Clarksons Platou Securities expects a recovery in LR1 tanker rates to push earnings above break-even for the fleet acquired by Singapore’s Hafnia.
The BW Group company spent $413.8m on 12 modern vessels from Scorpio Tankers in the week ending 28 January.
Frode Morkedal, managing director of equity research at Clarksons Platou, said he understands the shipowner intends to fund the transaction at 100% loan to value (LTV) from sale-and-leaseback transactions at attractive terms.
This indicates a cash break-even of about $14,500 per day for the vessels, he estimates.
Hafnia has said it is in advanced discussions with ICBC Financial Leasing over leasebacks.
“As long as freight rates are above this level, the transaction is accretive to free cash flow per share,” Morkedal said.
Although LR1 earnings averaged around $11,000 per day in 2021, the investment bank believes it is very likely that levels will be above $14,500 per day in 2022.
This is due to the improving market outlook with limited fleet growth and strong oil demand growth, the analyst argues.
Sooner or later...
This should sooner or later result in higher refinery runs and increased product trade volumes, he believes.
UK shipbroker Howe Robinson currently assesses average LR1 spot rates at $2,500, however.
“Hafnia is clearly leveraging up, which in a cyclical view makes sense,” the analyst said.
“The ability to achieve 100% LTV is a strong testimony of their balance sheet,” Morkedal added.
Including the acquisition of Chemical Tankers Inc last month, Hafnia has added 44 modern vessels without compromising cash liquidity, Clarksons Platou said.
On the back of the Scorpio deal, the investment bank’s 2022 earnings per share forecast has been lifted from $0.21 to $0.25, assuming on LR1 rate of $18,000 per day.
Target price lifted
“Based on our positive market outlook for products and chemical tankers, Hafnia’s attractive valuation and low cash break-even rates, we reiterate our ‘buy’ rating but lift our target price to NOK 35 [$4].”
This was previously NOK 31.5. The stock was trading up a fraction at NOK 17.72 in Oslo on Wednesday.
“We expect positive free cash generation from the second quarter, although actual evidence of a rate improvement is likely needed for a real improvement in the stock price,” Morkedal said.
Hafnia’s acquisition price reflects a rise of 15% from previously quoted broker values.
But Morkedal said: “Transactions with modern product tankers have been relatively few in the past and the company argued that the price paid compares favourably [to] rates achieved relative to, for example, the MR sector.”
The company has now cemented its leadership position within the LR1 sector with 73 vessels under commercial management, representing 19% of the world fleet, he added.
