TRMD - TORM plc: Favorable Market Outlook And Attractive Financial Position

2023-03-31 02:48:14 ET

Summary

• Oaktree, the majority shareholder of TORM, which owns about 65% of the company’s Class A common shares, started selling 5 million shares.
• However, there is no need to be panicked, as the company’s fundamentals suggest that TORM is on the right path.
• LR2 and MR freight rates are significantly higher than the five-year average.
• Also, relying on its cash position and concentrated customers, TORM can pay its debts and reward its shareholders.
• TORM stock is a buy.

TORM plc ( TRMD ) stock price dropped by 13% on 30 March as the company announced the commencement of a secondary public offering of 5 million Class A common shares by Oaktree Capital Management. One might think that due to the recent stock price drop, it is time to sell TRMD. However, the company's financial position and the tanker vessels' demand outlook, do not suggest that. On the supply side, driven by hiked new building prices and limited shipyard spaces, product tanker ordering in 2022 remained low and is expected to remain low in 2023. On the demand side, due to the changing trade flows and reopening of China, TCE rates are supported. Also, according to the company's new agreements to increase its capacity and its investment plan, I expect TRMD's operating days to increase. In January and March 2023, TRMD entered into agreements to purchase seven LR1 vessels and three MR vessels. I expect TRMD's financial results to be strong in 2023. The stock is a buy.

Financial results

In its fourth quarter and full-year 2022 financial results, TRMD reported revenue of $1443 million, compared with $620 million in 2021, as the company's TCE revenues hiked. Following Russia's invasion of Ukraine in February 2022, and subsequent sanctions imposed on Russia, the price of crude oil jumped. Also, the uncertainty and potential for rerouting of oil trade flows, caused crude tanker freight rates to soar. Overall, trade recalibration caused by geopolitical tensions in Europe and low fleet growth in 2022, caused the utilization of the global product tanker fleet to jump. Thus, TRMD was able to report an attractive annual report, with improved earnings metrics and cash position. The company's TCE earnings, gross profit, and EBITDA increased to $982 million (up 159% YoY), $782 million (up 316% YoY), and $743 million (up 443% YoY), respectively. The company's net loss of $42 million in 2021, turned into a net profit of $563 million in 2022, and its free cash flow of $(243) million in 2021 increased to $513 million in 2022. While the company's OPEX per day remained flat year-over-year in 2022, its TCE per day increased from $13703 in 2021 to $34154 in 2022.

TRMD reported a 2022 diluted EPS of $6.80, compared with a diluted loss per share of $0.54 in 2021. The company paid dividends per share of $4.63 in 2022 and paid no dividends in 2021. "In the second quarter of 2022, TORM introduced a new Distribution Policy where we intend to distribute on a quarterly basis excess liquidity above a fixed threshold cash level as of the balance sheet date. For each quarter, the threshold cash level will be determined as the product of cash requirement per vessel and the number of owned and leased vessels in TORM's fleet as of the balance sheet date," the company stated.

The market outlook

TRMD has two cash-generating units, including Main Fleet and Marine Exhaust. The Main Fleet which is comprised of LR1, LR2, and MR vessels, accounted for 99.8% of the company's total revenues in 2022. All of TRMD's vessels (in the Main Fleet) can carry multiple sizes of cargo and sail over short and long distances across all seas and oceans.

