The product tankers market had a solid last quarter. The Red Sea crisis, declining diesel inventories, and new refining capacity expected to come online might extend the rally in the product tanker stocks. One of the best ways to get exposure is TORM Plc (NASDAQ:TRMD). Along with Scorpio Tanker (STNG) and Hafnia (OTCQX:HAFNF), TRMD is the third-largest product tanker globally. It has 93 vessels with an average age of 12 years, and 72% of the ships are scrubber-equipped. The company has the highest return on equity and pays dividends with 20.7% yields TTM. TRMD has superior liquidity figures and a conservative capital structure. One of the drawbacks, though not decisive, is the older fleet. The company trades at 112% P/NAV, and its multiples are well below its historic peaks. TORM is an enticing company for income-minded investors venturing into the shipping industry. I give TRMD a buy rating.
Tanker market catalysts
The demand and supply disbalance keeps growing. The chart below from the last presentation shows both sides of the equation:
Ton-mile demand is rising at a higher rate than tonnage supply. The increase in the tons-mile demand is driven by multiple catalysts: declining diesel inventories, growing refinery dislocation, sanctions, and price caps on Russian crude oil and CPP. The diesel inventories reached their lowest levels in 2022, well below their five-year average. A colder winter will be an additional catalyst for long-haul imports. Since 200 2.7m b/d refining capacity has been taken out. Australia closed two of its four operational refineries. New Zealand followed by shutting down its sole refinery. Meanwhile, additional capacity has been added, mainly in China and the Middle East. This adds another pressure on the supply lines, creating demand for extended long-haul imports. The tonnage supply is a function of an aging fleet, order book, and shipyard capacity. The current order book is at 11%, while 9% of the global product tanker fleet is over 20 years old.
The Red Sea crisis is the wild card disrupting the supply chains. The most profound effects are on container shipping. Most of the Chinese export to Europe travels through the Red Sea. The second most impacted categories of ships are crude oil tankers (Aframax and Suezmax) and product tankers (primarily LR2).
TRMD has a large fleet of 93 ships. In 2023, the company took delivery of 22 vessels and sold 7. More details about the TRMD fleet are shown below:
TRMD has the best fleet composition to benefit from the Red Sea crisis, owning 20 LR2 vessels, representing 21% of the company`s fleet and 25% of the global LR2 fleet. STNG does not have any LR2 tankers, while HAFNF owns 8 LR2s.
The last deal was announced in November 2023. TRMD entered an agreement to purchase eight second-hand LR2 vessels. The ships have been built in South Korea in 2010-2012. The cost of the acquisition is $399 million. The transaction consists of a $239 million cash payment and 5.5 million shares. The average age of the fleet is 12 years. Compared to its STNG (7.8 years) and HAFNF (8.1 years), TORMD has the oldest fleet. TRMD installed scrubbers on 67 vessels, representing 72% of the fleet. For reference, STNG scores the highest at 78%, and HAFNF is the underdog at 18%.
TRMD management has been doing a great job expanding the company’s fleet while maintaining a conservative balance sheet and returning profits to its shareholders. The image below shows some of the company highlights.
One thing that caught my attention was that EBITDA grew (15.6% YoY) more than TCE revenues (15.0% YoY). The company has maintained its costs and expenses relatively stable to achieve that. The fleet value increased by 13.2% YoY following the new vessel acquisitions. The NAV grew for the same period by 7.2%. TRMD has an impressive LTV of 32% pro forma, including the vessels.
TRMD gives priority to spot contracts. Nevertheless, in 3Q23, the company entered a couple of two-year period charters. I believe the clever way (and most challenging) is to play the cycle and shift the weight between spot and period contracts. While the rates are rising, it is better to take spot contracts. However, they will not move north for eternity, and at this point, it is wise to lock in the higher rates.
The list below shows the largest shareholders in TRMD.
Oaktree Capital Management LLP (OAK) owns 62.4% (in 3Q23) of company shares. TRMD holding represents 21% of Oaktree’s portfolio. The fund focuses on alternative investments. Among its most prominent positions are StarBulk (SBLK), Vale (VALE), and Vista Energy (VIST). OAK sold shares for $85 million in December 2023. I consider this fact as a temporary headwind that has been priced in. The company’s CEO, Jacob Medgaard, owns 0.39% of the shares. The remaining stock owners, like Norge Bank and its subsidiaries, are the usual suspects.
