Hafnia Tankers: Strong Fundamentals, Changing Trade Patterns Look Favorable

seekingalpha08-29

Hafnia Tankers Limited, part of BW Group, operates the world's largest fleet of product tankers, showing strong financial performance with a net profit of $478.8 million in FH 2024.The bullish outlook...

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Henk Hulshof/iStock via Getty Images Investment thesis In one of our earlier analyses on SFL Corporation (SFL), back in March 2022, we shared our bullish stance on large product tankers. We saw changes in trade patterns from refinery closures in various countries, which we concluded should lead to higher rates for those vessels. We have also previously covered pure product tanker players like Torm plc (TRMD) and Ardmore Shipping (ASC). Product tankers' earnings have been good over the last couple of years, so we want to explore gaining exposure to this sector, other than our SFL Corp. position, which does have some product tankers on long-term charters Therefore, this time we want to explore Hafnia Limited (NYSE:HAFN) to see if it is a good time to invest in that company. Hafnia Tankers background Hafnia Tankers Limited is part of the BW Group which originated from Sir Y.K. Pao’s Hong Kong company Worldwide Shipping buying over the Norwegian Bergesen shipping company in 2003. BW Group manages a fleet of more than 490 vessels managed with an international team of over 12,000 staff worldwide. Other shipping and offshore companies in the group are: BW LPG (BWLP), BW LNG, BW Epic Kosan, DHT Holdings (DHT), Hafnia, BW Dry Cargo, BW Offshore (OTCPK:BWOFY), and Navigator Gas, referred to as Navigator Holdings (NVGS). HAFN operates the world’s largest fleet of product tankers. As of the end of Q2 of 2024, it controlled 133 product tankers with 117 of them being owned by them, and the other 16 vessels chartered in. These are:  10 LR2 35 LR1 64 MR 24 Handy-size vessels    Hafnia LR2 with LNG as dual fuel (Hafnia Tankers FH 2024 results presentation) Let us start by looking at their most recent financial results. FH 2024 financial results HAFN delivered a net profit of $478.8 million in the FH of 2024. This is slightly higher than the $469.9 million it earned in FH 2023. This works out to EPS for FH 2024 of $0.94 The average TCE for the fleet was $39,244 per day with an average Opex of $8,024 per day. As of the 8th of August, they have secured 72% of Q3 at an average of $34.934 per day, and 45% is covered throughout the end of the year at an average rate of $33,534 per day. ROE stood at 41.1% at the end of Q2 Their balance sheet is strong with a net loan-to-value being reduced to 21.3% from 30.1% by the middle of last year. On the topic of the LTV ratio, HAFN is using this to determine the size of their quarterly dividends. They have just updated their dividend policy. The payout ratio of net profit is adjusted for extraordinary items.   Hafnia dividend policy (as of FH 2024) (Hafnia Tankers FH 2024. Compilation by author) The LTV will likely fall below 20% next year, triggering an even higher payout ratio of 90%. Market conditions Our bullish view of the shipping bulk market, whether dry or wet cargo, has been supported by attractive supply and demand dynamics. For the large product tankers, there has been an uptick in newbuilding orders for LR2 vessels. According to Torm’s Q2 of 2024 presentation, the orderbook stands at 36% of the fleet. This is high. However, it is pointed out that it should be seen in the context of a low orderbook for crude oil-carrying Aframax vessels, which stand at just 5% of the fleet. If we include the medium range, known as MR, and Handy-size product tanker, the total newbuildings on order is 567 vessels with a total present fleet of 3,537 vessels. That gives us a percentage of 16% of the fleet. We often do hear management from various shipping companies arguing that as much as 20% of the fleet is over 20 years old, so those vessels have limited effect on the market. It is true, but often they do not get scrapped and somehow seem to find cargoes where there are fewer requirements to comply with. Demand for seaborne clean product export has increased over the last years, despite concerns about lower demand for gasoline and diesel for use in transportation.   Seaborne CPP exports continue to rise (Scorpio Tankers Q2 of 2024 presentation) On top of this demand increase, we also have the extra ton-miles from the diversion away from the Red Sea. According to Torm’s Q2 of 2024 presentation, the diversion of LR2 vessels around the Cape of Good Hope has increased the ton-miles by 24% Y-o-Y so far in 2024. We started the article by pointing out our bullish view which was partly a result of a global reduction of refining capacity. Since 2020, as much as 2.9 million barrels per day of refining capacity has been permanently closed. Another 0.6 million barrels per day are scheduled to close down within this and next year. New refining capacity is coming up, mainly in the Middle East and in China. Much of their export will be on long voyages where much of it might be carried on LR2 vessels. All in all, we continue to believe that this trend is positive for the market Share price and fundamentals When we look at the share price, we compare it to industry peers that are pure product tanker owners and operators. A good comparison is against Scorpio Tankers (STNG) and Torm (TRMD). Since HAFN has a longer time as a listed entity on the Oslo Stock Exchange, than that of New York, we have used the share price in Oslo. Our preference is to look at the share price over five years.   Hafnia Tankers versus Scorpio Tankers and Torm (Yahoo Finance) Torm has increased by 316% and Scorpio Tankers by 248%, while Hafnia has “only” gone up by 134%. It is important to note that it is only in the last two years that the share prices have gone up. In the previous three years, we can see a mostly flat share price development. In terms of valuation, we benchmark HAFN against the same peers.   Hafnia valuation against peers (Data from SA. Compilation by author) We can see that HAFN has a similar valuation as their two peers, except for the dividend yield, where Scorpio Tankers has prioritized share buybacks as their focus concerning returning capital to shareholders. This can also be seen from the main return coming from the large increase in the share price shown in the earlier graph. Risks to thesis and conclusion A successful peace in the Middle East would improve the utilization of the fleet and reduce the ton-miles. Lower rates must be expected. The impact of newbuildings entering the fleet is something to monitor, as it could bring down the spot freight rates to levels seen between 2020 and 2022. We should not neglect this possibility. As a reminder, the average TCE in Q4 of 2021 was only $13,303 per day for their fleet. We do not foresee the rates going that low. Over the next six to twelve months, market conditions should not change much.  As such, we initiate our coverage of Hafnia with a Buy call.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2463499620"}