FLNG - FLEX LNG: 10% Yield Special Dividend Declared

2023-11-24 09:15:00 ET

Summary

• Europe's switch to LNG supply sources from Russia has increased demand for LNG shipping, leading to higher shipping rates.
• FLEX LNG Ltd. has a strong fleet with long-term charter contracts and has been able to lock in higher charter rates.
• FLEX LNG has been increasing its dividends and currently offers a base dividend yield of 9.58%, with a total yield of around 10%.

With Europe switching its liquefied natural gas ("LNG") supply sources from Russia in 2022, in the wake of the Ukraine invasion, LNG became a hot commodity, and LNG shipping was also impacted. Ton/miles increased, as the U.S. increased its LNG shipments to Europe. This, in turn, caused shipping rates to increase.

Higher spot rates allowed FLEX LNG Ltd. ( FLNG ) to lock in higher long-term charter rates. The fleet has 51 years of minimum contract backlog. The only vessel with a near-term charter expiration is the Flex Constellation, which is on a fixed charter until Q2 '24. However, 7 of 8 of the fleet's charters expiring in 2024-2027 have options via which their contracts may be extended.

Company Profile:

FLEX LNG Ltd. is an LNG shipping company with a fleet of thirteen fuel-efficient, fifth-generation LNG carriers. Its fleet consists of 9 M-type, Electronically Controlled, Gas Injection ("MEGI") LNG carriers, and 4 Generation X Dual Fuel ("X-DF") LNG carriers built between 2018 and 2021. It also provides chartering and management services. Flex LNG Ltd. was incorporated in 2006 and is based in Hamilton, Bermuda. (FLNG site).

Dividends:

FLNG's dividends began to increase dramatically in Q1 2021 when management increased the quarterly payout from $.10 to $.30. They continued to increase it to $.75 in Q4 '21, where it has remained.

They also paid special dividends of $.50 in Q3 '22 and $.25 in Q1 '23, and recently declared a $.125 special dividend. Both the regular $.75 and the special dividend go ex-dividend next week, on 11/27/23.

At $31.33, FLNG's base dividend yield was 9.58% - the $.125 special adds .40%, for a total yield of ~10%.

In 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.

For Q1-3 '23, the EBDA payout ratio was above 1X, at 113.53%.

The overage in dividend payments reduced Equity from $907M as of 1/1/23, to $875M, as of 9/30/23.

"Lately, we have been paying out slightly more than we have been earning because we have a substantial cash balance. Knut Traaholt did a good job in last year when we did the balance sheet optimization program when we released $387 million of cash from that program, which kind of enabled us to pay back some of the capital in addition to also the return on capital." (Q3 '23 call .)

Earnings:

Q3 '23 saw a 3.6% rise in revenue, while Net Income and EPS fell ~3%. Adjusted EPS, which eliminates changes in assets/liabilities of derivative instruments, rose 6%, while EBITDA rose 5.5% vs. Q3 '22. Interest expense rose $6M, up 27.7% in the quarter.

FLNG had all 13 LNG carriers back in operation during Q3 '23. Its dry docking program was completed in the first half of the year, so that's done for 2023, and it only has 2 ships for drydocking next year, which bodes well for 2024.

Q1-3 '23: Revenue had a healthy 9.5% jump, while Net Income and EPS dropped 31%.

The big dip in Net Income was due to a $29M increase in Interest expense, and a much lower gain on derivatives. There was a $29.9M gain on derivatives in Q1-3 '23, vs. a $74.8M gain in Q1-3 '22.

Adjusted EBITDA was up 10.4%. The share count was flattish.

The time charter, TCE, the equivalent rate for Q1-3 '23 was $78,888/day, up 13%, vs. $69,809/day in Q1-3 2022.

Management has done a good job of meeting guidance figures so far in 2023, and they feel that Q4 '23 will be a strong quarter:

"With seasonally stronger spot market heading into the winter season, we expect a further increase in revenues in the fourth and last quarter of the year with expected revenues of $97-99M. This is also at the high end of our guidance of $90-100M. With the third quarter numbers presented today and the guidance for the fourth quarter, we are thus well on track to deliver on our revenue guidance for the year of $370M, our adjusted EBITDA target of$290-295M, and the overall average Time Charter Equivalent guidance of $80,000 per day." (FLNG site.)

Industry Status:

There are about 300 ships under construction today, but there is also a large amount of LNG coming from the U.S. and Qatar in 2025-2026, and an ongoing expected increase in production in 2027-2028. Higher interest rates have helped to increase the cost of new build ships to ~$265M, which has also helped to increase shipping rates. 10-year term rates have stabilized at ~ $100,000/day.

Management sees 2024 volume growth in exports as limited, while there will be a lot of ships in the market. "There's also - there's more export growth coming to the market in '25, but there's also a lot of ships." (Q3 '23 call).

They feel that the new production will tighten the shipping market in 2027-2028. Another factor impacting this is that there are many older vessels in the market, which will most likely be scrapped in the future:

"About 200 of the ships in the fleet today are old steam turbine propelled ships with - which are too small and very inefficient. As we have shown in our presentation in the past, about 100 steamships are coming off charters by 2027. So these are ships that have been fixed, typically 20-, 25-year contracts. And once they are rolling off those contracts, the charterers will typically not extend those ships because of the inefficiency of the ships." (Q3 '23 call.)

Profitability & Leverage:

With tough comps from 2022, FLNG's ROA and ROE have declined in 2023. Debt/Equity leverage has risen a bit, and remains higher than the Marine Shipping industry average, whereas Net Debt/EBITDA leverage has eased somewhat. However, EBITDA/Interest coverage has declined and is much lower than average.

Debt:

That being said, FLNG is still in a good financial position, with $429M in cash, and no debt maturities until 2028. Management completed its balance sheet optimization program, which included a number of sale-leaseback arrangements, in Q1 '23.

Valuations:

At its 1/22/23 intraday price of $31.33, FLNG was selling at premium valuations for trailing and forward P/E vs. Marine Shipping industry averages. Its trailing P/E has risen from 9.9X in Q1 '23 up into the 11X-plus range over the past 2 quarters.

P/Sales, P/Book, and EV/EBITDA were all much higher than industry averages, whereas the 9.58% base dividend yield is right in line with the industry average.

Parting Thoughts:

FLNG looks well set up for 2024, with long-term charters mostly extending into 2025 and beyond; and only 2 drydockings for the coming year.

At its premium valuations, we rate FLNG a Hold. We'll hold onto our FLEX LNG Ltd. shares, as we like the company's prospects in 2024 and beyond, but we'll wait for lower prices before buying more shares.

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