TRMD primarily carries refined oil products for its customers. For a tanker company, freight rates and customer base are the two main elements of its profitability. TMRD's 20 largest customers accounted for 74% of its total revenue in 2022. It is worth noting that in DWT terms, the company's owned fleet accounts for 3% of the existing global product tanker fleet. The company states that considering its concentrated customer base, the continuing geopolitical tensions may not affect its operations directly. Thus, we should mainly focus on freight rates to asses TRMD's market outlook. According to Figure 1, in 2022, MR TCE earnings, LR1 TCE earnings, and LR2 TCE earnings accounted for 69.6%, 10.1%, and 19.9% of the company's total TCE earnings, respectively. TRMD's product tanker fleet TCE per day increased 149% YOY to $34154, as LR1 and LR2 TCE per day increased by 157% to $36879 and $39612, respectively, and MR TCE per day increased by 145% to $32795. Also, it is important to know that a large part of TRMD's TCE earnings growth in 2022 is linked to the second half of the year. Figure 2 shows that in the third quarter and fourth quarter of 2022, TCE rates were significantly higher than in the first half of the year. The continuing change in refined product trade flows may increase tanker freight rates in the following months. Europe is still trying to displace refined Russian products from the distant market. Also, Russia is trying to find new destinations for its refined products as EU sanctions have come into effect on February 2023. In the past few months, Brazil's import of naphtha and gasoil/diesel from Russia increased . Also, Saudi Arabia started importing diesel from Russia on March 2022. Thus, I expect a favorable market condition for TRMD in the following quarters.

Figure 1 - TRMD's TCE earnings in 2021 and 2022 by vessel type

Figure 2 - TRMD's quarterly earnings data by vessel type

Figure 3 shows clean LR2, LR1, and MR TCE rates in the past six months. We can see that on average, TCE rates in 1Q 2023 were lower than in the fourth quarter of 2022. Thus, I don't expect TRMD's 1Q 2023 TCE earnings to be as high as in the previous quarter. However, the important thing to consider is that in the past few weeks, the LR2, LR1, and MR TCE freight rates have been increasing. Figure 4 shows that TCE rates for MR IMO3 vessels increased from $27950 per day in the week ending 1 March 2023 to $30000 in the week ending 29 March 2023. The TCE rates for LR1 vessels increased from $36500 per day in the week ending 1 March 2023 to $37500 per day in the week ending 29 March 2023. Finally, the TCE rates for LR2 vessels increased from $40000 per day in the week ending 1 March 2023 to $45000 per day in the week ending 29 March 2023.

Figure 3 - Clean LR2, LR1, and MR rates

Figure 4 - Weekly time charter estimates

TRMD performance

TRMD's cash and equivalents increased continuously in the past quarters. The company's cash increased from $145 million in 4Q 2021 to $321 million in 4Q 2022. Also, the company's debt level decreased by 15% year over year to $967 million in 4Q 2021. This resulted in a significant drop of 35% in the company's net debt level to $647 million from $991 million in the same period last year. Due to a strong financial and operation year as a result of hiked freight rates, TRMD's total equity reached $1504 million at the end of 2022, compared to $1052 million at the end of 2021, up 43% YoY. TORM's net debt is well below its total equity level, providing ample capacity for shareholder benefits and risk management. Overall, TORM's capital structure is healthy and positioned well for future growth opportunities (see Figure 5).

Figure 5 - TRMD's capital structure (in millions)

Upon analyzing TRMD's cash structure, it appears that the company is poised to generate a substantial amount of operating cash flow in 2022. Specifically, the company's cash operation experienced a significant boost of over 1800% in the fourth quarter of 2022, reaching approximately $248 million compared to $13 million during the same period in 2021. The company's capital expenditure accrued in 4Q 2022 was significantly lower than in 4Q 2021. It is worth noting that the company's capital expenditures decreased from $369 million in 2021 to $120 million in 2022. As a result, TRMD generated $235 million in free cash flow during 4Q 2022 - a marked increase from the negative free cash flow of $34 million in 4Q 2021. This made the company able to enter into separate agreements to acquire LR and MR vessels, which support its cash flow generation in the future. Given these factors and TORM's solid balance sheet and cash structure, it is anticipated that the company will experience long-term growth (see Figure 6).

Figure 6 - TRMD's cash structure (in millions)

Summary

In terms of the financial results, TORM recorded very strong results in 2022, and the company's profitability ratios and debt ratios suggest that TORM is well-positioned to benefit from the favorable refined product market condition. The stock is a buy.

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