The opportunity
My focus has remained on stocks that have underperformed in 2017. Companies with strong fundamentals provide a good entry point at a time when several stocks are trading at stretched valuations.
A master limited partnership (MLP) that has underperformed in terms of stock upside but offers strong growth in cash distribution is GasLog Partners LP (GLOP, Financial). The company has been on my investment radar in the past and currently offers a cash distribution of $2 per share and dividend yield of 8.5%.
Besides providing an attractive dividend yield, the company's stock price has moved higher by 14.1% year to date. The stock, however, currently trades at exactly the same level as on Feb. 13.
This sideways movement for almost five months is a good indication investors should sieze the opportunity to accumulate the stock.
Secure revenue and EBITDA
As of the end of June, GasLog Partners had 11 liquefied natural gas (LNG) carriers on multiyear contracts. All 11 carriers are chartered to Royal Dutch Shell (RDS.A, Financial), which ensures clear cash flow visibility considering a fundamentally strong counterparty.
Importantly, six carriers have contracts expiring on or after April 2020. Therefore, the multiyear cash flow visibility ensures GasLog Partners is well positioned to continue robust cash distribution.
It is also important to note all the LNG vessels are on 100% fixed-fee revenue contracts, so even if there is commodity price volatility in the medium term, the MLPs cash flow remains unaffected.
With a secure source of revenue and EBITDA, GasLog Partners is certainly worth considering for investors looking for regular cash distributions. The bullish thesis for the company, however, goes beyond stable cash distribution.
Drop-down deals for growth
While the company has steady distribution from existing contracts, GasLog Partners has also seen steady revenue and EBITDA growth coming from drop-down deals. GasLog Partners has an agreement with its parent company, GasLog Ltd. (GLOG, Financial), that allows the former to acquire LNG vessels that have contract terms of over five years.
To further elaborate on the growth trajectory, GasLog Partners reported revenue of $169 million in fiscal 2015, $206 million in fiscal 2016 and the company’s first-quarter 2017 annualized revenue came in at $228 million.
In sync with revenue growth, EBITDA and distributable cash flow have also trended higher, which will likely take the stock price higher in the near to medium term. On June 1, the company announced the acquisition of GasLog Geneva from its parent. This acquisition is expected to boost annual EBITDA by $23 million.
At the same time, the acquisition will ensure dividends also increase. While the dividend currently stands at $2 per share, GasLog Partners expects it to increase to $2.09 per share by the fourth quarter of this year.
Therefore, the drop-down pipeline serves as a source of revenue, EBITDA and cash flow growth. It is also likely to ensure GasLog Partners remains attractive from a dividend growth perspective.
Fundamentals support growth
Steady drop-down deals from GasLog are only possible if GasLog Partners has the financial flexibility to support growth. As of March, the company had total debt of $801 million, translating into a debt-to-capitalization ratio of 56% and net-debt-to-EBITDA ratio of 4.6.
While the leverage seems high, the key factor to note is debt servicing. With annualized EBITDA expectation of $168 million, GasLog Partners will see smooth debt servicing in 2017 and in 2018.
To put things into perspective, GasLog Partners reported cash interest output of $8.5 million for first-quarter 2017, which translates into an annualized interest expense of $34 million. Considering $168 million in EBITDA, the MLPs EBITDA interest coverage comes to 4.9.
Therefore, GasLog Partners is unlikely to face any hurdles when it comes to new LNG vessel financing. Importantly, the drop-downs from GasLog will be under long-term charter and will immediately begin contributing to EBITDA and cash flows.
Conclusion
GasLog Partners is one the few MLPs that has seen steady dividend growth, even in uncertain times for the broad energy industry. The company is insulated from volatility in commodity prices and is worth considering for high dividend yield as well as potential stock upside.
The drop-down deals from GasLog will continue and strong fundamentals for GasLog Partners will ensure the latter has a strong appetite for acquisitions. Investors should consider this MLP for a time horizon of two to three years.
Disclosure: No positions in the stocks discussed.
