Hafnia Limited: A 20% Yield And The Best Value On The Water

seekingalpha09-27

HAFN represents the best value in what, I believe, will be a multiyear upcycle in the refined product shipping industry.HAFN’s dividend is currently producing a 21% yield. Following structural changes...

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Following structural changes...</p>\n\n<a href=\"https://seekingalpha.com/article/4723741-hafnia-limited-a-20-percent-yield-and-the-best-value-on-the-water\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Hafnia Limited: A 20% Yield And The Best Value On The Water</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nHafnia Limited: A 20% Yield And The Best Value On The Water\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-09-27 22:39 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4723741-hafnia-limited-a-20-percent-yield-and-the-best-value-on-the-water><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>HAFN represents the best value in what, I believe, will be a multiyear upcycle in the refined product shipping industry.HAFN’s dividend is currently producing a 21% yield. Following structural changes...</p>\n\n<a href=\"https://seekingalpha.com/article/4723741-hafnia-limited-a-20-percent-yield-and-the-best-value-on-the-water\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":null,"symbol_name":null,"start_time":0,"source_url":"https://seekingalpha.com/article/4723741-hafnia-limited-a-20-percent-yield-and-the-best-value-on-the-water","article_id":"2470087450","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/185097199/image_185097199.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2470087450","pubTimestamp":1727447980,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"HAFN represents the best value in what, I believe, will be a multiyear upcycle in the refined product shipping industry.HAFN’s dividend is currently producing a 21% yield. Following structural changes","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{},"translate_title":"Hafnia Limited：20%的收益率和最佳的水上价值","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"HAFN":0.9},"content_text":"HAFN represents the best value in what, I believe, will be a multiyear upcycle in the refined product shipping industry.HAFN’s dividend is currently producing a 21% yield. Following structural changes in the refining industry and the low vessel order book, I believe high teen yields are sustainable.HAFN shows leading performance metrics in terms of break-even rates, fleet age, EV to EBITDA valuation, and dividend yield.I rate HAFN as a STRONG BUY.   HeliRy Thesis Hafnia Limited (NYSE:HAFN) is one of the largest owners and operators of tanker vessels in the world. The company transports oil, refined products and chemicals around the globe using its diverse fleet of 193 vessels. Since HAFN has only been trading on the New York Stock Exchange in April of 2024, the company may not be on many investors’ radars. As a result of this analysis, HAFN appears to be the best value for investors to leverage the structural shift in the global refined product trade. This shift has caused transporters of refined products such as gasoline and diesel to reap record profits. This has been caused by the polarization of the refined product market, where production is shifting away from demand hubs in North America and Europe. Production is now concentrating in China, India, Africa, and the Middle East, requiring the product to be shipped via tanker to the end user. The dynamics of this trade are still developing, as three refineries in Europe are slated to close or reduce output in 2025. Concurrently, new large-scale refineries in Africa, the Middle East and China are beginning to ramp production to full capacity. I believe these structural changes will be long last because of the minimal impact to the cost for the end user. Even at record-breaking shipping rates, the additional cost per gallon translates to only a few cents per gallon at the pump. To demonstrate an advantaged value position, Hafnia scores near the top of the pack in multiple valuation categories. The company allows investors to crystallize this value and cash flows created by the strong upcycle in the refined product shipping market with its massive 20% dividend. Global Refined Products Fundamentals Global refining capacity took a hit in the years surrounding the COVID pandemic, accounting for several millions of barrels per day in capacity coming offline. The bulk of these closures came in developed countries such as the US, Australia, and Europe. All the while, China, India, and the Middle East have brought additional capacity online.   