Business Context and Reporting Period
TORM plc is a global product tanker company incorporated in England and Wales, operating a fleet of vessels transporting refined oil products. The company is an "emerging growth company" under the JOBS Act and reports in accordance with International Financial Reporting Standards (IFRS). This Form 20-F covers the fiscal year ended December 31, 2017.
As of December 31, 2017, the company had 61,985,975 Class A common shares outstanding. Following the reporting period, in January 2018, the company completed a private placement of 11,920,000 shares for approximately $100 million, with the controlling shareholder, Njord Luxco (affiliated with Oaktree Capital), backstopping the offering.
Key Financial Metrics
| Metric (USD Million) | 2017 | 2016 |
|---|---|---|
| Revenue | 657.0 | 680.1 |
| Operating Profit | 39.5 | (107.2) |
| Net Profit/(Loss) | 2.4 | (142.5) |
| Adjusted EBITDA | 157.6 | 200.0 |
| Time Charter Equivalent (TCE) Earnings | 397.1 | 458.2 |
| Cash Flow from Operating Activities | 109.8 | 171.1 |
| Cash and Cash Equivalents (Year End) | 134.2 | 76.0 |
| Total Debt (Interest-Bearing) | 753.9 | 685.2 |
| Net Interest-Bearing Debt | 619.7 | 609.2 |
| Loan-to-Value (LTV) Ratio | 55.8% | 52.4% |
Material Changes vs. Prior Period
- Profitability Turnaround: The company returned to profitability in 2017 with a net profit of $2.4 million, compared to a net loss of $142.5 million in 2016. The 2016 loss was significantly impacted by a one-time impairment charge of $185.0 million on vessels and goodwill. In 2017, impairment losses were minimal at $3.6 million.
- Revenue and TCE Decline: Revenue decreased by 3.4% to $657.0 million, and TCE earnings dropped 13.3% to $397.1 million. This decline was driven by lower freight rates (average TCE rate fell to $14,621/day from $16,049/day) and a reduction in available earning days due to vessel sales and fleet optimization.
- Cost Management: Operating expenses decreased by 3.5% to $188.4 million, and administrative expenses increased slightly to $45.0 million. Depreciation expenses decreased to $114.5 million from $122.2 million.
- Liquidity Improvement: Cash and cash equivalents increased by 76.6% to $134.2 million, supported by a net cash inflow from financing activities of $62.1 million, largely due to a new $130 million Term Facility 2.
Guidance, Outlook, and Risks
Outlook and Strategy: Management continues to employ vessels primarily in the spot market to capitalize on potential rate increases. The company has a significant order book with eight newbuildings under construction, with remaining capital expenditure obligations of approximately $307 million as of year-end. The company expects to fund these commitments through cash flow and existing credit facilities.
Key Risks and Contingencies:
- Market Volatility: The product tanker sector is highly cyclical. Freight rates and vessel values are subject to significant fluctuations based on global supply and demand, bunker prices, and economic conditions.
- Regulatory Compliance: Upcoming IMO regulations regarding sulfur emissions (effective 2020) and ballast water treatment (compliance required 2018–2024) will require significant capital expenditures. The company estimates ballast water treatment costs at $1.0–$1.3 million per vessel.
- Debt Covenants: The company is subject to strict financial covenants, including minimum liquidity requirements and loan-to-value ratios. A breach could trigger an event of default and acceleration of debt.
- Geopolitical and Sanctions: Operations are subject to risks related to piracy, war, and international sanctions (e.g., Iran, Sudan). Violations could result in fines, vessel arrests, or reputational damage.
- Concentration Risk: The 20 largest customers accounted for approximately 76% of total revenue in 2017.
Investor Verification Checklist
- Impairment Methodology: Verify the assumptions used in the 2017 impairment testing, noting that management changed the method for estimating key assumptions during the year.
- Capital Expenditure Funding: Confirm the ability to fund the $307 million in outstanding newbuilding commitments without breaching debt covenants or requiring dilutive equity raises.
- Regulatory Capex: Assess the total projected cost for IMO 2020 sulfur compliance and ballast water treatment systems across the entire fleet.
- Debt Maturity Profile: Review the repayment schedule for Term Facility 1 (maturing 2021) and Term Facility 2 (maturing 2022) to evaluate refinancing risks.
- Shareholder Structure: Note that Njord Luxco (Oaktree affiliate) controls approximately 64.4% of voting shares and holds a Class C share with significant voting power on board elections.