Based on Frontline’s projected growth, it appears to be a favorable investment at its current price.
Based on the global outlook for 2024 and 2025, and the potential benefits for Frontline plc (NYSE:FRO), it is my belief that the company is a favorable investment. Frontline has experienced significant growth in revenue and profitability over the past 12 months, leading to a dividend with an impressive yield. I have observed a significant increase in demand for our products and services across all sectors. This surge can be attributed to ongoing geopolitical events, which I anticipate will continue to drive our company’s growth in the coming years. After conducting a thorough valuation of the company, it is evident that there is significant upside potential. As a result, I am confident in recommending it as a buy.
With my ultimate aim of achieving financial freedom always in mind, I constantly remind myself to maintain patience and unwavering focus when selecting stocks that I can truly comprehend. By following this approach, I can potentially outperform the market over time. In addition, ensuring that I’m not paying more than necessary for them can often be the most difficult aspect.
In the ever-changing landscape of geopolitics, certain industries have the potential to thrive amidst the uncertainty. Frontline, a company that has experienced a significant surge in its stock price since the beginning of the decade, has witnessed a remarkable growth of over 200% since the start of 2022. Considering the ongoing global instability, it has led me to contemplate the possibility of further upside with FRO stock.
Frontline is a global shipping company based in Limassol, Cyprus since 2022. They have expertise in transporting crude oil and refined petroleum. The company operates a diverse global fleet consisting of VLCCs, Suezmax, and LR2/Aframax vessels. The company’s primary focus is on operating their tankers in both spot and time charter markets to facilitate the global transportation of crude oil and refined petroleum.
Recent global events, including the war in Ukraine, Red Sea crisis, and Israel-Palestine conflict, have had a significant impact on the global supply chain. These events have caused a major shift in the operating environment for FRO, resulting in a notable increase in the stock price. Over the past 3 years, the stock has experienced remarkable growth, increasing by 221.3% from $7.38 to $22.89 today. This translates to an impressive compound annual growth rate (CAGR) of 47.8%.
Being a dividend investor, my focus is on finding businesses that consistently offer sustainable dividends. This strategy allows me to generate passive income and also serves as a reliable indicator of a company’s financial stability. Upon analyzing my investment strategy, I was immediately impressed by FRO’s remarkable dividend.
Frontline’s dividend track record has been inconsistent, which can be attributed to its cyclical nature. The company has experienced consistent annual increases in dividends over the past 2 years, with only two instances in the past decade where dividends were not paid. Over the past decade, FRO’s dividend has seen an impressive compound annual growth rate (CAGR) of around 17.7%. Despite some cuts and pauses along the way, it is important to highlight that a significant portion of this dividend growth has occurred in the most recent year. Frontline’s (LTM) dividend for today stands at $2.17, resulting in an attractive dividend yield of 9.4% when considering the current price of $22.89. This yield significantly surpasses the average dividend yield of 1.35% for the S&P500.
In my opinion, Frontline’s payout ratio of 97.3% is quite sustainable. This suggests that they should be able to maintain their dividend amount as long as the company keeps growing. It is worth noting that Frontline’s dividend policy sets it apart from other companies that maintain a consistent quarterly dividend throughout the year. Frontline strives to provide regular dividends to shareholders, typically aligning with or closely matching adjusted earnings per share (EPS). The decision regarding dividends is ultimately made by the Board of Directors. Frontline’s dividend payout ratio falls between that of Teekay Tankers (TNK) and SFL Corporation (SFL), indicating a moderate level of sustainability. FRO’s dividend yield is more attractive compared to its competitors, with a yield of 9.4% as mentioned, while TNK and SFL have yields of 1.8% and 7.7% respectively.
Frontline has consistently demonstrated strong financial performance over the past decade. Despite the usual ups and downs, the company has been able to consistently improve its financial performance. In terms of revenue, it increased significantly from $240 million in 2014 to $1.8 billion in the last twelve months, showing a consistent annual growth rate of 25%. However, it is important to mention that there were a few instances where the revenue declined by more than 10% on a year-on-year basis during this time. FRO has also experienced significant growth in its bottom line. The earnings per share (EPS), a crucial measure of profitability, has increased from $1.60 in 2014 to $2.95 at present. Over the past ten years, the company experienced several years of negative (EPS), which emphasizes the cyclical nature of the business. This is an important factor for investors to keep in mind when evaluating Frontline.
In regards to the balance sheet and the company’s liquidity, it appears to be in a manageable position despite its significant debt positions. Frontline’s net debt position stands at around $3.14 billion, while they have $308 million in cash and cash equivalents. I have some concerns upon initial inspections as the company has a negative free cash flow (FCF) of $775 million. Nevertheless, a significant portion of the company’s unfavorable (FCF) yield can be attributed to the investment in growth capital expenditure, aimed at expanding the business and ultimately driving higher revenue and profitability down the line. In addition, the company does not have any newbuilding commitments and has no significant debt maturities until 2027. This gives me confidence that the company will be able to reduce its debts to a more manageable level in the years to come.
