DHT Holdings Inc. ("DHT") was previously written up on VIC in June 2013 by chewy.   It may be helpful to review chewy's write-up before proceeding here - it is located here:  http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/101319.  I figured it was worth putting out an updated write-up on DHT given the changes in the business since last year.

 

1) DHT is trading at 0.94x NAV which compares to peers at 1.1-1.5x.  The discount is unwarranted and should collapse. 

2) The NAV argument today is the easy nearer term money (20%-40% upside), but there is huge (i.e., multi-bagger) upside to the extent asset values recover to historical averages

3) The crude tanker space supply/demand is very attractive right now given that the supply of new ships hitting the water is virtually nil for several years.  

4) The company has six newbuildings which are fully funded from an equity perspective and debt will be easy to procure, i.e., no liquidity concerns

 

At the time of chewy's write-up, DHT was a ~$60-70mm market cap NYSE-listed company that had fallen on hard times as a result of a very weak tanker market.  DHT was founded as a leasing company where the company owned its assets and leased them principally to OSG, which filed for bankruptcy in late 2012.  As a result of the OSG default, the company was forced to find charters for its then eight ships and re-invent itself in the mold of a typical shipping company, i.e., owning the ships and finding outside managers to run the commercial and technical operations.   For most of 2013, DHT was a very below the radar stock but began to become more known as analysts learned about DHT through their work on the OSG bankruptcy (DHT held an unsecured claim in OSG which it monetized way too early -- oops!).   Like many nano-cap shipping stocks, DHT traded at a significant discount to NAV -- the reason being that small shipping companies typically do not have access to capital and are viewed to be un-trustworthy companies laden with related party issues.  (As an aside there are several attractive companies today that fit that mold including Globus Maritime, which was recently written up on VIC, and Jinhui Holdings, which is an Oslo-listed comp to Eagle Bulk that trades at a 50% discount to NAV).

 

A few months after chewy's write-up, DHT transformed itself through a ~$110mm private placement of equity at $4.75/share, which more than doubled the size of the company.  The timing of the deal couldn't have been better for the investors that participated, as VLCC rates had begun rallied significantly in the month leading up the offering but the equity market hadn't given DHT any credit -- perhaps because they anticipated the offering as a result of DHT presenting at conference and marketing on non-deal roadshows.  In any event, after the transformative equity offering, the crude tanker market, which had been left for dead for the last several years, was now very much a focus as a result of VLCC rates reaching a multi-year peak of almost $60k/day in December 2013 and January 2014.   The consensus on the crude tanker market for a long has been that increasing US oil production would displace imports of foreign crude and that as a result the demand for tankers would be significantly diminished -- this is largely true but the spike in rates was evidence that the market was quite tighter than anticipated.  This is largely a function of two factors - first, that much of the displacement of imported crude has already occurred and second, that the supply of crude tankers is at best flattish and possibly declining as a result of ship owners neglecting the crude space and instead focusing on other segments within shipping such as dry bulk and product tankers.

 

As a result of the spike in VLCC rates in late 2013 / early 2014, there was suddenly a flood of interest in the crude space, which was kicked off by the announcement of Euronav acquiring 15 VLCCs from Maersk in late December 2013 for $980mm ($65mm/ship, avg age was ~4 years).  Following the news of that deal, several other shipowners began to raise capital to order ships including DHT (raising $228mm on 2/3/14), Navig8 Crude (Oslo listed OTC), Tanker Investments Limited (TK sponsored entity), Teekay Tankers, Navios Maritime Acquisition, to name a few.   DHT's February equity raise was to order three additional VLCC newbuildings (bringing its total to 6) and two VLCC acquisitions.   As a result of the ordering activity, vessel valuations increased substantially.   VLCCs, because they are the largest and most leveraged to a recovery, are up 15-20% year to date and the smaller ship types (Suezmax, Aframax) are up as well, although slightly less.   As a result of the increase in asset values and DHT's acquisitions, I know estimate that DHT's NAV is $7.92/share, which compares to the NAV in chewy's write-up last year of $6.75/share and the trough NAV of ~$5.50/share in October/November 2013.  

