Correction Is an Opportunity to Accumulate Dorian LPG

Modern fleet likely to capitalize on long-term opportunity related to swelling Asian LPG consumption

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Jun 28, 2017
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Even as broad market valuations look stretched, there are individual sectors and stocks that offer value. Using a bottom-up approach, investors can still find companies that are reasonably valued and have not moved in sync with broad markets due to industry-specific factors.

These stocks provide attractive buying opportunities for the medium to long term with their strong fundamentals being the key consideration even if industry sentiments are depressed. This article will discuss one stock that has declined steeply but holds good long-term potential. Dorian LPG (LPG, Financial) declined from $12.38 on Jan. 30 to $7.17 to June 21. Subsequent to this 42% decline, the stock moved higher by 15% to current levels of $8.26.

The stock has bottomed out, and the following factors can trigger upside for this liquefied petroleum gas shipping company over the next 24 to 36 months.

Company overview

Dorian LPG is a liquefied petroleum gas shipping company with the company being an owner and operator of modern very large gas carriers (VLGCs). The company’s fleet is comprised of 19 ECO-VLGCs and three modern VLGCs, with an average age of 3.5 years. The company provides in-house commercial and technical management services for all of the vessels in the fleet.

At the onset, it is important to mention that Helios LPG Pool was established in April 2015 as a 50-50 partnership between Dorian LPG and Phoenix Tankers. The pool is comprised of 18 Dorian LPG VLGCs, four Phoenix VLGCs and five Oriental Energy VLGCs. These assets are utilized to offer and spot freight, TCs and COAs.

Quality fleet

Before talking about the fleet, I must briefly mention here that Dorian LPG stock has declined primarily due to lower spot rates that have been a direct result of VLGC fleet growth in the past. I will elaborate on this factor and the potential impact in the long term.

Coming to the first key positive, Dorian LPG has a modern fleet and asset quality is one of the key factors to like this stock. Just to put things into perspective, the company’s average vessel age is 3.5 years as compared to the global average VLGC age of 8.9 years.

Further, the company has 19 eco-VLGCs and 16 of the 22 vessels already equipped with Ballast Water Treatment Systems. With a modern fleet, Dorian LPG has an advantage over peers and a high-quality fleet is likely to ensure that the utilization rate remains robust even in relatively depressed times.

As industry conditions peak in the next few years, the company’s fleet will ensure healthy EBITDA margin and cash flow.

Positive industry triggers

While near-term industry factors have translated into lower earnings and depressed stock price for VLGC companies, the long-term industry outlook is robust and this section will discuss key points that will ensure that Dorian LPG recovers and outperforms in the medium to long term.

One of the most important industry developments is that there is growing demand for LPG consumption in Asia, and there is growing supply of LPG from the U.S. Just to put things into perspective, seaborne LPG exports from the U.S. were 15% of total seaborne LPG exports in fiscal 2015. It has jumped to 36% year to date and with rising capacity in the U.S. the trend is likely to be higher.

Long-distance trade from the U.S. to Asia will naturally create demand for VLGC carriers and I expect an increasing number of term contracts to provide higher revenue visibility for VLGC companies. Further, LPG export from the Middle East to Asia is also likely to sustain and grow and that will create incremental demand for VLGCs.

Elaborating further on the demand outlook, annual China LPG imports during the period of fiscal 2013 to fiscal 2016 increased at a CAGR of 50.7% and stood at 16.1 million tons in fiscal 2016. For India, import for fiscal 2017 is forecasted at 11.5 million tons, and imports growth will remain robust for India for the next decade. Therefore, just considering China and India, there is ample demand potential for LPG, and this will directly translate into healthy markets for VLGC in the medium to long term.

It is also important to mention here that 36 new VLGC were introduced in the markets in fiscal 2016 and for fiscal 2017, it is likely that 24 new VLGCs will enter the market. This has created some near-term excesses and translated into relatively lower spot rates. However, the order book for fiscal 2018 and fiscal 2019 is slim at five and six VLGCs, and this can result in day rates trending higher.

Conclusion

Dorian LPG has a quality fleet, and the company’s balance sheet is also healthy to navigate relatively challenging times for the industry. The stock has seen some upside in the near term; the stock has bottomed out after a sharp decline since January.

Investors can consider accumulating the stock gradually in the next few months. I advise gradual accumulation as broad markets can potentially see some correction and that can provide further attractive entry points.

Disclosure: No positions in the stock.