Centralized Refining and Consumption Hubs (TRMD Investor Presentation) The shift in refinery locations has increased the distance between the supply and the demand, requiring more ton-miles to be absorbed by the shipping industry. The increased volume and distances have caused shipping rates to double and, at times, even triple compared to historical averages. MR tankers are now consistently logging charter rates at over $30,000/day and LR2 vessels are trading well above $40,000/day. MR and LR2 Historical Charter Rates (TRMD Investor Presentation) The Russian invasion of Ukraine served as the catalyst for the opening round of the upcycle in refined product shipping. Even though this headline has now generally faded into the background, the refined market continues to trend in the direction of more concentrated locations of supply and demand. In 2025 three European refineries are slated to close or reduce output. 1. Wesseling Refinery (Germany) will be repurposed to produce lubricant feedstock, effectively removing 150,000 barrels per day of capacity. 2. 1/3 of the Gelsenkirchen Refinery (Germany) will be converted to produce biofuels. This will remove roughly 80,000 barrels per day of capacity throughout the conversion process. 3. Grangemouth Refinery (Scotland) will be converted to an import terminal, removing 140,000 barrels per day of capacity as it cannot compete with modern refineries These developments coincide with the startup of the Dangote refinery (650,000 barrels per day) in Nigeria, and the startup of China’s Shandong Yulong refinery (400,000 barrels per day). While portions of these new refiners are expected to satisfy domestic demand, incremental barrels are still expected to hit the open water. The Dangote refinery is expected to be capable of supplying all of Nigeria at only 44% capacity, leaving significant barrels for export. This refinery is roughly 5,000 nautical miles from major destinations in Europe, making for an ideal trade pattern in the wake of reduced capacity in Europe. This trade is bolstered by the economics of shipping massive cargos of diesel or gasoline. An MR vessel can hold upward of 345,000 barrels of refined product, while an LR2 vessel can transport 1 million barrels. Even at current market rates, the cost felt by the consumer is relatively minor, at under $0.10 per gallon in almost every scenario. The table below gives example costs for MR and LR2 vessels across a variety of transits and day rates. This assumes a travel speed of 12 knots and 10 knows for MR and LR2 vessels respectively.   Author's Calculations Now that we have firmly determined that the two ends of the supply chain are creating a strong market for shippers, we need to analyze the middle of the supply chain, the vessels themselves. Cyclicality in the shipping market is usually caused by a build out of vessels following a period of strong rates. However, I believe this cycle will be longer lasting than in the past. The pipeline of new vessels entering the water for the refined product trade has been disrupted by shipyard closures during the COVID-19 pandemic and the massive number of LNG vessels under construction that are keeping shipyards relatively full. The current fleet sits at a crossroad of advanced age and minimal new supply. The current order book sits at around 20% over the next four years. With 510 vessels over 20 years old and approaching typical scrap age, global fleet growth will be minimal over this period. I believe this will elongate the current upcycle we are in. HAFN Investor Presentation Hafnia Is In Pole Position To Capitalize On This Market To determine where HAFN stands in relation to its peers, I compared it across four main categories.  Operating break-even rates Fleet Age EV to EBITDA ratio Dividend yield  Operating Break-Even Rates A low break-even rate translates into the highest margins and provides downside protection when rates decline. The peer group established are shippers with a focus on the clean product trade and with a market cap between $2 billion and $4 billion. Note, Teekay Tankers (TNK) primarily ships crude oil but recently has transitioned a portion of its fleet into the clean trade resulting in its inclusion in the comparison. Company 10-K Reports HAFN takes second place to only Scorpio Tankers (STNG) with a break-even rate of roughly $13,000 per day. The low rate can mainly be attributed to its young fleet and capturing economies of scale by having the largest fleet of the peer group. Fleet Age A younger fleet is obviously more attractive from both a OPEX and a capital re-investment perspective. The average age of HAFN’s owned fleet is 8.8 years, only rivaled by STNG’s 9.1 years. However, if one is to include HAFN’s operated (non-owned) fleet, the average age rises to 10.3 years. Including these vessels would bump HAFN down to second place in terms of vessel age, but still at a considerable advantage to TRMD, INSW, and TNK. Fleet Profiles It should be noted that HAFN’s fleet is roughly double the size of STNG and more diverse, trading across all major vessel classes and 30 chemical tankers. In contrast, STNG owns mainly MR and LR2 vessels. This category is too close to call, so I’ll default to a tie between HAFN and STNG for best-in-class assets. EV to EBITDA Ratio HAFN takes the gold medal in the valuation category amongst the pure product tanker competition. TNK certainly trades at discount to HAFN thanks to its large cash reserves with lower its enterprise value. On the flip side, TNK’s fleet is