UBS Is Upgrading Scorpio Bulkers

In a report published Tuesday, UBS analyst Spiro Dounis upgraded shares of Scorpio Bulkers Inc (NYSE: SALT) to Buy from Neutral with a price target raised to $3.50 from a previous $2.75 ahead of impending vessel sales that will "lift" a "funding overhang" that has created a negative sentiment on the name since the fourth quarter 2014.

Scorpio Bunkers announced on April 21 that it has entered into agreements to sell three Capesize newbuilding dry bulk vessels, a Kamsarmax newbuilding dry bulk vessel and three LR1 newbuilding product tankers for around $290 million in aggregate.

"In our view, the name has effectively traded on option value and now presents an opportunity with 40 percent upside," Dounis wrote. "We believe additional vessel sales are imminent based on management's comments and news reports."

Dounis said the sale of six additional vessels will "close the funding gap" and "pads" the balance sheet for newbuilding working capital and operational cash burn.

However, Dounis cautioned that the positive developments at Scorpio Bulkers does not reflect a bullish view on the entire industry. In fact, the analyst noted that the market is likely to struggle to recover through 2017. His positive views of Scorpio Bulkers merely reflect "deep value" given that shares have been trading at what he calculated to be a 40 percent discount to its net asset value.

Finally, Dounis stated that the company has previously suggested it could be a target for potential acquirers. While a takeout premium is "premature and unlikely" at this point, the analyst did suggest that the company's fleet is "one of the most attractive" in the space.