Seeking Alpha

Profit From Hafnia's Blackout Period

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Includes: SEA, STNG
by: Jan Martinek
Jan Martinek
Special situations, long only, short-term horizon, Growth
Summary

Hafnia is one of the largest tanker companies in the world with market capitalisation of around USD 1 billion.

IPO placed in mid November. The main shareholder was the main buyer in the IPO, an indication of an attractively priced IPO.

There is no research coverage on Hafnia due to the Blackout period. Therefore the company is still off radar screens of many investors.

10 December, 2019 the Blackout ends - the five brokers that worked on the IPO will start publishing the research which should generate interest in the stock.

Tanker rates are highest in two years due to new environmental regulation. The situation should continue for most of 2020. That would likely drive the valuations up.

Profit from the Blackout and the Fundamentals

Hafnia Ltd (HAFNIA:OSL) is one of the largest tanker companies in the world with market capitalisation of around USD 1 billion. Hafnia is an attractive one month play on the Blackout end and six month attractive play on its fundamentals.

One month play summary

Hafnia launched its IPO on 11/11/2019 at 25.45 NOK per share. All the banks that participated in the syndicate are in Blackout period. During the Blackout the banks can not publish research on the company. No research means limited new buyers. Limited new buyers means share underperformance. The stock currently trades only 1% up at around 25.70 NOK, while its closest peer Scorpio tankers is up around 10%. The Blackout ends on 10 December. The company is meeting all syndicate banks/brokers in the first week of December to answer questions for the research reports, which should come shortly after 10 December. Since the IPO the company underperformed its closest peer by 15%. The analyst reports should bring new buyers, liquidity and price re-rating.

Six month play summary

The tanker rates are highest for the last two years. It is caused by several factors. The main tipping point is ship refurbishment due to new environmental regulations. The refurbishment with scrubbers should take between two and three weeks per ship. In reality the ship is out of operation for six to eight weeks. That limits tanker supply and pushes rates up. The situation will persist until at least mid next year. The result is simple - peaking rates and increasing share prices.

Hafnia introduction

Hafnia is one of the world's leading oil and oil product tanker owners and operators based on number of vessels andtotal carrying capacity. The Group provides transportation of oil and oil products to leading international oil companies, major chemical companies, as well as trading and utility companies. The company operates from four global offices and employs 1350 people.

Hafnia IntroductionThe Group operates a fleet of 180 vessels in pools including newbuilds, of which 102 are owned or chartered-in and the remainder is chartered on a fee basis for other shipping owners. According to the company its fleet value is estimated at around USD 2.5 billion and the NAV is around USD 1.1 billion, which represents USD 3.1 (28 NOK) per share.

Pool EconomicsThe scale of operations as the largest product tanker operator is the major competitive advantage for Hafnia. The charter services provide additional margin for the business and contribute to Hafnia being one of the most cost-efficient operators in the industry. As a result Hafnia has an industry low cost based compared to tanker peers.

Operating costs

The easy check of the above is the Hafnia performance relative to its closest competitor Scorpio Tankers (STNG). The recent rate increases were not reflected in Q3 numbers; they will be fully reflected in Q4. Hafnia therefore broke even in Q3 and while Scorpio Tankers lost USD 47m. Accumulated net profit in HAFNIA for 9M19 is USD 40m, where Scorpio Tankers has a net loss of USD 60m (USD 100m difference). In summary, Hafnia achieved ~8% ROE during the difficult H1’19 , with all the US peers reporting net losses. Hafnia 9m19 presentation is below.

Market overview

The tanker market is taking off into 2020, product tankers the biggest beneficiaries from Q1’20. Long-range tankers (LR2) rates are already around 7xthe level seen a year ago. Long-range tankers (LR1) and Medium range tankers (MR) are also 200% above last year’s level (see the slide at conclusion section)

Price volatility and rising refinery margins will boost trade activity. The company expects more arbitrage trading and long-haul cargoes to impact the market positively. The positive rate growth was driven by scrubber installations, increased unrest in the MEG, and Iranian vessels, COSCO ships and units traded with Venezuela excluded from the market (though COSCO ships could come back now) all factors pulling in the same direction now.

One of the main factors is the scrubber installations. The refurbishment with scrubbers should take between two and three weeks per ship. In reality a vessel is out of operation for six to eight weeks. The situation will persist until approximately mid next year. The result is simple - peaking rates and increasing share prices should continue. Shipping brokers believe that this will continue at least till mid 2020. The company completed all its planed scrubber installations.

marketAnother contributing factor is low order book for new tankers. I enclose two slides from Scorpio Tankers latest investor presentation, that confirms the same view on the market.

scorpio 1

Scorpio Tankers expect further market tightening into 2020.

scorpio 2

Valuation

Shipping companies are valued based on P/NAV multiple, where NAV is based on market value of the fleet and based on forward looking EV/EBITDA.

Pareto Securities, one of largest brokers in Scandinavia prepared the below table, that shows that clean tanker peer group is now priced at 1.16x P/NAV and EV/EBITDA of 5.1x

Based on the above Pareto derived Hafnia per share valuation of NOK 30 -36,6, which represents 17%-43% upside from the current share price of 25.6 NOK.

Conclusion

In my view, Scorpio Tankers is the closest peer and therefore its the best company to derive valuation from.

  • Scorpio now trades at USD 34.9 per share which represents 1.3x P/NAV and 5.5x EV/EBITDA.
  • Based on this valuation Hafnia valuation should be NOK 33.3 - NOK 39.5 per share.
  • As mentioned above while Hafnia is very similar size company, its operations are more cost-efficient (see above the discussion of the nine months financials of both companies).
  • Hafnia is better managed and does not have corporate governance issues that investors are rumored to face at Scorpio Tankers. Based on this my base target valuation is NOK 35 per share.

Risks factors

The primary risk factor is change of investor sentiment on the world markets. The other risk includes change in shipping rates, increase in fuel charges and additional operating costs, change in environmental regulations, shipping routs disruptions, etc.

Disclosure: I am/we are long HAFNIA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.