Bermuda-based DHT Holdings (DHT, Financial), the $624.9 million shipping and ports company, reported a 21.6% year-over-year drop in adjusted revenue to $70.7 million and an even bigger drop (54.6%) in profits to $14.3 million –Â 20.2% margin compared to 34.9% in the same period last year –Â in its first-quarter results in May.
According to filings, DHT’s first-quarter results included an impairment charge of $7.5 million related to the sale of DHT Ann and DHT Phoenix. The company sold the two vessels at book losses of about $3.5 million and $4 million.
Valuations
DHT had negative trailing 12 months earnings resulting in no trailing price-earnings (P/E) ratio. In review, the company recorded a hefty loss, $75.7 million in third quarter fiscal 2016. According to filings, the company had taken an impairment charge of almost similar amount in relation to having adjusted the company’s carrying value of its fleet.
Nonetheless, the company has traded lower than its book value with 0.6 times multiple vs. industry median 1.24 times (GuruFocus). DHT’s P/S ratio multiple was 1.33 times vs. industry median 1.14 times.
The company also has a high dividend yield of 9.35% with 0% payout ratio.
Average revenue and earnings per share estimates for the coming fiscal year indicated forward multiples of 1.48 times and 20.9 times.
Total returns
DHT has slightly outperformed the broader Standard & Poor's 500 index so far this year having generated 9.9% total returns vs. 9.6% (Morningstar). In the past five years, the company provided (-)3.98% annualized returns vs. the index’s 14.48%.
DHT Holdings
According to filings, DHT Holdings was incorporated under the name of Double Hull Tankers or “Double Hull” in April 2005 under the laws of the Marshall Islands. The name then was changed to DHT Maritime in 2008.
In 2010 DHT Holdings was incorporated under the laws of the Marshall Islands, and DHT Maritime became a wholly owned subsidiary of DHT Holdings in the same year.
DHT owns each of the vessels in its fleet through wholly owned subsidiaries incorporated under the laws of the Marshall Islands or the Cayman Islands. Additionally, the company wholly owns a subsidiary incorporated under the laws of the Republic of Singapore that does not own any vessels.
DHT operates a fleet of crude oil tankers. As of March, the company’s fleet consisted of 21 crude oil tankers in operation. The fleet in operation consists of 19 very large crude carriers or “VLCCs,” which are tankers ranging in size from 200,000 to 320,000 deadweight tons (DWT) and two Aframaxtankers or “Aframaxes,” which are tankers ranging in size from 80,000 to 120,000 DWT.
Further, eight of DHT’s 21 vessels currently in operation are on fixed rate charters for periods of up to 4½ years.
The company’s fleet principally operates on international routes and its fleet currently in operation had a combined carrying capacity of 6,087,095 DWT and an average age of approximately 7.4 years as of its annual filing.
DHT has a fleet of 30 VLCCs, 26 in the water and four under construction, as well as two Aframaxes. This compared to a fleet of 20 VLCCs and two Aframaxes in the first quarter of 2016.
The company has only one operating segment and consequently does not provide segment information.
Metrics
Time charter equivalent (TCE)
Time charter equivalent is a standard industry measure of the average daily revenue performance of a vessel. The TCE rate achieved on a given voyage is expressed in dollars per day and is generally calculated by subtracting voyage expenses, including bunker and port charges, from voyage revenue and dividing the net amount (time charter equivalent revenues) by the round-trip voyage duration.
In the recent quarter, the TCE rate fell 35.94% to $40,100 a day compared to the same period last year.
Deadweight tons (DWT)
Deadweight tons refers to the carrying capacity of a vessel by weight.
In the first quarter, DHT’s DWT capacity was 9.5 million compared to 6.6 million the year prior.
Spot exposure
(Company defined) as percentage of total operating days in period.
In the recent quarter, spot exposure was 58.1% compared to 57.2% in the same period last year.
Sales and profits
In the past two years, DHT averaged revenue increase of 69.8%, profit growth of 313%, and profit margin of 13.33% (Morningstar).
Cash, debt and book value
As of March, DHT had $72.2 million in cash and $674.6 million in debt with debt-equity ratio 0.97 times vs. 0.87 times in the prior year period. Overall debt has increased by $20.18 million while equity has fallen by $57.2 million resulting in more leveraged balance sheet.
The company did not have any goodwill or intangible assets. DHT’s book value has dropped by 7.6% year over year to $693.4 million.
Cash flow
In the recent quarter, DHT’s cash flow from operations declined by 30% to $41.4 million year over year. In addition to lower overall profits, the company registered more cash outflow in relation to its derivative financial instruments, purchase convertible bond, shares of profit in associated companies, deferred shipping revenues and bunkers, lube oils and consumables operations.
Capital expenditures were $70 million leaving DHT with (-)$28.6 million in free cash outflow compared to (-)$4.94 million in the same period last year. Despite having negative free cash flow, the company provided $7.57 million in shareholder dividends for the period.
DHT was able to provide $123 million in dividends and share repurchases in the past three years despite having patchy free cash flow performance.
In the quarter, the company also allocated $24.3 million in debt repayments net any issuances.
Conclusion
DHT’s recent quarter demonstrated susceptibility to volatility or cyclicality in business. Having recorded impairments resulting from disposal of vessels could severely impact earnings. A key metric, TCE rate, indicated marked declined year over year that otherwise could have been brought upon by increase in capacity or external industry affectation.
Nonetheless, DHT seems to be positive in growing its capacity as it entered agreements and acquisitions as of the recent quarter.
The company does seem to carry a little more leveraged balance sheet year over year and at the same time has been overly generous to its shareholders in terms of its free cash flow payouts.
Meanwhile, 13 analysts have an average price target of $5.56 per share – 26.7% upside from today’s share price of $4.39 (at the time of writing). Should one ask a 30% margin from DHT’s current book value would indicate a value of $5.2 per share.
In summary, DHT is a buy with $5 per share target price.
Disclosure: I do not have shares in the company mentioned.
