After an aggressive M&A attempt by Frontline that by some accounts is still ongoing but from a financial standpoint appears dead, the company acquired BW’s fleet of VLCCs through a combination of new shares and cash, and has emerged as one of the largest listed crude tanker companies with 30 VLCCs and 2 Aframaxes on a fully delivered basis. Although we expect the company to continue scaling down its dividends, we believe DHT has enough cash to maintain a yield of some 3-4% through the trough given its low cash break-even vs peers and recently secured USD 383m in new debt. If our earnings base case were to undershoot significantly, the company can further ease the strain on cash through the abolition of dividends and/or increasing leverage on its balance sheet (net LTV peak at 67% in 3q18E). Despite being our top-pick in the crude tanker sector, we initiate coverage of DHT with a SELL recommendation and target price of USD 4.0 (-6%) given the lackluster short-term outlook for the sector.
Valuation: We calculate a current NAV of USD 5,1/sh (P/NAV = 0.84, peers at 0.86), but see downside due to continued falling asset prices, aging of the fleet and limited cash flow generation. Our target price of USD 4.0/sh is based on a weighted average of current/future NAV and mid-cycle multiples in 2019E.
Market overview: After enjoying a brief peak in 2015, oil tanker earnings were soon subdued again as overly eager owners contracted too many ships in the cyclical expansion, resulting in a rapidly increasing net fleet growth from 1Q16. The elevated supply growth persists, with a net fleet growth of 2.0% in 1Q17 alone. We forecast net fleet growth of 7% in 2017E, 4% in ‘18E and 2% in ‘19E. Although supply growth in 2019E implies a pivotal point in the cycle, recent increase in contracting (annualized YTD 5% of the fleet, 336% above same period 2016) could hamper a potential recovery in 2019.
We forecast a low but steady demand growth of 3% in 2017E, 4% in ‘18E and 5% in ‘19E. Although implied demand growth in 2016E was negative, US crude oil imports on a tonne-mile basis increased some 18% and has continued the trend YTD. However, we expect the tonne-mile growth to abate or even reverse going forward as consumption growth is muted while recent increase in the rig count will likely increase domestic production (see graphs below). Looking to China, crude oil imports on a tonne-mile basis increased around 14% in 2016E, but we expect the growth to subside somewhat as leading indicators point to a cooling of the Chinese economy.
In sum, we expect utilization to fall 3%p to 82% in 2017E, down another 1%p in ‘18E before the recovery starts in ‘19E with utilization rising 2%p to 83%. Given the forward-looking nature of share and asset prices, and the historical significant relationship between the two; we forecast 3Q17E-2Q18E to represent the share price trough. More specifically, we expect that increasing earnings will lead to rising asset and share prices from 2H18E, and believe just prior or just after the next winter season (circa Oct’17-Feb’18) to be an opportune moment to BUY, all else equal.