Deploying New VLCCs Will Secure Future Revenue Amid Market Supply Squeeze

Key Takeaways

• Proceeds from ship sales are being reinvested in corporate investments and debt reduction, potentially optimizing asset performance and improving net margins.
  
• Investments in efficient new vessels and strong customer interest could boost revenue stability and earnings through higher time-charter rates and elevated market demand.
  
• High depreciation costs and tight liquidity, coupled with reliance on a compliant fleet's uncertain demand, could constrain revenue growth and asset liquidity.

Catalysts

Through its subsidiaries, owns and operates crude oil tankers primarily in Monaco, Singapore, and Norway.

• The sale of their oldest ship, DHT Scandinavia, is expected to result in a book gain of $19.8 million, with proceeds allocated to corporate investments, share buybacks, and debt prepayment, potentially improving net margins by optimizing asset performance and capital allocation.
  
• Investments in their newbuilding program, with total installments amounting to $90.1 million during 2024, may lead to enhanced revenue through the deployment of more efficient vessels, possibly increasing earnings with newer technology and fuel efficiency.
  
• The company is actively negotiating financing for new vessels, potentially exceeding the base debt of $60 million per vessel, which could lead to favorable financing conditions and impact net margins positively by ensuring vessel financing aligns better with market conditions.
  
• There is significant customer interest in long-term charters for new and fuel-efficient vessels, which could secure stable revenue streams and leverage higher time-charter rates, thus potentially boosting overall revenue and earnings stability.
  
• The diminishing availability of modern VLCCs and new orders aligns with a market supply squeeze, which, combined with tightened U.S. sanctions, might increase demand for compliant DHT ships, potentially leading to higher TCE rates and elevated revenue.

DHT Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming DHT Holdings's revenue will grow by 3.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 31.7% today to 56.5% in 3 years time.
• Analysts expect earnings to reach $353.0 million (and earnings per share of $2.21) by about April 2028, up from $181.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.5x on those 2028 earnings, down from 8.9x today. This future PE is lower than the current PE for the US Oil and Gas industry at 11.4x.
• Analysts expect the number of shares outstanding to decline by 0.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.95%, as per the Simply Wall St company report.

DHT Holdings Future Earnings Per Share Growth

Risks

• The shadow fleet's inefficiency and the challenge in transacting with counterparty vessels due to potential sanctions could limit revenue growth.
  
• Selling older ships in the spot market may not be feasible due to the difficulty in finding buyers and counterparties meeting compliance standards, impacting asset liquidity and devaluation risk.
  
• High depreciation costs and planned financing for new vessels could pressure net margins if expected freight rate increases do not materialize due to market disruption or unforeseen events.
  
• The tight liquidity and thin market for secondhand vessels result in limited options for fleet expansion or renewal without incurring significant costs, potentially constraining revenue-earning capacity.
  
• The reliance on the tightening of the compliant fleet without a clear demand uptick creates a risk of overestimating future earnings growth if market conditions or geopolitical scenarios shift unexpectedly.

Valuation

• The analysts have a consensus price target of $13.7 for DHT Holdings 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 $16.0, and the most bearish reporting a price target of just $11.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $625.0 million, earnings will come to $353.0 million, and it would be trading on a PE ratio of 7.5x, assuming you use a discount rate of 6.9%.
• Given the current share price of $10.08, the analyst price target of $13.7 is 26.4% higher.
• 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.