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Odfjell: Stabilization in 2018 and recovery later awaited

Odfjell posts its 4Q17 results next Thursday. For a better understanding, we decided to include in this report and going forward separate estimates for each of the segment in proportionate method, as it shows a more representative picture of operations, however, we keep P&L and Balance Sheet total estimates as of equity method, as it provides a fair presentation of Odfjell’s financial position. We see chemical tankers being in the low point of the shipping cycle and anticipate the turnaround, thus our long term Buy recommendation is reiterated at a slightly lowered Target Price of NOK 37/sh.

Chemical Tankers – spot rate recovery since November is not directly transferred to a jump in revenues – flattish guidance stays

Although Odfjell’s journey to a very ambitious target of 100 vessels was anticipated to take at least several years by us, it finished at an amazing pace. Having the orders for the fleet to grow up to 97 vessels, Odfjell does not look forward to any other newbuild for now. The current fleet consists of 78 vessels, 14 are on order to be added gradually until end-2020, 5 will be still owned by Chemical Transportation Group, however, put in a pool operated by Odfjell, thus, even with a minimal impact to revenues, included into the expansion program. Low period in the cyclical shipping industry also means rather low prices for newbuilds and the timing to strengthen the fleet could not have been better.

The spot rates finally showed an improvement in 4Q17, however, this does not transfer to company’s revenues straight away. Firstly, 65% of operations are under CoA, while only 35% are in the spot market – these proportions are not expected by the company to have any significant movement to neither side. Furthermore, October was a very low month, the beginning of November was low and even with the recovery in end-November and December, our estimates for the whole quarter are almost unchanged, while Odfjell has also communicated that the flat guidance for chemical tankers is reiterated. Notably, the part of an increase in chemical tanker rates is related to benzene transfers, where Odfjell has a low position in, still this has an overall positive impact for the whole market. Although we have seen the recovery in rates already started, any larger moves in the chemical market are not anticipated until 2019.

Terminals – either it is in China or in Rotterdam – it just takes time

Odfjell SE has divested two terminals as part of their strategy to focus on terminals where they have operational control. Sale of Oman terminal at an attractive price and Singapore terminal also with sky-high multiples followed. The company has Antwerp terminal left in their portfolio with no operational control in. However, we understand that there are no plans to divest it today, as this terminal still offers synergies with tankers, which Oman and Singapore terminals did not. The improvement program in the largest terminal in Rotterdam was said to be successfully ongoing as planned, still it will take some more time to be implemented completely. The new Terminal in Tianjin is also in the last phase before the opening, but Odfjell still awaits permits for the vessels from outside China to be allowed. For a better understanding on our view towards Terminals from now on we include a proportionate method table in our report, although the P&L and balance sheet are still as of equity method, as it provides a fair presentation of the company’s financial situation.

Gas Carriers – looking for a buyer

LPG segment brings a positive net profit for the company, however, when the cancellation of ordered 8 vessels was finalized, it was decided to divest in the whole segment. Currently Odfjell owns 2 LPG vessels and are willing to sell both if the buyer is found. As told by the company, if the buyer is found and both vessels are sold for a price of USD 20m each, this, including the reduced debt, would mean the net cash increase for Odfjell of around USD 10m.

Financials – secured financing for most of the orders

There were no difficulties in securing the financing for the newbuilds to be delivered in 2018-2020. With the current loans and bonds anticipated to be refinanced, the long term interest bearing debt is expected to increase. Equity ratio, which has the lower bound of 25% is still projected by us to remain at a 33-37% level, while the cash position, which has the floor of USD 50m is never projected to cross a line to double digits. Dividends, on the other hand, are not guided still, as the company needs to be sure they can be paid regularly since beginning. Until we receive further news on that and the size that is willing to be paid, we include zero dividends in our model, however, see that cash position allows the company to start regular payments.

Ballast Water Convention and Sulphur regulations are not a large issue

Both the regulations regarding BWC (Ballast Water Convention) and Sulphur are not anticipated to be a significant issue for the company. BWC aims to prevent the spread of harmful aquatic organisms from one region to another and the international vessels are required to manage their ballast water and sediments to a certain standard. However we believe that only a very limited amount of ships will need additional investments. As of sulphur regulations, it is more of a global issue – the global limit of sulphur content of the vessels fuel oil from January 1st 2020 will be dramatically reduced from 3.5% mass by mass to 0.5% mass by mass. To meet the new standards ships will need to be using the cleaner low-sulphur compliant fuel oil. We highlight that Odfjell has bunker adjustment clauses with customers where bunker costs are transferred to customers, we therefore expect this to counter some of the impact from higher bunker cost for Odfjell.

Low point of the shipping cycle in our view is a good point for the investors

Following the oversupply in the chemical tankers market, freight rates dropped significantly. Companies like Sinochem, JO Tankers or CTG found themselves in selling parts of fleet and a need of partnering with the largest players in chemical shipping business, namely Odfjell and Stolt-Nielsen. Although we are at the bottom of the shipping market cycle, we begin to see some positivity with rates starting to recover and see this as a decent point for the investors to enter the market. 2017 was a very low year, in 2018 the situation should stabilize and 2019 is anticipated to be a start of a much better period for chemical tankers. We reiterate our long term Buy recommendation at a slightly reduced Target Price of NOK 37/sh for Odfjell’s A share, as we see the company being well positioned and prepared for the market cycle to turn.
Source: Norne Research

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