FLNG - FLEX LNG: 10% Yield Industry Tailwinds

2023-08-20 09:15:00 ET

Summary

• The Russian invasion of Ukraine disrupted the LNG industry, leading Europe to seek alternative suppliers like the US.
• FLEX LNG Ltd. benefited from the increased demand for LNG vessels and locked in high long-term charter rates.
• The company's fleet is relatively young and has a significant contract backlog, contributing to its positive earnings performance.

The Russian invasion of Ukraine deeply affected the Liquefied Natural Gas industry in 2022, causing Europe to divert its purchasing to other suppliers, such as the US. This subsequently hoisted LNG vessel rates, benefiting LNG vessel companies, such as FLEX LNG Ltd. ( FLNG ), whose management was able to lock in high long term charter rates.

Company Profile:

FLEX LNG Ltd., through its subsidiaries, engages in the seaborne transportation of liquefied natural gas, LNG, worldwide. As of 6/30/23, it owned and operated 13 vessels: 9 M-type electronically controlled gas injection LNG carriers; and 4 vessels with generation X dual fuel propulsion systems. It also provides chartering and management services. FLEX LNG Ltd. was incorporated in 2006 and is based in Hamilton, Bermuda. (FLNG site)

Fleet:

FLNG's fleet is one of the younger ones in the LNG shipping industry, with an average age of 3.6 years as of 6/30/23. When newbuilding rates jumped, management bought used newer vessels at a much lower price than newbuilds, and was able to deploy them much quicker, since newbuild orders take years to be fulfilled. This enabled FLNG to capitalize on higher rates.

Its fleet had 54 years of minimum contract backlog, as of 6/30/23.

Earnings:

Q1-2 '23: The ~13% increase in Revenue is due to a higher proportion of the fleet on improved longer term fixed rate contracts, in addition to a stronger spot market vs. early 2022, which affected 1 vessel on a variable rate hire contract, the Flex Artemis.

Net Income fell 44.5%, due to $32M difference in hedging derivatives; a $23M rise in Interest Expense, an ~$8.8M non-cash write-off of unamortized debt issuance costs; with direct exit costs of $1.4 million in relation to the extinguishment of the $629M Facility and the Flex Amber Sale and Leaseback as part of the Company's refinancings.

On an adjusted basis, Diluted EPS increased 12.3% in Q1-2 '23, while Adjusted EBITDA rose 13.3%. The share count rose 2.7%.

2022: Revenue was roughly flat, but Net Income rose nearly 16%, and EPS was up 15.46%, even with the 36% rise in Interest expense:

Management reiterated 2023 guidance for Revenues of ~$370M, and Adjusted EBITDA of $290-$295M on the Q2 '23 earnings release. With the 3 drydocking's completed in the second quarter, the drydocking schedule for 2023 is now completed.

This bodes well for Q3 and Q4 earnings, which are also expected to benefit a bit from higher spot rates:

Industry Trends:

Thus far in 2023, China and Europe have led LNG import growth, up 5.5% and 5% respectively. Japan's imports have dropped 7%, leading to an overall 3% growth rate. On the export side, US export volumes were flat in Q1, before increasing from April due to the restart of the Freeport terminal.

LNG supplies are expected to continue growing into 2030, with the US providing more than 50% of the projected growth. That should help support vessel demand, even with newbuild orders escalating in 2024 - 2026, as only 11% of those newbuild vessels remain uncommitted.

Dividends:

Management declared another $.75 dividend on the Q2 '23 earnings release, but hasn't given the ex-dividend and pay dates, at the time of this article was written. At its 8/17/23 closing price of $30.99, FLNG's forward yield is 9.68%.

For full year 2022, FLNG's Adjusted EPS dividend payout ratio was 111.7%.

However, there was $1.34 in non-cash Depreciation included in Adjusted EPS. On an EBDA basis, the dividend payout ratio was 76.5% for 2022, and 81.2% for Q1-2 '23:

Profitability and Leverage:

The lower Q1-2 '23 Net Income decreased FLNG's ROA and ROE, which were below industry averages, whereas EBITDA Margin was stable, remaining far above the industry average.

The Marine Shipping industry generally has low debt/low leverage, while FLNG's management has decreased leverage from 5.44X to 4.9X over the last 5 quarters. As interest expenses rose over the past year, FLNG's EBITDA/Interest coverage decreased from 4.77X to 2.9X:

Debt and Liquidity:

As of June 30, 2023, FLNG had total long-term debt of $1,863.9M, with no debt maturities until 2028, with $450M in cash.

Management completed its balance sheet optimization program, which included a number of sale leaseback arrangements, as of 3/31/23. FLNG had $936M in Leases, a $400M revolving credit facility, and $528M in term loans.

Performance:

FLNG's price performance has lagged its industry over the past month, quarter, year, and so far in 2023. It has also trailed the S&P 500, except for the last month:

Analysts' Targets:

At its 8/17/23 closing price, FLNG is already 3.3% above Wall Street's $30.00 lowest price target, but is 6.6% below the $33.18 average price target. It's 18% below its 52-week high of $37.97, and 11% above its $27.92 52-week low.

Valuations:

Although it has lagged its industry in price performance, FLNG is getting premium valuations for trailing and forward P/E, P/Sales, and P/Book, in addition to having a much higher EV/EBITDA. Its dividend yield is also much higher than the industry average.

Parting Thoughts:

With its 2023 drydocking expenses completed in Q2, FLNG should have increased support for dividends in the back half of 2023. We'll continue to hold FLNG shares, but we advise waiting for more of a pullback before buying any new shares, as we're heading toward the treacherous month of September.

All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.

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