We would like to shed some more color on the value of the Frontline Ltd's (FRO) fleet and our estimate of its NAV.
In recent months, FRO has sold some of its older vessels and all of its modern vessels. The summary of which is in the table bellow:
It is obvious that the market value of Frontline's fleet were significantly lower than their book values. Frontline recorded losses of about 50% on the sale of the older vessels and more than 25% on its modern vessels.
Frontline's fleet is worth significantly less than the debt the company has. Some of the vessels sold are being scrapped and most of them have been sold at considerable losses. The following table presents our estimate as of the market value of the vessels and the debt related to them (based on information in Frontline and Ship Finance public disclosures, recent reported transaction and our estimates. We have applied zero value to the ITCL vessels and reduced correspondingly the ITCL debt):
Lets assume we are wrong in our estimates.
In order to cover the debt, Frontline's vessels would need to be worth $1.215 billion, or 15% more than our estimate. As 10% of the vessels prices have been fixed for sale, it would make this 15% even more challenging to justify. That means the NAV of a share of Frontline is negative.
But this would be only to cover the debt. What about shareholders?
As of this morning, the market valued Frontline was $330 million. That would suggest a value for the vessels of $485 million more than our estimated value (46%).
The value of the equity of Frontline is economically an option on the company's survival and of it being able to repay its debt to Ship Finance (SFL) (its leasing counterparty and a related party). This option drives most of its value from the probability that tanker rates will increase. However, as we have explained in our previous analysis, Frontline is pretty much indifferent to the increase in tanker rates (up to a certain level) and only a significant and quick rate increase will enable it to earn any money. Therefore this option is in our view basically worthless and as such also the common equity of the company.
The following is a table summarizing the current bullish analysts covering FRO, their price target, the value assigned to the vessels and the premium over our calculation of the tankers values.
We doubt there is any value in Frontline for shareholders. Neither in the value of its assets, nor in its ability to generate cash going forward.
This brings us back to our discussion on our long position in DHT (DHT holdings).
The following is our analysis of the DHT fleet, the estimated vessels values, their scrap value, their current earning rates and our worst case LT earnings scenario:
According to the same methodology applied to FRO, DHT's NAV is $0.67 per share (book equity-difference between market value of vessels to book value of vessels)/diluted number of shares = $288m-($441m-$266m)/168m= $0.67, approx. the share current share price.
To summarize, we are short FRO for the following reasons:
- Trading at a infinite premium to our estimated NAV (of Zero).
- In order to justify its share price, its assets value would need to increase by 46% over our estimated values.
- Needs its vessels to earn approx. 50% more than current rates to start to generate any cash due to the cash sweep (not going to happen).
- If rates actually increase 50%, it will need to share 25% of the upside with its counterparties.
- It is not paying dividends, and probably will not pay any in the future.
- Its main shareholder refused to invest more money in it and bought the newer vessels for his new vehicle (Frontline 2012 Ltd).
- There is a fair chance it will run our of cash if rates don't pick up.
And we are long DHT which is:
- Trading at a slight discount to our estimated NAV ($0.67).
- Will earn 100% of any prices increases in the tanker market.
- Is still paying dividends as it is generating cash.
- Has very minimal debt repayments until 2015.
- A new investor with approx. 30% holding joined the board and put fresh equity into the company.