• Kashyap Sriram

Short DHT Holdings

DHT Holdings (DHT) is in the business of crude oil transportation. The company operates a fleet of 23 VLCCs. I believe the share price is significantly overvalued. Historically, the company has been run for the benefit of insiders and has a poor track record compared to bigger peers.


The business of owning a shipping fleet is quite simple. You contract out your vessels for a spot voyage or a longer-term charter, you lease-in, acquire or dispose of vessels to manage your fleet age profile and to play the changes in market conditions.


DHT used to have two CEOs, a practice it only stopped early this year when one of the CEOs chose to retire. Even shipping companies with a fleet size several multiples of DHT do not need two CEOs, making DHT’s practices unique.


By unique, I mean shareholder-negative.


As a general rule, poison pills are a despicable management/Board tactic employed to maintain the lifestyle of company executives at the expense of shareholders.


Companies adopt it when they don’t like a particular shareholder. While legal, it goes against the philosophy of shareholder capitalism. If hired hands want to run a business as they please, they should be owners rather than managers. The Drexel LBO era, for all its shortcomings, got this right.


DHT used a poison pill in 2017 to thwart an acquisition attempt by 16% shareholder and peer tanker operator Frontline (FRO).


https://www.dhtankers.com/dht-holdings-inc-announces-receipt-of-non-binding-proposal-adopts-one-year-shareholder-rights-plan/


When the market valued DHT at $4.27/sh, FRO offered an implied valuation of $5.09/sh, a 19.2% premium. Instead of evaluating the bid or putting it up for a shareholder vote, DHT adopted a poison pill and mounted a legal defense to keep the company as-is, so the Board, the two CEOs, and key management personnel could keep their bloated compensation structure.


In 2016, the company’s executive compensation was $10.55 million, or 114% of net income. By comparison, Frontline paid out $3.5 million in executive compensation (3% of net income).


DHT got away with their poison pill, and the entrenched insiders continued to live large at the company’s expense. In 2017, executive compensation was $8.43 million, clocking in at 128% of the company’s net income. The Board thought it would be prudent to award each of the two Co-CEOs an additional cash bonus of $1 million for the stellar results (not!) the company achieved in 2016.


The rot ran deep.


While DHT has nominally outperformed FRO in the period since, considering the 19.2% premium FRO offered, DHT has actually underperformed by 2.8%. Adjusted for dividends, that number would be higher. In other words, nearly 6 years later, DHT shareholders would have been better off had they accepted the Frontline offer. The combined company would have been even better off in the market, with greater pricing power, lower operating costs, and without the deadweight of overpaid executives dragging down profits.


Instead, the bout went to the DHT executives and directors, who amply benefited from keeping the company independent. In the last 3 years, they took home a whopping $22.8 million in executive compensation.


DHT insiders – 1

Frontline, DHT shareholders, oil tanker bulls – 0


Fast forward a few years, and International Seaways (INSW) adopted a poison pill.

https://www.intlseas.com/news/news-details/2022/International-Seaways-Adopts-Limited-Duration-Stockholder-Rights-Plan/default.aspx


Only, this time around INSW unlocked shareholder value by selling a non-core asset, repurchasing shares, and engaging with the concerned shareholder. The result? 124% increase in share price in 6 months, outpacing the 89% gain in FRO share price.


INSW may have its flaws, but shareholder apathy is not one of them, unlike DHT.


Of course, terrible management cannot be the sole reason to short a company.


Valuation-wise, DHT is overvalued.


There are two approaches to valuation – one based on vessel values, another based on discounted earnings. Since vessel values go up as market conditions improve and go down as the earnings outlook devolves, I’m going to use vessel values for valuation. Note that market conditions couldn’t be more favorable for tanker owners, meaning vessel values are now at the high end of historical averages.

Year Built

#

Age

Vessel Value ($ mn)

Total ($ mn)

2018

4

4

97

388

2017

1

5

91

91

2016

6

6

86

516

2015

1

7

81

81

2012

3

10

66

198

2011

4

11

62

248

2007

3

15

37

111

2006

1

16

33

33

23

1666

My vessel value estimates are based on the latest Fearnleys report and applying a 20-year useful life.


Per the company’s 2021 annual report, the difference between book value and charter-free fair value of vessels was $12.5 million, i.e., the values were more or less aligned. As of Q3 2022, the book value of vessels was $1.3 billion. My valuation model provides a higher figure, capturing the upswing in TCE rates and vessel values this year.


Arriving at vessel values is the hard part.


Value of equity = Value of vessels + working capital – long-term liabilities

Working Capital as of Q3

$102.53 million

LT Liabilities

($381.2 million)

Value of equity

$1,387.33 million

Current market cap

$1721 million ($10.58 share price)

Downside

19.4%

Value of equity using book value of fleet

$1,021 million

Downside

40.6%

Time Charter rates for VLCCs are at lofty levels


For the first nine months of 2022, the company reported a net loss of half a million dollars (first 9 months 2021: $8.6 million net loss).


If the company cannot turn a profit in this market, will it survive as a going concern?


Disclaimer: I have no position in DHT but intend to establish a short position.


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