LPG Shipping – Valuations Uncompelling Despite Price Correction

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LPG

Strong supply growth because of high vessel deliveries scheduled in FY16/FY17 will continue to keep the LPG shipping market in imbalance.  On the demand side, with lower price of LPG in Asia, the propane trade has been hurt, and there has been no major driver of incremental demand to absorb the excess tonnage available.

Freight rates across segments have dropped in the recent past, and we do not expect a meaningful recovery over the next 12 months, even though there could be a short-lived seasonal rebound, considering the sharp fall in rates.

LPG vessel owners are struggling to break even after the drastic drop in rates.  They will remain under pressure in FY17 as well.  VLGCs are unable to cover the daily opex, while smaller vessels are merely covering the costs.

Lower earnings potential amid falling rates and a reduction in asset values has led investors to disassociate from LPG shipping stocks, resulting in the LPG shipping sector markedly under performing the benchmark index.

We can expect that a challenging business environment for LPG ship operators will continue in FY17, which will tell on the earnings of the companies, even though the intensity could vary for each of the sub segment.

Even though the market capitalisation of LPG shipping players has shrunk sharply, the valuations on forward basis are necessarily not cheap.

With earnings expectations pared down, investors are unlikely to lap up the LPG shipping stocks, and hence, they will remain range-bound.

We do not see investors willing to accord higher multiples, and we believe the share prices could trade within a range.  Hence, we have trimmed our valuation forecasts and our base case is a Neutral stance on LPG shipping businesses.  We have accorded the base-case fair value per share of NOK 27 for BW LPG, USD 4 for StealthGas and USD 8 per share for Navigator Holdings.

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Source: Drewry Maritime Equity Research (DMER)

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