Valuation multiple for crude tankers
Crude tanker companies are cyclical and volatile in nature. These companies are capital intensive, with high levels of depreciation and amortization. Also, these companies have varying degrees of financial leverage. Such companies are better-valued and compare better using EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiples.
Forward EV-to-EBITDA tells us how a company is valued for each dollar of EBITDA that it’s expected to earn. A lower ratio might indicate that a company is undervalued, but not always.
How to interpret EV-to-EBITDA
Companies with higher risk can also have low valuation multiples. These risks can be any type of financial risk, including having higher leverage or operational risk.
Companies that are less popular among investors may also be trading at lower valuation multiples.
Nordic American Tankers’ high multiple
Nordic American Tanker (NAT) is trading at a one-year forward EV-to-EBITDA multiple of 7.09 as of December 4, 2015. This multiple is the highest among its peers. The market is most likely giving a premium multiple to NAT due to its strong balance sheet.
Also, NAT has a low break-even cost and one of the highest EBITDA margins among its peers. Its high dividend yield is one of the reasons why investors value it more than its peers based on its EBITDA.
DHT Holdings’ low multiple
DHT Holdings (DHT) is currently trading at a forward EV-to-EBITDA multiple of 5.3, the lowest among its peers.
The company has a strong balance sheet. It has a good mix of spot and fixed exposure. It has an EBITDA margin of 59%—lower than NAT but higher than its other peers. DHT’s tankers are relatively young, and it’s expanding its fleet. Despite these factors, investors have given it a lower valuation, most likely due to its convertible debt.
Teekay Tankers’ valuation can be misleading
Teekay Tankers (TNK) is trading at a forward EV-to-EBITDA multiple of 6.33. The company has many of its vessels classified as operating leases. This can artificially keep enterprise value on the lower side, which can result in a misleading EV-to-EBITDA multiple.
Tsakos Energy Navigation (TNP) and Euronav (EURN) are trading at forward EV-to-EBITDA multiples of 5.30 and 5.38, respectively.
Shipping companies make up 19.7% of the Guggenheim Shipping ETF (SEA). Investors interested in broad exposure to the industrials sector can invest in the SPDR Dow Jones Industrial Average ETF (DIA).