Frontline to continue to employ its vessels in the spot market and while we believe this exposure to the weak rate environment will remain a headwind for shares, we believe substantial negative sentiment is already priced in as it is simply difficult for rates and sentiment to get much lower,” he told clients in a morning alert.
Webber said he doesn’t expect to see “continued linear downside” going forward and urged investors who are shorting the stock to proceed with caution as he believes the days of making quick cash by picking low hanging fruit in the tanker space are drawing to a close.
“There is significant option value within Frontline and while we think that option is still overvalued given how aggressive recent downside has been, the fact that tanker rates have been hitting systemic floors for eight consecutive weeks amid what may be bottoming sentiment, and the possibility of more positive Q4 seasonality, we simply no longer advise being short Frontline and its inherent optionality,” he explained.
Of the 26 equity analysts following Frontline, Webber and his rating are among the minority but still in good company. At last check, sixteen had stamped the stock with a “sell” and only one, Omar Nokta of Dahlman Rose, branded shares with a “buy”.
