DHT - DHT Holdings: In A Sweet Spot

2023-03-16 07:18:15 ET

Summary

• Market dynamics are positive for owners of crude oil tankers, and we believe this will continue for a couple of years.
• A payout ratio of 100% of earnings should remunerate shareholders with attractive yields.
• The excellent balance sheet is a protection against any potential downturn.

Investment thesis

In our last article on DHT Holdings ( DHT ) from 25th of November last year, titled "On Very Solid Footing " we pointed out the higher earnings and dividends to come.

Favorable market dynamics are still the case for owners of crude oil tankers and it is going to take time for that to change.

As DHT have come out with Q4 and FY 2022 financial results it is a good time to look at how they did and what to expect going forward.

Q4 and FY 2022 Financial Results

Their net profit jumped from $7.5 million in Q3 to $61.3 million in Q4. That translated to an EPS of $0.38.

The first nine months of the year were not particularly profitable as the EPS for the entire FY 2022 was only $0.37 per share. It was Q1 with its loss per share of $0.10 that dragged down the overall result for the year. It is of course also a stark reminder to all that this type of business experiences large swings in earnings. That is something investors and prospective buyers of DHL have to bear in mind.

The average TCE for Q4 came in at $56.900 per day.

With their new dividend policy of paying out 100% of net profit, the dividend for Q4 was also $0.38 per share.

We should look at the dividend history too.

It is important to bear in mind that we can speculate on what it is going to be, but if history does teach us anything, then consistency is not something we should bank on.

Analysts did question management about the capital allocation and soundness of a 100% payout ratio during the last earnings call on the 14th of February. At this point in time, the dividend is preferred rather than share buybacks and there is not much interest to buy new or second-hand tonnage at prices they now see.

For the dividend going forward, we believe that the next few quarters will see an increasing dividend just like we saw in 2022. Therefore, we think it is reasonable to hope for at least a similar level of dividend as Q4 or possibly even higher dividends. Based on the present level of $038 per share it would give shareholders a yield of about 13%.

Next up is the balance sheet.

Let us remind our readers what we wrote in our last article:

In times of uncertainties around the world's economy and rising interest rates, we look for companies with great balance sheets. DHT fits that description."

Long-term debt stood at $367 million as of the end of 2022. Cash on hand was $126 million.

DHT has reduced debt to the point where its leverage has come down from 22.6% at the end of Q3 to 19.4% at the end of Q4. This is based on net debt to market values for the ships. The net debt per vessel was down from $15.4 million to $11.8 million q-o-q.

The current scrap value for a VLCC is about $26 million.

Their weighted average cost of outstanding debt and revolving credit facilities is equal to LIBOR plus 177 bps. Six months LIBOR is sitting at 5.2%.

Business development

Allied Shipbroker reported on 13 March that they had seen exceptional rates last week for crude oil tankers.

VLCCs trading in the spot market had estimated average earnings closing on Friday at close to $70,500 per day. That was an increase of 92.5% w-o-w. It is caused by more long-haul voyages of crude. There were even talks of some ships earning more than $100,000 per day.

We have earlier pointed out favorable fundamentals for large crude oil tankers as the supply and demand dynamics are positive for ship owners.

As of the 1st of March 2023, the present fleet of VLCCs in the world was 882 vessels.

There is very little demolition happening because earnings are high and older less attractive vessels are being used in what is described as the " shadow fleet ". These are ships being sold to people who will trade their ships pretty much anywhere regardless of sanctions and regulatory requirements.

There are only 18 new VLCCs scheduled for delivery, with 16 this year and no other newbuildings coming out until 2025 when 2 vessels are scheduled for delivery. This number is quite manageable to absorb. We like to look at the number of vessels in a percentage of the fleet. That is an increase of only 2%.

Although demand for crude oil from refineries is dependent on the general economy, with less demand expected in a weak economy, we are still optimistic that demand will hold up quite well;

China is only now starting to open up after 3 years of COVID-19 restrictions. It was only on the 15th of March that China opens up its border to foreign visitors to come without restrictions. According to an article by Reuters on the 17th of February, China is set for a record import of crude oil in 2023.

The longer voyages we are seeing are also not going to go away soon, even if the Ukraine war ended tomorrow. It is unlikely that the whole world will immediately go back to relying on Russia for its crude oil and gas.

The trade patterns we now see are likely to stay around for a long time. More ships are needed and that will take roughly two years even when companies start to order new crude oil tankers.

Conclusion

We have been bullish on DHT since our first Buy stance in August last year. The share price has gone up 50% since our change from a Hold to a Buy call.

With an even more aggressive dividend policy, we believe it might send the share price even higher.

As such, our Buy stance continues.

For further details see: