Avance Gas (AVACF) is one of the leading global VLGC ship owners and operators having a current fleet of six VLGCs with eight VLGCs to be delivered in 2014 and 2015. A strong new vessel program coupled with robust industry dynamics is likely to result in robust revenue, EBITDA and cash flow growth for Avance Gas over the next two years.
This investment thesis discusses the newly listed company from a growth and valuation perspective to conclude on a significant upside potential over the next year.
Company Overview and History
Avance Gas operates in the global market for transportation of liquefied petroleum gas. The company transports LPG from either Middle East Gulf or US Gulf to destinations in Europe, South America, India and Asia. In terms of size, the company is one of the world's leading owners and operators of very large gas carrier (VLGCs) operating a fleet of six modern ships and has a new vessel program of eight VLGCs.
Originally, Avance Gas was established by Stolt-Nielsen Gas to exploit opportunities in the fast growing global LPG market with the group acquiring its first VLGC in 2010.
In late 2010, Avance Gas acquired three VLGCs in a share/cash transaction, and Sungas became a 50% shareholder in the company, alongside Stolt-Nielsen Gas.
The company’s growth continued in the summer of 2012, when Avance Gas acquired Maran Gas’ VLGCs in a cash transaction, adding two more ships to the fleet.
In August 2013, the company entered into an agreement with Frontline 2012, pursuant to which Frontline 2012 become a shareholder in the company alongside Stolt-Nielsen Gas and Sungas.
In November 2013, the company completed a USD100 million private placement of approximately 5.9 million new shares at a price of USD17.00 per share. Following the private placement, the shareholdings of Stolt-Nielsen Gas and Sungas were reduced to 25.8% each, and Frontline 2012’s shareholding was reduced to 22.6%.
Avance Gas got listed in April 2014 and the stock has surged by over 40% since listing. However, for the reasons discussed below, the upside potential for the stock remains significant over the next year.
Before looking at the management team, I would briefly like to focus on the company’s chairman and director. Niels G. Stolt-Nielsen, the chairman of Avance Gas, has served as a director of Stolt-Nielsen Limited since 1996 and as chief executive officer since 2000. I wanted to mention this because Avance Gas is a relatively new company. It however has the board expertise from a well-established firm.
Jan Chr. Engelhardtsen, one of the directors of Avance Gas, has served as chief financial officer of Stolt-Nielsen Limited since 1991. He served as interim chief financial officer, Stolt Offshore S.A. from September 2002 until March 2003. He also served as president and general manager of Stolt-Nielsen Singapore from 1988 through 1991.These were the two prominent chairmen's and directors' expertise I wanted to focus on before looking at the management team.
The key highlight in the management team is Christian Andersen, the president at Avance Gas. Christian Andersen founded the company in September 2007 together with Stolt-Nielsen Gas. He is an employee of Stolt-Nielsen Gas and is seconded to the company on the terms of the Service Agreement as the president of the company. Andersen has 25 years of experience in the industry and has previously worked as head of LNG at BW Gas and as founding partner of Amanda LPG Trading.
Avance Gas therefore has a strong team with several people with long-term expertise in the LNG industry. The company's operations to date, strong fundamentals and well-planned growth underscore the strength of the management team.
Strong Company Fundamentals
Along with a robust growth in the number of VLGC, Avance Gas has exhibited robust fundamentals. For the year ended November 2013, Avance Gas revenue increased by 18%. Further, for the first quarter of 2014, the company’s revenue witnessed a growth of 29%. I will later discuss the reasons for believing that the company’s growth trajectory will be sharper for the remainder of 2014 and for 2015.
What is important to mention in the fundamental factors is the control in leverage exhibited by the company even in times of robust growth. This is also indicative of a good management team.
Coming to the leverage, Avance Gas had a debt to EBITDA of 4.0 for the year ended November 2013. More importantly, the company also had an EBITDA interest coverage and OCF interest coverage ratio of 4.0 and 2.8, respectively. This is indicative of the point that the company has sufficient financial flexibility and debt servicing is not a concern.
Robust operating cash flows are likely to continue and this should aid investments. The company’s OCF increased to $35.7 million in fiscal 2013 as compared to $12.0 million in fiscal 2012. In addition to this, the balance sheet strength is further enhanced a $162 million in cash reserves as of first quarter 2014 (including recent IPO proceeds).
Overall, the company’s fundamentals are robust in terms of growth, balance sheet metrics and cash flow metrics. The reason for believing that the robust growth will sustain is discussed in the next section of the thesis.
For the first quarter of 2014, Avance Gas reported an increase in day rate by 104% as compared to the first quarter of 2013. I strongly believe that the robust trend in the industry is likely to be sustained over the next few years. This section discusses some of the key industry fundamentals.
According to DNB Markets, VLGC demand to ship out from the U.S. would increase from 16 vessels in 2013 to 78 ships by 2017. From current levels of 10 million tons, the U.S. LPG export is expected to more than double to 21 million tons by 2020. This boom in LPG export (especially from the U.S.), is likely to keep the day rates firm over the long term.
From a demand perspective, a bulk of the demand is likely to come from the Asia-Pacific. The region accounted for 54% of demand in 2013. The important point to note here is the fact that 51% of the end-use for LPG comes from the household sector.
With increasing urbanization and rising income levels in China and India, the demand for LPG will remain strong. Further, the worst economic period for China and India seems to be over and the next phase of economic growth should help in keeping the demand significantly high.
Revenue and EBITDA Forecast for 2014 and 2015
For the first quarter of 2014, Avance Gas reported revenue of $28 million and EBITDA of $12 million, translating into an EBITDA margin of 41%. The revenue was on a day rate of $34,999 for the vessels. For the second quarter of 2014, the company has guided a day rate of $40,000. I have assumed the same day rate for the remainder of 2014 for my assumptions.
This is a conservative estimate, as the day rate has been trending higher in the recent past. Further, the company has two new vessel deliveries in October 2014 and December 2014. This gives the quarterly revenue increase (fourth quarter 2014) as shown in the table.
For 2015, the growth is stellar and the markets are likely to discount this growth over the next year. Avance Gas is expecting the delivery of three VLGC in first quarter 2015, two VLGC in second quarter 2015 and one VLGC in third quarter 2015.
The delivery of six VLGCs will provide a major revenue upside in 2015 as shown below. I must mention here that I have considered a day rate of $44,000 for 2015 as compared to $40,000 in 2014. Again, this is conservative considering the robust increase in day rates witnessed in the recent past. To put things into perspective, day rates increased by 104% for the first quarter of 2014 as compared to the first quarter of 2013.
The current growth is always discounted in the stock price. It therefore makes more sense to consider the forward valuation to determine the potential upside.
Considering EBITDA of $55 million for fiscal 2014, Avance Gas is currently trading at a forward (2014) EV/EBITDA valuation of 14.4. The valuation for 2015 is more interesting and worth considering. Considering EBITDA of $132 million for 2015, Avance Gas is currently trading at a forward (2015) valuation of 6.0.
This is very attractive considering the fact that peers such as Navigator Holding (NVGS) is currently trading at an EV/EBITDA valuation of 14.6 and StealthGas (GASS) is trading at an EV/EBITDA valuation of 9.7.
The average EV/EBITDA of peers comes to 12.1, which implies a valuation gap of 100% considering the forward EV/EBITDA valuation of 6.0 for Avance Gas. The upside potential is therefore significant over the next year.
The risk factors specific to the company is any delay in the delivery of new vessels. While the delivery of new vessels has been on schedule in the past, this risk needs to be considered because my assumption on revenue and EBITDA incorporates a high utilization for the fleet as expected by the company. A delay in delivery of the fleet can negatively impact the revenue forecast for 2015 and can dent the stock upside. I, however, see the probability of such a delay as low given the fact that all the new vessel construction is on schedule.
The risk related to the industry also needs to be discussed. It is expected that 31 VLGCs will be delivered in 2014 and 2015 amid strong market conditions. I believe that the delivery of new VLGC will not impact day rates as the industry outlook remains robust. However, Avance Gas transports LPG from either Middle East Gulf or US Gulf to destinations in Europe, South America, India and Asia. Any potential downturn in economic activity in emerging Asia can negatively impact the day rates. Again, this risk needs a mention, but the probability of this risk panning out is low considering the point that growth in emerging Asia (especially China) might have bottomed out in 2013.
Outlook and Conclusion
Avance Gas is set for strong growth in 2015 and the stock should gradually begin to discount this positive development. Emerging Asia will be one of the major export markets for LPG from the U.S. Even for 2013, the LPG import demand was nearly 54% from the Asia Pacific region. This growth will continue to increase over the next few years as Asia continues to experience relatively robust growth. Being one of the big players in the industry, Avance Gas is well positioned to capitalize on this demand.
Very importantly, Avance Gas has planned its growth at the right time with eight new vessels coming into operation over the next year and half. The stock price is likely to adjust higher with the commencement of operation for each of the eight new vessels.
Even from a valuation perspective, Avance Gas is trading at very attractive forward EV/EBITDA valuations. I believe Avance Gas can potentially return over 100% to investors over the next one year and I recommend the stock as a strong buy.