Hafnia Limited

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Hafnia Limited is a global provider of transportation of oil products and chemicals via its large fleet of tankers.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Explanation

Hafnia Limited is a leading player in the global transportation of oil products and chemicals, operating a fleet of over 200 vessels. The company’s revenue is generated primarily from the chartering of these vessels to customers for the movement of various cargoes, with different charter types:

  • Time Charter: Vessels are chartered for a specific period at a fixed daily rate, providing stable and predictable cash flows.
  • Voyage Charter: Vessels are chartered for a specific voyage at a rate that depends on market conditions for that route.
  • Contracts of Affreightment (COAs): Long term contracts that are made for certain routes between two parties.

Hafnia’s business is highly correlated to the global economy and, therefore, the demand for commodities. The shipping industry is also particularly cyclical. The most important factor is ship price.

A crucial aspect of Hafnia’s business model is its focus on efficient fleet management. The company emphasizes operational expertise to optimize utilization, reduce costs, and prioritize safety. Their fleet is mostly comprised of modern medium-range (MR) tankers, but also includes LR1 tankers, and a few smaller vessels. The company has an emphasis on modern vessels, making their fleet more fuel-efficient and reducing operating costs compared to older vessels.

Hafnia’s business model is reliant on a global scale. It is affected by geopolitical shifts. The company has exposure to emerging markets such as the Middle East and South America, and Europe.

The tanker shipping industry is characterized by significant fluctuations driven by several factors:

  • Global trade: The volume of trade in oil products and chemicals directly impacts the demand for tanker shipping.
  • Geopolitical events: Unstable political situations, geopolitical tensions, trade disputes, and sanctions can lead to major shifts in the demand of the industry.
  • Supply and demand for tankers: The number of ships available also plays an important role in their prices.
  • Fuel prices: Fuel costs can make a huge impact on a shipping company.
  • Global economic activity: The fluctuations on the global economy also has a significant effect on the company.
  • Environmental regulations: These regulations also have a big impact on the industry.

The industry is highly cyclical and has recently seen strong rates because of the war in Ukraine and the changes in supply chains. These changes have greatly benefited companies such as Hafnia, that are highly dependent on global trade.

The competitive landscape is highly fragmented, with numerous private and public companies competing. The key factors for competition include ship capacity, geographic reach, operating expertise, fleet quality, and financial stability. Hafnia’s main competitors are:

  • Product tanker companies: such as Torm, Scorpio Tankers, Ardmore Shipping and Hafnia’s partnership pool, the Handytanker alliance.
  • Private ship owners: are extremely competitive and have lower costs.
  • Large Integrated Companies: these companies own and operate their own fleets.

Hafnia seeks to differentiate themselves through its fleet efficiency, risk management strategies, and a history of strong operational performance.

Moat Analysis: 2/5

The “moat” of a company represents the sustainable competitive advantages that protect it from competitors.

  • Switching Costs: A company has a moat when their customers will pay a premium for their products instead of using competitors. There are no switching costs for a customer, which is a weakness for the company.
  • Network Effects: A business that has network effects benefits from more users. Hafnia does not have that.
  • Intangible Assets: A brand is one of the strongest economic moats. Hafnia does not have a specific strong brand recognition. Therefore, intangible assets is not a source of a moat for them.
  • Cost Advantages: Cost advantages exist when companies operate at a lower cost than its competitors. This could be due to location, scale, or access to unique assets. While they are efficient, their fleet is more of a commodity and not a unique asset. Furthermore, any company can achieve economies of scale by getting a very big fleet of ships. They have no location advantage. Overall, there are no cost advantages that create a moat for them.

Therefore, based on the framework of strong economic moats, HAFN seems to have none of the moat categories:

Therefore, HAFN’s moat is non-existent: 2/5. However, due to its size, expertise, and relationships, HAFN can continue to perform in the industry for a long period.