roughly 6 years older than HAFN’s. One could argue that TNK is cheap for a reason. Data by YCharts In the previous category, HAFN and STNG were essentially tied on an asset quality basis. However, in this category, the balance sheet tips the scales in favor of HAFN. STNG’s larger debt position ($680 million vs $372 million) inflates its enterprise value. Trading at only a 0.5x discount may not sound that impressive, but in such a low multiple industry, this translates to a 14% discount to STNG’s valuation. Data by YCharts Dividend Yield Dividends aren’t always the answer to a successful investment, but in a cyclical industry, I believe dividends allow investors to crystalize the free cash flow generated by the asset. Holding a cyclical stock through the ups and downs tends to only pan out in the longest of strategies and that’s why I favor dividends here. In this industry, I am looking to capitalize on the strong shipping market to generate cash for reinvestment into more stable asset classes. I want to make hay while the sun is shining. Shareholder returns in the form of equity (share buybacks) are less advantageous to me, as I expect to one day rotate out of the sector (after recouping a massive portion of my investment in cash). I make this statement facing the reality that there is an opportunity cost to riding out the downside of a cycle. I fully intend for the dividends harvest by this sector to fund increasing the size of my long-term holdings. If you are in the same camp as I, you’ll find that this final category of Dividend Yield is a blow out for HAFN’s 16% TTM yield. The only close competitor is TORM (TRMD) at 17%-CHECK. Data by YCharts The company’s payout ratio is governed by its net loan to value. The company’s latest dividend was $0.4049/share, or an annualized yield of 21.8% at the current share price of $7.40. Based on the second quarter’s conference call, the company expects this payout to improve to 90% going forward by the end of the year. The current LTV sits at 21.3%, making it just shy of the 90% mark. Of course, depending on markets and valuations, we do anticipate reaching our next milestone in our dividend payout policy of a net LTV below 20% before the end of the year. This would trigger a further increase of our payout ratio to 90% of net profits for such quarter.   Dividend Policy (HAFN Investor Presentation) After a strong Q2, the industry has experienced a moderate retrace in spot time charter rates for Q3. This is in part due to typical seasonality in the refining industry as well as increased supply into the refine product by VLCC and Suezmax vessels migrating into the clean product trade. This has softened the market somewhat but is expected to be a short-term headwind as both the refined product and crude trades head into the seasonally strong Q4 and Q1. Q3 Time Charter Rates (HAFN Investor Presentation) I believe, given the general market fundamentals and a historically low order book, this upcycle can be sustained and is not just a flash in the pan. The current share price affords a high teen yield even if rates retrace moderately. This greatly tilts the scales in favor of HAFN over what has been a close competition with STNG for overall value. STNG has been deploying its cash to paying off debt while only rewarding shareholders with a 2% yield, paltry in comparison to HAFN's current 21.5%. Risks The health of the global economy is front and center of the investment community. Concerns are mounting about stalling economic growth. In such a scenario, consumption of crude and refined products would stall. Any pull back in utilization by refiners would be a double-edged sword. Reduced crude exports and fewer refined products available for export would impact both the clean and dirty shipping markets. Rates and vessel values would decline. In HAFNs case, this would reduce the dividend payout ratio while also reducing earnings. This creates a smaller piece out of a smaller pie effect and could greatly impact shareholder returns. Investor Key Takeaways  HAFN was narrowly beat out by STNG for lowest operating expense per day, but was notably better than others in its peer group. HAFN was tied with STNG for having the best assets based on vessel age and vessel diversity. Among pure refined product shippers, HAFN currently has the best EV to EBITDA valuation, trading at a 14% discount to STNG. HAFN’s dividend is currently producing a 21% yield. Given the structural changes in the refining industry and the low order book, I believe high teen yields are sustainable after accounting for the effects of seasonality and occasional competition for the VLCC market. Cumulatively, HAFN represents the best value in what, I believe, will be a multiyear up cycle in the refined product shipping industry. I rate HAFN as a STRONG BUY.   Editor's Note: This article was submitted as part of Seeking Alpha's Best Value Idea investment competition, which runs through October 14. With cash prizes, this competition -- open to all analysts -- is one you don't want to miss. 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