Aging Tanker Fleet And Longer Trade Routes Will Sustain Attractive Product Shipping Fundamentals

Catalysts

About TORM

TORM operates a fully integrated product tanker platform focused on transporting refined oil products globally.

What are the underlying business or industry changes driving this perspective?

• Closure of refining capacity in Europe and on the U.S. West Coast is structurally increasing import needs for middle distillates and gasoline, supporting sustained high utilization and stronger freight rates, which should translate into higher revenue and more resilient EBITDA over the cycle.
• Lengthening trade routes driven by increased East to West flows, Red Sea disruptions and rerouting around the Cape of Good Hope are lifting ton-mile demand faster than vessel supply, underpinning elevated TCE levels and expanding operating margins and earnings power.
• An aging global product tanker fleet, combined with a significant share of older LR2 and Aframax vessels under sanctions, is tightening effective supply despite headline fleet growth, which should support vessel values, bolster NAV and enhance return on invested capital.
• TORM’s integrated platform, consistent TCE outperformance and ability to secure above market long term charters even for older vessels position the company to monetize strong market conditions more effectively than peers, improving net margins and cash generation.
• Disciplined capital allocation, including accretive vessel acquisitions, lease repurchases and a conservative balance sheet with long debt maturities, provides flexibility to capture potential future rate upside, which should support dividends and long term earnings potential.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming TORM's revenue will decrease by 15.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 21.4% today to 12.2% in 3 years time.
• Analysts expect earnings to reach $96.7 million (and earnings per share of $0.83) by about December 2028, down from $276.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $120.3 million in earnings, and the most bearish expecting $19.9 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 32.4x on those 2028 earnings, up from 7.7x today. This future PE is greater than the current PE for the GB Oil and Gas industry at 7.8x.
• Analysts expect the number of shares outstanding to grow by 0.7% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.85%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A normalization of geopolitical disruptions such as the Red Sea issues or a relaxation of sanctions could reduce voyage distances and inefficiencies that currently support elevated ton mile demand, leading to lower freight rates and pressure on revenue and EBITDA over the long term.
• The sizeable product tanker order book over the next 2 to 3 years, if not fully offset by scrapping and sanctioned capacity exits, could increase effective fleet supply faster than demand and erode TORM’s current TCE outperformance, compressing net margins and earnings.
• Structural changes in global energy consumption, including more aggressive decarbonization policies or faster adoption of alternative fuels than implied by the delayed IMO Net Zero Framework, could weaken long term oil product demand and reduce utilization of TORM’s fleet, negatively impacting revenue and asset values.
• Reliance on locking in high long duration charters on older vessels may become less repeatable if counterparty appetite for vintage tonnage declines or if rates soften, which would limit TORM’s ability to secure above market coverage and could increase earnings volatility and downside risk to cash flows and net profit.
• Continued high dividend payouts and vessel acquisitions, even from a currently conservative balance sheet, could reduce financial flexibility if market conditions weaken, raising refinancing and interest costs over time and weighing on future earnings and free cash flow.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of DKK169.57 for TORM based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $794.5 million, earnings will come to $96.7 million, and it would be trading on a PE ratio of 32.4x, assuming you use a discount rate of 5.8%.
  
• Given the current share price of DKK134.1, the analyst price target of DKK169.57 is 20.9% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.