Risks to the Moat and Business Resilience

The main risks that could harm the moat and the business resilience are:

  • Overbuilding in the Industry: A major risk for the industry, overbuilding can increase the overall supply of vessels and depress prices. The industry is still very fragmented and there could be an overbuild of the fleet.
  • Geopolitical instability: Geopolitical uncertainty causes a decrease in volume, and the inability to create new trade routes. The current market of high demand may not last.
  • Shift in Demand: If the world shifts away from oil and oil products, their business will be under direct threat.
  • Environmental regulations: Environmental regulations might force HAFN to invest a lot of money to update its fleet.
  • Economic Recession: If the global economy goes into a recession, the shipping industry will suffer as the demand for oil products goes down.
  • Low Barriers of Entry: Given the low barriers of entry, new competitors may come and further disrupt the industry.
  • Operational issues: Ship accidents are possible, can shut down operations, and will cause loss of income.

Despite these risks, Hafnia’s business model has a proven history of adapting to change. They manage their operational risk and finances conservatively, which should help the company adapt through difficult times. Also, the large size of the business should help it compete better.

Financials Analysis

Hafnia’s financial performance has been affected by the cyclical nature of the industry.

It is important to note that HAFN reports in USD currency even though they earn a big portion of their revenue in foreign currencies.

The table below summarizes some financial information based on latest earnings call and filing: | Metrics | 2021 | 2022 | 2023 | |—————————————————-|———-|———–|———-| | Revenues (in millions of USD) | $577 | $1,490 | $1,522 | | Net Income (in millions of USD) | -$160 | $683 | $683 | | Total Assets (in millions of USD) | $2,591 | $3,361 | $3,325 | | Total Liabilities (in millions of USD) | $1,324 | $1,397 | $1,034 | | Cash and equivalents (in millions of USD) | $184 | $474 | $485 | | Debt (in millions of USD) | $1,070 | $894 | $699 | | Working Capital(in millions of USD) | $278 | $234 | $372|

Key Observations:

  • Revenues: Revenue has increased dramatically from 2021 to 2022 and has stayed relatively consistent in 2023, which is a reflection of the strong market for oil products and high prices. They are dependent on oil and oil-products markets, that can be very volatile.
  • Profitability: The company was severely unprofitable in 2021 but rebounded very strongly in 2022, as is visible with net income. Net Income is almost the same in 2022 and 2023, meaning that the company was able to continue its good performance.
  • Balance Sheet: The company has maintained good levels of liquidity and continues to use free cash flows to reduce debt.
  • Debt: The company was focused on reducing debt, which makes it more resilient in face of a market downturn. They have low debt levels.
  • Assets: Total assets are slightly lower from last year, mostly due to a reduction in liabilities.

HAFN has been performing very well given the latest macro environment. However, it is important to know that the macro environment is temporary and the company may not be able to continue its current performance in the future.

Understandability: 2/5

Understanding the shipping business model of Hafnia is relatively straightforward. They are essentially in the business of leasing out ships to clients. However, the key drivers of the business require some in-depth knowledge of the global markets of oil products and chemical transportation, and how the supply/demand dynamics work.

The complex interplay of macro forces and their impact on the cyclical shipping industry makes understanding the details a little complicated. Therefore the understandability rating is 2/5.

Balance Sheet Health: 4/5

Hafnia has maintained a relatively healthy balance sheet and improved it in the last two years.

  • The company’s debt-to-equity ratio is low, meaning that they have a good base of equity to withstand difficult economic times.
  • The company maintains enough liquidity in the form of cash to keep its operations going and use it to buy new ships if needed.

However, the high dependence on the volatile market for oil products could make the balance sheet less resilient in a possible downturn in the shipping market.

The balance sheet was rated 4 out of 5 because, while they have a healthy debt situation and cash levels, they have not proven how they can handle the business in times of low demand for the shipping market.

Recent Concerns

The main concern in the recent earnings call and articles seems to be whether the company can repeat its outstanding financial performance for the past couple of years in the future, given that the macro environment has been very favorable due to the Russian-Ukraine war and the related trade imbalances. The management, however, is quite confident that even if rates are lower, they should be able to continue to generate excess returns on its investments. The company also expects to continue its deleveraging program and grow their operations by acquiring more ships.

Also, during the last earnings call, the management was questioned by a few analysts regarding their decision to include long-term time charters as revenue as a percentage of total revenue. The company defended its decision by noting that time charters are stable and provide good returns over a long time. Also, for the company to take up new investment opportunities, this is a better way to use cash. There was some concern among analysts about the level of transparency, but they seem to have accepted it without an argument.

Finally, there is an overall concern in the shipping industry that the high profits will attract newcomers. This can create excess supply and disrupt the industry with oversupply.