Shifting our focus to more recent developments, the most recent quarterly earnings report showcased the remarkable year FRO has had. It is worth noting that this is their strongest full year performance in 15 years, despite a slower fourth quarter. In Q4 2023, management announced that full year revenues have increased by 26% compared to the previous year, while (EPS) has seen a growth of almost 33% for the year. In addition, the company has recently made announcements regarding the sale and refinancing of several vessels. This strategic move allows the company to make significant progress in paying off its debt and, in my opinion, slightly mitigates the risk associated with the company’s debt. The company recently announced its Q4 dividend, however, no information was given regarding their plans for 2024 or any guidance for the upcoming year or earnings. In my opinion, the current market conditions, with disrupted trade routes and altered energy demands, are likely to lead to further growth in 2024. These changes are expected to result in increased tanker demands.
As previously stated, several geopolitical events in recent years have significantly affected the demand and supply chains for commodities like crude oil and refined petroleum. These events, although unfortunate for the world, have led to an increase in demand for tankers. This is due to the shift in trade routes, resulting in ships having to travel longer distances to reach their destinations. I am confident that the distinct dynamics of supply and demand will drive the growth of Frontline until at least 2025.
Examining the demand side of the industry, BIMCO’s Chief Shipping Analyst predicts a 6.5-7.5% increase in crude tanker demand in 2024 and a 2-3% increase in 2025. Additionally, the Red Sea crisis is expected to contribute to higher demand in the coming months of 2024 due to increased sailing distances. In both 2024 and 2025, the average sailing distances will be influenced by the ongoing trend of moving supply to the Americas and crude demand to Asia. This development is definitely a positive for FRO as it leads to an increase in tonne-miles and freight rates, which typically results in higher-utilization and higher-revenue per voyage.
In addition, our customers are currently unable to explore other markets or transportation options for crude oil and refined petroleum, whether by choice or due to circumstances beyond their control. Take the EU’s sanctions on Russia after their invasion of Ukraine, for instance. These sanctions have caused Russian oil exports to the EU to plummet by over 90%. As a result, the EU has had to search for alternative markets to meet their oil needs, while Russia has had to seek out new customers. As a result, Europe has shifted its oil purchases to countries like Norway, Kazakhstan, and notably the U.S., while Russia has redirected its oil sales towards India and China. In my opinion, it is important to consider that the increase in travel distance has a significant impact. However, it is worth noting that there are no alternative transportation methods available anymore. Therefore, when shipping prices rise, pipelines and land transportation are unable to meet the demand.
In my opinion, Frontline’s growth over the past decade has been impressive, indicating that the company has effectively utilized debt to establish itself as a prominent player in the tanker industry. Despite the company’s impressive performance in recent years, with a growth of over 200%, the current valuation grade from Seeking Alpha indicates that the business might be slightly undervalued. Wall Street has assigned a buy rating to this sentiment, despite the fact that its current (PE) ratio suggests it may be nearing its fair value, as it is slightly above its 3-year average PE ratio.
In order to assess the valuation of Frontline, I have chosen to evaluate the company based on their earnings per share (EPS). The reported earnings per share (EPS) for 2023 stood at $2.95 for FRO. Assuming a variable growth rate, starting at 17% in year 1 and gradually slowing to 2% by year 5, Frontline’s estimated (EPS) is projected to reach $3.95 by 2028. This projection aligns with their historical growth rate of 6.8% per year. This growth projection appears to be quite reasonable, considering Frontline’s efforts to modernize and expand their fleet, along with the favorable market conditions. Based on a (PE) ratio of 7.5, the projected share price in 2028 would be approximately $24.32. Investors could potentially achieve a Compound Annual Growth Rate (CAGR) of 13% by purchasing shares at the current price. In light of the projected return from the valuation model and the positive outlook for the business, I am of the opinion that FRO is a favorable investment at its current price of $22.89.
There is a considerable amount of risk involved in my investment thesis. The future success of Frontline is closely tied to the global economy and the demand for crude oil and refined petroleum products. If there were to be a recession or any other event that leads to a decline in the demand for oil, it is highly probable that the demand for oil tankers would also decrease. This could potentially have a negative impact on FRO’s revenue and profits, potentially putting them in a challenging financial situation. It’s worth noting that the company has recently undergone a significant fleet modernization, a substantial portion of which was financed through debt. Repaying this debt would become increasingly challenging without severely affecting the financial well-being of the business. Additionally, it is highly probable that we would witness a substantial decrease in the stock price.
Upon examining Frontline, it becomes evident that the company has enjoyed a remarkably robust performance over the past year, resulting in a significant surge in the stock’s value and the company’s dividend. I believe the company is poised for continued growth in the coming year, thanks to the ongoing demand for tankers driven by the geopolitical environment. If the global economy continues to show strength and there is sustained demand for oil and petroleum, FRO could be a good investment due to its potential for high returns.