As I delve into the world of maritime commerce, I find myself intrigued by the journey of TORM plc (NASDAQ: TRMD). Last year, this company was riding high on the winds of change, benefiting from the sanctions imposed on Russian oil exports due to the Ukraine conflict. The resulting disruptions caused ripples in transportation routes, leading to favorable shifts in marine transportation tariffs. The outcome? TORM reaped substantial profits. However, it’s important to note that the tailwind effect is slowly waning, and the company’s financial performance is expected to revert to its standard trajectory. Although the stock price remains closer to its record highs following the surge, the euphoria of the “Golden Rush” seems unlikely to be replicated. In this article, I’m going to take you through my perspective on TORM’s journey, its financial standing, and where it’s headed.

Setting Sail with TORM

TORM has quite the history, dating all the way back to 1889. The company stands tall in the realm of refined oil product carriers. Its cargo includes clean petroleum products like gasoline, jet fuel, kerosene, naphtha, and gas oil, as well as occasionally handling dirty petroleum products like fuel oil. At the close of the fiscal year, TORM’s fleet encompassed a total of 80 owned or chartered-in vessels.

The fiscal year’s finale aligns with December 31, and as of 2022, the company’s top twenty customers contributed a substantial 74% to the total revenue. Remarkably, a single customer alone accounted for 12% of this sum. TORM operates through two distinct segments: the Product Tanker segment and the Marine Exhaust segment. However, it’s worth noting that the latter holds negligible significance when it comes to financial performance.

Riding the Financial Waves

The nature of TORM’s business places it squarely in the path of industry cyclicality. Consequently, its financial performance over the past decade has been a roller-coaster ride. Yet, amidst the turbulence, the company managed a remarkable 45% CAGR in terms of revenue over the course of the decade. Even during crisis years for the industry, the company experienced only minor contractions. The star of the show was the last fiscal year, propelled to great heights by the favorable tailwinds of the Russian-Ukrainian conflict and the subsequent sanctions. The disruption in the oil and gas sector due to the sanctions had a positive ripple effect on TORM’s earnings.

Navigating the Near Future

Following the banner year of 2022, it’s no surprise that consensus estimates are predicting a dip in revenue for the next three years, bringing TORM back to its standard state. The vigor that buoyed the product tanker industry seems to have ebbed, and a swift turnaround doesn’t appear on the horizon. However, it’s worth noting that these estimates might err on the side of caution, predicting a 2025 revenue of $665 million – a figure below both the 2019 and 2020 levels. This forecast doesn’t quite jibe with the burgeoning global oil demand, a trend likely to continue given the favorable demographic shift and the return of employees to office spaces. Furthermore, the U.S.’s need to replenish strategic reserves acts as a short-term tailwind for TORM.

Plotting the Financial Course

The recent quarters witnessed TORM flexing its financial muscle, leading to significant improvements in its balance sheet. The leverage ratio stands comfortably below one, with a majority of the debt allocated to the long-term category. Liquidity metrics are healthy, and the covered ratio paints a similarly positive picture.

Setting Our Bearings on Valuation

In terms of stock performance, TORM has been somewhat lackluster, trailing behind the broader market by a 5% margin year-to-date. The Energy sector (XLE) has also outpaced the company, registering a 4% increase. Seeking Alpha Quant deems TORM worthy of the highest “A+” grade, predominantly due to its forward P/E ratio comfortably resting below 4. The present multiples are also notably lower compared to the company’s five-year averages.

Judging by the Numbers

While discounted cash flow analysis isn’t ideal due to the cyclical nature of TORM’s business, the dividend discount model (DDM) steps into the spotlight. With consensus projecting an FY 2023 dividend payout of $8.18, offering a 31% yield, it’s clear that last year’s extraordinary numbers are driving this projection. However, the prospect of a similar tailwind is unlikely, leading me to adopt a more conservative $2.5 dividend for my DDM calculations. While the stock appears attractively valued, uncertainties around dividend consistency remain. The company’s history of volatile payouts highlights the inherent unpredictability. Given these factors, it seems more prudent to assess the stock’s distance from its all-time highs. The current trading price, nearly 30% below the peak, suggests a gradual return to its historical range.

Navigating the Risks

Of course, every investment venture comes with its fair share of risks. TORM’s exposure to the cyclical nature of the product tanker industry means that volatility is a constant companion. A range of external factors, from global economics to geopolitical tensions, can sway the company’s earnings. Unpredictable events like marine accidents or unfavorable weather conditions could disrupt vessel operations, impacting sales.

Charting the Course Ahead

In conclusion, I view TORM as a “Hold.” While the company boasts impressive scalability and profitability, it’s undeniable that its fate is intertwined with industry cycles. The extraordinary surge of the past year is unlikely to repeat, and the stock’s price trajectory should converge with historical norms. The allure of the “Golden Rush” has faded, leaving us with a clearer picture of TORM’s trajectory.