Investment Overview
In the last year, several midsize companies that have done exceedingly well and have the potential to become long-term value creators. For investors seeking growth stocks, GasLog Ltd. (GLOG, Financial) is a stock worth holding, even after 92% returns in the last 12 months.
I have discussed this LNG carrier in the past and will not elaborate much on its business model. The key focus will be industry factors supporting the company and the new initiatives that can be game changers in the long term.
Positive industry outlook
Starting with the industry factors, I believe the outlook is likely to remain positive in the coming five to 10 years for several reasons.Â
The sudden slide in spot rates and plunging prices for crude oil tanker stocks was due to an excess supply of tankers. I see no demand-supply mismatch in the LNG (liquefied natural gas) carrier industry as new orders are at a multiyear low. In general, it takes two and a half years for a LNG carrier to be built. Therefore, even if new orders increase in the foreseeable future, the deliveries will only be in or after 2019. In other words, there is a low probability of demand-supply mismatch, meaning the industry outlook will remain robust.
In the coming years, LNG exports from the U.S. are likely to surge due to growth in Asia. LNG import growth has been impressive with demand surging 40% in China and 29% in India. Imports from the United States to China or India will involve long-distance trade, which will boost the demand for LNG carriers with long-term contracts.
I believe these two factors will ensure industry fundamentals remain strong and GasLog benefits in the markets through long-term contracts that provide strong revenue and EBITDA visibility.
Strong EBITDA outlook
One of the factors that make GasLog attractive is the fact its EBITDA visibility is solid. The current outlook ensures the company’s cash flow and dividend payout is stable. At the same time, GasLog’s expansion will ensure EBITDA growth is seen on a sustained basis.
On average, a new LNG carrier delivers $21 to $23 million in incremental EBITDA for the company. The new vessel deliveries in 2016 will translate into full-year operational EBITDA in fiscal 2017. While there are no LNG carrier deliveries scheduled for 2017, GasLog has deliveries in 2018 and 2019.
This will ensure the outlook for the next three to four years is strong in terms of sustained EBITDA growth. Importantly, all the new LNG carriers to be delivered have long-term contracts, further establishing cash flow visibility.
The key point is that GasLog provides dividend stability through clear backlog visibility and has steady revenue and EBITDA growth prospects. This makes the stock worth considering for the next several years.
Other key triggers
In the coming years, one of the big upside triggers is likely to be floating storage regasification units (FRSU). GasLog has already initiated the process of LNG carrier to FSRU conversion, but the market has yet to realize its potential.
GasLog is likely to have an early adopter advantage in the FSRU industry, but Golar LNG (GLNG, Financial) has also made significant inroads. According to the latest presentation from GasLog, Wood Mackenzie predicts up to 60 additional LNG importing nations by 2025. This will boost demand for LNG floating terminals.
From a financial perspective, GasLog has net debt to EBITDA (leverage) of 4.1, but I do not see that as a concern since its EBITDA interest coverage ratio is 5.2. Therefore, debt servicing is likely to be smooth. In addition, GasLog Partners (GLOP, Financial) has the right to acquire LNG carriers from GasLog, which will ensure the financial flexibility remains high on any potential drop-down to GasLog Partners.
Conclusion
GasLog has seen big rally in the last 12 months, but the stock remains attractive for investors with a 24 to 36-month time horizon. The company has a robust order backlog that ensures earnings stability, and timely delivery of new LNG carriers will boost EBITDA.
Even for dividend investors, GasLog is an interesting investment option considering its solid backlog. Additionally, steady cash flow growth is likely in the next few years.
Disclosure: No positions in the stocks discussed.
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