TORM balance sheet
The company’s liquidity position is bulletproof with $240 million cash, $724 million operating earnings LTM, and $857 million operating cash flow LTM. The operational cash flow exceeds multiples times the interest expenses. TRMD`s management has been prudent with the company`s financials over the years.
Even at the bottom of the tanker cycle in 2020, TRMD had 82% total debt to equity and 5.8 EBITDA/Interest expenses. Since then, the company has reduced its debt to 69% total debt to equity and 44% total liabilities to total assets. 3Q23 TRMD reported $1,088 million in total debt (including lease obligations) and $886 in long-term debt.
The company has a low-risk maturity profile, as seen below.
The debt payments are well distributed, with only a few lump sum payments (bult payments) on the horizon in the next five years. 76% of the company`s debt is at fixed rates, minimizing the company’s default risk even further. TRMD, as seen, has an excellent liquidity position, covering multiple times its outstanding debt payments.
Finally, it`s time to compare TRMD with STNG and HAFNF’s total debt to equity, EBITDA/Interest expenses, and quick ratio.
TRMD scores the best results with a 1.6 quick ratio and 15.0 EBITDA/Interest expenses. Its total debt-to-equity ratio is between STNG and HAFNF. In general, all three enterprises have healthy balance sheets. TRMD, however, fares better at the liquidity metrics.
Profits and dividends
Let’s see how TRMD fairs compared to STNG and HAFNF. The chart shows Gross margin, EBITDA margin, and ROE. All parameters are LTM.
TRMD has the highest ROE, while STNG commands the highest margins. The latter has the youngest fleet in the group with the highest percentage of scrubber-equipped vessels. The former means lower maintenance and repair costs and reduced time, while the latter means higher day rates. Both combined result in broader profit margins.
TRMD management has proven its ability to build a quality fleet while avoiding overleverage. Eventually, TRMD turned into one of the most efficiently run tanker companies.
The chart compared crude oil and product tankers based on ROTC and total debt/total capital. The direct competitors in the list are HAFH and STNG. All three fall in the higher percentile.
TRMD pays the best dividends in the group, with a 20.67% TTM yield or $1.46/share.
STNG’s strategy to enhance shareholder value accents on share buybacks. The bottom section of the image compares buyback yield. STNG creates value for its shareholders with a 17.9% buyback yield. Both approaches have pros and cons from the company and investors’ perspectives. I prefer dividend stocks. However, I reconsider my preferences when I see double-digit buyback yields some tomes. TRMD maintains the highest payout ratio at 84% to pay its generous dividends. They are well covered by the company’s excess profits and cash reserves.
TRMD trades at 112% P/NAV. STNG and HAFNF trade below their NAV per share at the current stock prices. I assume Mr. Market calculated the company`s strengths into the price. However, STNG seems the most expensive based on EV/Sales and EV/EBITDA. TRMD P/TBV, like its P/NAV, is the highest in the group.
Looking at the charts above, all three seem to be reasonably priced. I have been a long tanker for the last several months and am not planning to exit soon. If I had to enter the tanker market now, I would do it patiently with a fraction of the capital devoted to TRMD. The generous dividend helps to swallow 112% P/NAV.
Two are the most apparent risks for TRMD: high exposure to spot contracts and higher fleet age. One must fully embrace the market volatility and the risk of being wrong to get the optionality of high returns during rising day rates. TRMD is stashed with cash and contracted some of its ships under period charters. Both act as a liquidity cushion in case of declining day rates. The aging fleet leads to higher maintenance and repair costs. On average, the operational costs are around 18% until the fifth year of the vessel’s life. Approaching the tenth year, they climb to 22%; at the end of the vessel’s life, they top 31%. TRMD ships are, on average, 12 years old, meaning the operational costs are above 22%. With age comes some benefits—the capital costs of acquiring the vessel decrease, netting the rising repair costs.
TRMD was one of my top picks in 2023. Since then, its shares have risen considerably. The company is superbly positioned to profit from tanker market fundamentals. TRMD owns 25% of LR2 vessels globally. Why is that important? The Red Sea crisis first impacts the containers, and the next in line are Aframax/Suezmax crude oil tankers and LR2 product tankers. In the end, all tankers benefit to a different degree, but those mentioned above are the first to do so. TRMD maintains a conservative balance sheet while updating its fleet. The company realized a superior ROE compared to STNG and HAFNF. The dividend yield is beyond tempting and well-secure, given the company`s liquidity. Mr. Market is also aware of TRMD’s strengths, valuing its shares at 112% P/NAV.