The shipping industry should be more highly regarded in the market, but repurpose those big ships and fill them with consumers paying for pleasure and the value skyrockets. For instance, Carnival Corp. (CCL, Financial) has a greater market capitalization than all of the shipping companies listed on stock exchanges in the United States. Yet, while people party on Carnival’s boats, companies like Knot Offshore Partners LP (KNOP, Financial) and Hoegh LNG Partners LP (HMLP, Financial) are transporting the goods we all seem to take for granted.
Both Knot Offshore and Hoegh have market capitalizations upward of $600 million and have very tight trading ranges. Both companies pay very healthy dividends- $2.08 (11.54%) for Knot and $1.74 (9.93%) for Hoegh. More importantly, both have grown into solid cash flow generators despite the business model, which finances shipping fleets with debt and pays out the spread back to shareholders as dividends.
Company breakdown
Knot Offshore
Total sales: $270 million
Net income: $92 million
Book value: $22.73
Price-earnings: 6.9
Price-book: 0.8
Price-sales: 2.2
Knot owns and operates a fleet of 16 state of the art shuttle tankers, and has increased in fleet size four times since its initial public offering in 2013. The company provides crude oil loading, transportation and storage services in the North Sea and Brazil. The majority of its fleet is contracted out past 2021 with major energy companies like Shell (RDS.A), Exxon Mobil (XOM), Equinor (EQNR) and Transpetro. It is expected to earn $2.12 in 2019, but currently trades below its five-year average multiples across the board. Any revaluation back to the mean would push Knot’s stock north to $30 per share.
Hoegh LNG
Total sales: $146 million
Net income: $85 million
Book value: $15.68
Stock price: $17.73
Price-earnings: 9.2
Price-book: 1.1
Price-sales: 4.1
Hoegh released strong fourth-quarter numbers last week. Despite missing expectations on earnings, revenue was up year over year. Similar to Knot, Hoegh owns and operates ships it leases to energy companies under long-term charters, but instead of crude oil, the company focuses on liquid natural gas and offers floating storage and regasification units. Hoegh is able to generate pretty high gross margins and carries relatively little debt to income compared to Knot. A major advantage for Hoegh is the market for LNG is poised to triple in capacity and demand by 2035. As long as it remains profitable, the low fixed interest (5%) on its debt will mean high dividends for shareholders for some time.
Risk-reward
Part of me wants to remain cautious considering how the 2008 financial crisis played out for shippers, yet with the industry so vital to the global economy, and these two being at the top of the list of value trades, it’s worth a flyer on either Knot or Hoegh.
Disclosure: I am not long or short any stocks mentioned in this article.
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