BWLLY - BW LPG: Expect A Strong First Quarter Ahead Of Worldwide Fleet Expansion

2023-03-27 10:30:00 ET

Summary

• BW LPG focuses on LPG shipping. It owns and operates a fleet of VLGC carriers.
• Q4 2022 was strong and Q1 2023 will likely be equally strong. But as 46 new vessels will hit the water this year, I am on the sidelines for now.
• Seeing the additional capacity get absorbed by the market would be bullish for the entire LPG shipping market.

Introduction

BW LPG ( BWLLY ) ( BWLLF ) is a Norway-based operator of LPG carriers. About a year ago, I turned more cautious on this LPG carrier as dozens of new vessels are expected to hit the water this year and the increased capacity could have an impact on charter rates. The stock is now trading about 50% higher than when I moved to a hold-rating last year but fortunately I didn’t entirely miss out on the LPG boom as I ‘cheated’ on BW LPG by also trading Oslo-listed Avance Gas ( AVACF ). 2022 has now ended, and BW LPG was able to capitalize on a surge in demand and charter rates in the final quarter of 2022 resulting in a much better performance than I had anticipated.

BW LPG has its main listing on the Oslo Stock Exchange where it's trading with BWLPG as its ticker symbol . The average daily volume in Norway is just under 300,000 shares and this makes Oslo by far the most liquid exchange to trade in the company's shares. BW LPG is currently trading at 80 NOK per share which translates into $7.62 based on the current exchange rate (10.5 NOK per 1 USD).

2022 ended on a strong note

The fourth quarter of 2022 was absolutely excellent for BW LPG. The charter rates increased to approximately $55,000/day on an average basis thanks to spot prices zooming in on $70,000/day.

The total shipping revenue in the final quarter of the year came in at just under $265M while the gross income was $187M after taking the net contribution from product services into consideration while also deducting the voyage expenses.

The EBITDA was very strong as it increased by in excess of 75% compared to the final quarter of 2021. As the depreciation charges didn’t change at all, the EBIT (before taking impairments and impairment reversals into account) increase was even more impressive: it jumped from $37.5M in Q4 2021 to almost $97M in the final quarter of last year.

The sole reason why the net profit increase is ‘just’ 50% is because BW was able to record and report a few non-recurring gains in the P/L statement in the fourth quarter of 2021.

The income statement also clearly shows 2022 was a good year for BW. The full-year EBITDA came in at $408M (of which 34% was generated in the very strong final quarter of the year) while the net profit was $238.6M resulting in an EPS of $1.68. That’s approximately 17.6 NOK per share which means the stock is currently trading at less than 5 time last year’s earnings.

And the net income wasn’t just a ‘paper profit’. The cash flow statement also clearly shows the massive improvement on the financial front.

The company reported an operating cash flow of $407.2M in FY 2022, but this excludes the income taxes ($1.1M owed), the $54M in lease liabilities and the $26M in interest expenses and other finance expenses (see below). And to be fair, we should also include the $7.9M in finance leases and interest payments received. On an adjusted basis, the operating cash flow was $334M. Plenty of cash to cover the $46M in capital expenditures.

2023 could be a transformational year

2022 was excellent, thanks to a very strong final quarter of the year which admittedly came very unexpected. According to BW LPG there was an increasing demand from the Far East to replenish inventories And 2023 has started pretty strong as the average spot rate in the first two months of the year already came in at around $60,000/day, peaking at $80,000/day by the end of February.

BW is playing it smart this year as almost its entire fleet was locked in at an average rate of $56,000/day which means we should be able to expect the company to repeat its excellent result from Q4 2022.

That’s smart. As I explained in last year’s article, dozens of new VLGC vessels will hit the water this year. In the first quarter of 2023 alone, the total amount of vessels that will hit the water already exceeds the completed newbuilds of the past three quarters. A total of 46 new vessels will be delivered to their new owners this year.

This means 2023 will be an important year, mainly because the total amount of deliveries decreases again in 2024. As 2023 will likely be a year full of uncertainties, I certainly appreciate BW LPG is locking in charter rates for the rest of the year. Now the first quarter is over, I will be looking forward to see if BW further increased its time charter coverage from the 30% it has locked in for FY 2023.

Investment thesis

I’m still on the sidelines, mainly due to the delivery of almost 50 new vessels this year. While I realize some of the older vessels will be retired and the net increase will be lower than the 46 vessels hitting the water this year, the capacity increase will likely weigh on the charter rates. That doesn’t have to be a problem for BW as its management team has proven over and over again it knows how to navigate through uncertain times.

I currently have no position in either BW LPG or Avance Gas although I expect a strong first quarter from both LPG shippers which makes BW LPG a speculative buy.

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