As demand strengthens, this LPG shipper is increasing its newbuild program.
StealthGas (GASS)
from Canaccord Genuity
StealthGas (GASS) focuses on smaller LPG vessel classes, particularly in the 3,000 to 8,000 CBM LPG vessel class, where it is the largest single owner of vessels in the world. These vessels primarily focus on short-haul routes and coastal trades. Currently, about 60% of GASS’ fleet operates in Asia, while the rest operates in Europe and the Americas. We believe the supply dynamics of this sector are attractive, as the orderbook is significantly less than the larger LPG vessel classes, and the fleet’s weighted average age is an elevated 13 years. On the demand side, we believe continued strong demand growth from Japan, India, South Korea, and China will help support robust, fundamental ton-mile growth for LPG shipping, and this should translate well into StealthGas’ sector.
While crude tanker and dry bulk rates are prone to stomach-churning volatility at times, especially for the larger ships, earnings for smaller LPG vessels are considerably less volatile. On the whole, rates have stayed relatively range-bound between roughly $8,000 and $10,000 per vessel/day since 2005. At the same time, GASS keeps a large portion of its fleet employed under period charters, with 56% of 2015 days and 28% of 2016 days fixed. As such, we believe GASS is an attractive option for more risk-averse investors looking for exposure to shipping.
At the end of Q2/14, GASS had approximately $367 million in debt on the balance sheet, versus $139 million of cash and securities. As such, the company maintains a relatively low level of leverage, with a total debt/book capitalization of 40% and total debt/EBITDA (2014E) of 4.9x. We believe this corresponds to strong financial firepower for growth. The company has a substantial newbuild program of 19 LPG vessels, which should help drive fleet and earnings growth, and we expect management to continue to be active in raising capital and consolidating its sector.
We calculate GASS’ NAV is currently $11.29, implying that it is trading at a 20% discount to NAV. Given that the company also has 19 newbuild vessels expected for delivery by the end of 2015, we have estimated NAV at the end of 2016 to be $15.03, implying a 40% discount. Furthermore, GASS trades at only 6.8x to our 2014 EBITDA estimate and 6.1x to our 2015 EBITDA estimate. Combined, these metrics indicate to us that the stock is currently undervalued, and therefore we are initiating coverage of StealthGas with a BUY rating and $15 price target, which is based on a 1.0x multiple to our forward NAV estimate.
Noah Parquette, Canaccord Genuity Research, www.canaccordgenuity.com, 617-371-3711,
October 2, 2014