 

Valuing small operator shipping companies such as DHT is very simple.  The company's assets are its ships, which trade in a very liquid and transparent market.   After adjusting for net debt, we get to net asset value which reflects the theoretical value that we would get today if the fleet were liquidated.  The NAV below is based on Clarkson's numbers as of their 4/11/2014 report:

 

DHT's on the water fleet:  $366mm

DHT's six newbuildings:  $624mm*

 

*six VLCCs valued at $104mm (based on recently announced sale of 6 VLCC newbuildings from Scorpio Tankers to Peter G)

** adjusted for equity offering on 2/3/2014

 

Typically in improving markets shipping companies trade at premiums to NAV for several reasons:

1) There are other tangible and intangible assets not reflected in a NAV, including the working capital and the system value of the company, i.e., the intangible but economic benefits of having a fleet on the water (also investors may be willing to pay a premium or discount if they think management will create or destroy value)

2) Shipping investors are willing to pay more for optionality than the management teams

3) NAVs are based on secondhand valuations and may not reflect the fact that the next trade(s) will be at higher levels

 

DHT's peers all trade at varying premium to NAV, and they are also down quite a bit in the last month

 

1) Euronav:   P/NAV = 1.1x (stock off 20%+ in the last month) --- my take = trading at premium because of high leverage / option value

2) Nordic American Tankers:  P/NAV = 1.3x NAV (stock off 30%+ in the last month) --- my take = trading at premium historically because it's a dividend payout model

3) Teekay Tankers:  1.5x NAV (stock off 20% in the last month) --- my take = trading at premium because of high leverage / option value

 

1) The easy money has been made, many hedge funds invested in the November 2013 deal at $4.75/share or shortly thereafter and are short-term focused profit takers

2) Float is still pretty small and stock is illiquid

3) Management team is Norwegian, they aren't well known in the US which is where DHT is listed

 

VLCC:  $74mm (vs. $60mm last year) --- 10 year average = $96mm

Suezmax:  $50mm (vs. $42mm last year) --- 10 year average = $66mm

Aframax:  $38mm (vs. $32mm last year) --- 10 year average = $50mm

 

Over the last 10-20 years, rates have average $45k/day for a VLCC, $30k/day for a Suezmax and $20k/day for an Aframax.  At these rates, DHT's fleet will generate roughly ~$200mm of EBITDA which is ~$90mm from the existing fleet of 10 ships and ~$110mm from the newbuildings (I assume a $10k/day premium for these ships because they are more fuel efficient).   I ultimately expect that DHT will be 50% leveraged (roughly ~$500mm) at a 5% cost of debt, which gets me to $175mm of EBITDA less interest.  Maintenance capital is dry docking which will be pretty low ($5-10mm per year).  So I expect on a mid-cycle basis that the entire fleet (once fully delivered) is a $165-170mm of FCF/share of ~$2.50.   If the market values DHT on any reasonable FCF yield basis, we could see at least $25/share (at 10% yield). 

 

Yes from an equity perspective.  As a result of the February offering DHT is sitting with $235mm of cash on the balance sheet which compares to future capex related to the newbuildings of $472mm.  The gap will be financed with debt at 50% LTV which is very easy to procure currently.  Historically the shipping banks have no issues underwriting at 50% LTVs even in the worst of times -- in good time they will lend at 75-80% LTVs (the opposite of what they should do).

 

DHT's cash breakeven is ~$10k/day which compares to current VLCC rates of $23k/day.  My back of the envelope is that DHT generates $36mm of EBITDA today (excluding the newbuildings) and FCF of ~$25-30mm.

 

I will give a very brief overview of supply/demand.  The key thing to know here is that in 2011-2013 no one ordered any crude tankers and instead the orders were going to dry bulk, containers, product tankers, etc.  The reason is that people wrote off the crude tanker space believing that the US would stop importing crude and as a result the tanker market would be very oversupplied.  This seemed true until late in 2013 when rates skyrocketed to $50-60k/day -- illustrating that the market was quite a bit tighter than people expected.  As a result there are virtually no new ships hitting the water in the next few years.    At the same time, shipments from the Middle East to the US have declined but the decline has slowed considerably and is not expected to be as significant of a headwind on the sector.   In addition, about 15-20% of the fleet is over 15 years old which means that these ships will be scrapped in the coming years, further hindering supply growth. 

 

At the same time, voyages are getting longer which is driving additional demand.   The trend has been that new sources of crude oil are flowing from areas farther and farther away from consumption.  Incremental sources of supply is coming from Venezuela, Brazil, West Africa.   Incremental demand coming from Asia (China).   Over time more ships will be needed all else equal as a result of this ton-mile effect.