DMER: Positive Earnings Outlook for Tankers

The tanker market dynamics in the short to medium term are skewed in favour of market players as oil prices are expected to stay low and oil producers are not expected to cut supply in a hurry in a bid to protect their market share, Drewry Maritime Equity Research Assessment (DMER) believes.

“We see a positive earnings outlook for the Tanker shipping sector with a sustained demand for crude oil backed by higher refinery runs in emerging markets and increasing long-haul trade. We expect tanker companies to continue enjoying a good-run in FY15. However, the risk is excessive optimism leading to a high orderbook build-up, which could soften rates towards the end of FY16,” said Nikesh Shukla and Rahul Kapoor, analysts at DMER.

DMER has rated Euronav and DHT Holdings Attractive, while it has maintained a neutral rating on NAT because of rich valuation.

According to the rating, Euronav (EURN US), the fifth largest crude carrier, will see a sharp rebound in earnings in FY15 backed by the recent acquisition of 19 VLCCs and an uptrend in the tanker market.

The company is well-positioned to advantage of the increasing long-haul crude trade between AG and the Atlantic basin to Asia-Pacific.

The company has a reasonable net gearing of 53% at the end of 1Q15, and has recently announced dividend policy to shell-out 80% of earnings that translates into a yield of ~6% for FY15.

“Its market capitalisation of USD 2bn makes it a more liquid investment. We have assigned it a fair value of USD 17 per share, which translates into an upside of 25% from the current level,” Drewry said.

DHT Holdings (DHT US) is expected to register double-digit growth in earnings between FY14 and FY17, assisted by the benign operating environment and scheduled newbuild deliveries. Its balanced chartering strategy enhances visibility in revenue generation.

“DHT’s gearing is slightly higher than that of its peers, but we believe it shall comfortably service its debt. The acquisition of Samco Shipholding will boost DHT’s revenue stream and provide direct access to the technical know-how of ship management,” DMER added.

DMER accords attractive rating to DHT with a fair value of USD 10 per share based on charter adjusted NAV valuation.

According to DMER, Nordic American Tankers (NAT US) will return to the black in FY15, as the company’s entire fleet is deployed on the spot market, which will accelerate earnings growth. It has a strong balance sheet, with one of the lowest leverage in the industry.

However, DMER believes the current share price has factored in the company’s growth prospects considering that it is trading at a rich valuation of ~40% premium to its NAV, and therefore, assign it a neutral rating with a fair value of USD 11.50 per share. At the same time, it can be looked upon as a dividend play considering its history to pay dividends consistently. It currently offers a yield of 11% for FY15.