Fleet Expansion And Green Initiatives Will Boost Capacity Amid Potential Earnings Decline

Key Takeaways

• Fleet expansion and strategic fleet renewal position Odfjell for competitive future revenue growth and stable long-term income.
  
• Energy efficiency investments and bond refinancing efforts aim to reduce costs, improve earnings, and maintain competitive net margins.
  
• Reduced charter earnings, geopolitical instability, and potential excess capacity could pressure Odfjell's revenue and margins.

Catalysts

Provides services for the transportation and storage of bulk liquid chemicals, acids, edible oils, and other specialty products in North America, South America, Norway, the Netherlands, rest of Europe, the Middle East, Asia, Africa, and Australasia.

• Odfjell's fleet expansion plan, including 18 vessels on order and ongoing fleet renewal, is set to increase operational capacity and potentially boost future revenue growth.
  
• Strategic investments in energy efficiency and green technologies, such as retrofits and the use of suction sails, are expected to reduce operational costs and maintain competitive net margins in the long term.
  
• The repayment of outstanding bonds and refinancing efforts are anticipated to decrease interest expenses, thus lowering cash breakeven levels and improving earnings.
  
• A 16% order book, with a substantial portion for Odfjell, suggests competitive positioning for future fleet needs, contributing to stable long-term revenue potential through strategic fleet renewal.
  
• The decrease in swing tonnage from product to chemical tankers, with the expectation of more chemical volume being lifted by specialized fleets, is likely to stabilize and potentially enhance freight rates, positively impacting future revenue growth.

Odfjell Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Odfjell's revenue will decrease by 0.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 22.2% today to 17.7% in 3 years time.
• Analysts expect earnings to reach $227.0 million (and earnings per share of $2.87) by about March 2028, down from $277.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $293 million in earnings, and the most bearish expecting $160.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.9x on those 2028 earnings, up from 2.9x today. This future PE is greater than the current PE for the GB Shipping industry at 3.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.84%, as per the Simply Wall St company report.

Odfjell Future Earnings Per Share Growth

Risks

• Reduced time charter earnings and volumes, alongside an increase in cash breakeven, suggest potential pressure on revenue generation and net margins.
  
• Currency effects and write-downs negatively impacted the results from Odfjell Terminals, indicating potential downside risks to earnings.
  
• The ongoing geopolitical instability and potential introduction of tariffs could create disruptions in global trade, impacting revenue and margins.
  
• The significant presence of swing tonnage in the chemical segment may lead to inefficiencies and pricing pressure, potentially affecting time charter earnings.
  
• The order book being 16% of the total fleet and the presence of 50 chemical tankers that would have typically been recycled could contribute to excess capacity, potentially impacting revenue growth in the future.

Valuation

• The analysts have a consensus price target of NOK163.18 for Odfjell based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK191.44, and the most bearish reporting a price target of just NOK139.98.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.3 billion, earnings will come to $227.0 million, and it would be trading on a PE ratio of 6.9x, assuming you use a discount rate of 8.8%.
• Given the current share price of NOK107.6, the analyst price target of NOK163.18 is 34.1% higher. Despite analysts expecting the underlying buisness 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.