LPG Shipping: Imminent Seasonal & Cyclical Upside

13.03.2018 kl 21:56


We see the cycle turning to expansion in 2018 as supply growth turn negative and annualized demand growth continues around 10%. We also see signs of seasonal factors materializing, including more US LPG available for export, a rising price differential between Naphtha and LPG and stock building ahead of next winter. Thus, we expect an imminent upswing in spot rates from 2Q18 and forecast shares on average 94% higher in one year.

Market: We believe negative supply growth and imminent seasonal demand improvements will lead to significantly higher earnings from 2Q18. Add annualized demand growth of ~10% and a transparent low orderbook until 2020, the foundation is laid for the next cyclical expansion. Second hand LPG vessels are currently at trough levels and prices not seen since early 2004. When adjusting for inflation, second-hand prices are hovering around their lowest on record going back to 2000. Given current share pricing, investors are thus able to buy modern vessels at a 13-24% discount to all-time-low levels getting the operational organization for free.

Investments: AVANCE (BUY, 56) is our #1 pick trading at a P/NAV of 0.59 (peers 0.62) and 1y fwd NAV of 0.38 (0.48) even after applying a China-discount to its applicable fleet. Add high operational leverage and we see EV/EBITDA in ‘19E of 4.3 (4.6) and potential dividend yield of 41% (26%). LPG (BUY, 14) is ticking all the same boxes as Avance, but it ranks #2 as the discount is slightly lower across the board. BWLPG (BUY, 69) also has significant upside in our view, but the historically lower operational leverage from its industrial approach means it is not the best bet in the cyclical expansion.

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