Frontline Limited - Elevated earnings and higher dividend to drive valuation

Frontline Ltd. (FRO) stands to benefit from the surge in vessel earnings on the back of increased demand for tankers amid the sharp increase in on-the-water oil as demand destruction of crude due to COID-19 outbreak has created a wide gap between supply and demand. Not only traders but oil producers are also locking in tankers to store surplus production because of limited availability of conventional onshore storage facilities. Although the global output of oil has declined following the production cut by OPEC+ members, the oil market remains oversupplied. Higher spot exposure of FRO’s fleet at elevated freight rates would lead to a surge in the company’s topline as well as profitability. The acquisition of 10 Suezmaxes from Trafigura in 2H19 will further enhance FRO’s presence in the market and will augment the company’s revenue and profit. We estimate an EPS of USD 2.58 and an annual dividend of ~USD 2.15 per share which is more than four times the annual dividend in 2019. Although FRO’s leverage is higher than the peer average, it is manageable and is expected to decline gradually over the forecast period. FRO’s share is changing hands below our fair value estimate of USD 11.00 per share, and we see an upside potential of ~35%. Accordingly, we have an Attractive view on FRO’s stock and assign Medium risk to the company.