FLNG - FLEX LNG: 9% Yield Strong Q1 Earnings Tailwinds

2023-05-26 09:15:00 ET

Summary

• Q1 '23 EBITDA rose 29% and adjusted EPS rose 55%.
• FLNG yields 9.6% and goes ex-dividend on Monday, 5/30/23.
• No debt maturities coming due until 2028.
• No more drydocking expenses after Q2 '23.

Liquefied natural gas, LNG, was a hot commodity in 2022 due to Europe switching its energy supplies from Russia to other providers.

This rapidly increased demand for LNG vessels, to the benefit of vessel owners, such as FLEX LNG Ltd. ( FLNG ), which enjoyed high spot rates. FLNG's management also took advantage of those rates by locking in high long-term charter rates.

Company Profile:

FLEX LNG Ltd., through its subsidiaries, engages in the seaborne transportation of liquefied natural gas worldwide. As of 3/31/23, it owned and operated 13 vessels: Nine M-type electronically controlled gas injection LNG carriers, and four 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 has one of the youngest fleets in the LNG shipping sub-industry - ranging in newbuild dates from 2018 to 2021, with an average age of ~3.5 years. The contract backlog for FLNG's time charters is more than 57 years. Its earliest charter expiration is in mid 2024, but the charterer has a ~3-year extension option, which management feels will probably be exercised.

Tailwinds:

US LNG exports jumped 17% in April due to the reopening of the Freeport LNG Export Terminal. Year-to-date, they were up 6.8m metric tons, as of 4/30/23. Europe's LNG imports rose 3.7m metric tons, while China's imports rose 1.9m, taking off in March, with its reopening from COVID-based restrictions. LNG exports from the US are estimated to grow 14% in 2023.

The orderbook for newbuild LNG vessels has expanded, but there are only 12% of these newbuild vessels which are uncommitted , which implies that vessel demand should remain strong.

Newbuild prices keep rising, they're at ~$260M per LNG vessel, which has caused vessel owners to look for even longer 10-year charters, vs. previously typical five-year charters, in order to justify the much higher expense.

With these higher newbuild costs, there's not a great deal of speculation. The window is currently closing in on 2028 deliveries, which is the time period that FLNG will be looking to negotiate new charters for.

While spot rates declined in Q1 '23, they remained higher than in Q1 '22, and mostly above 2018-2021 averages.

Earnings:

Q1 2023 - revenues jumped 24% vs. Q1 '22, with TCE income at ~$92.2M, vs. $73.2M a year earlier.

Q1'23 adjusted diluted EPS rose ~55%, while adjusted EBITDA rose ~29%. Net income fell over 70%, due in part to ~$12M more in interest expenses, and some one-off events which are detailed below.

2022: For full-year 2022, although revenue was flattish, net income rose nearly 16%, and EPS was up 15.46%, even with the 36% rise in interest expense:

One-offs in Q1 '23 included $10M in debt extinguishment costs, and ~$8M in non-cash, mark-to-market derivative markdowns, bringing adjusted net income to ~$35M, vs. ~$22M in Q1 '22.

Fleet on-hire days were down slightly, to 1150 in Q1 '23, vs 1169 in Q1 '22. FLNG had 2 scheduled dry-dockings of the LNG carriers Flex Enterprise and Flex Endeavour, which were docked during March and April.

In Q2 '23, they'll complete the two last drydockings for 2023 , which are expected to be completed by end of June.

Guidance:

"Once we have done with June and getting into Q3 and Q4, all these 13 ships will be in operations and usually, we will see the seasonal uptick in charter rates during Q3 and Q4, which is also evident from the forward prices and thus revenues will grow to closer to $100 million for those quarters." (Q1 '23 earnings call )

Management reaffirmed its 2023 guidance, which calls for ~6.3% growth in revenue for 2023, and 7.5% growth for midpoint adjusted EBITDA, with TCE/Day expected to be at $80K, up ~9.6%:

Dividends:

Management declared another $.75 quarterly dividend, which goes ex-dividend on 5/30/23, with a 6/13/23 pay date. At its $31.22 5/24/23 closing price, FLNG yields 9.61%.

While the dividend payout ratio was 115% in Q1 '23 on an adjusted EPS basis, it's important to note that even adjusted net EPS includes a substantial amount of non-cash depreciation, which typically runs ~$.33 to $.34/share.

Adding back that $.33/share in non-cash depreciation gives you an EBDA dividend payout ratio of 76.79%, with a trailing ratio of 85%:

Profitability and Leverage:

ROA and ROE flip-flopped, with ROA falling a bit, and ROE rising somewhat in Q1 '23, as did EBITDA margin, which remained well above industry averages.

You might be surprised to learn that the marine shipping industry on the whole has very low leverage, which averaged 1.27X over the past four quarters. FLNG's management did manage to improve the Net debt/EBITDA leverage by ~10% over the past four quarters, from 5.44X to 4.9X. With interest expenses rising, FLNG's EBITDA/Interest coverage decreased from 4.59X to 3.27X.

Debt and Liquidity:

Management has completed its balance sheet optimization program, which included a number of sale leaseback arrangements. They refinanced all 13 vessels, and raised FLNG's cash balance to a record $475M, or $9/share, as of 3/31/23. FLNG's revolving credit facilities now total $400M in aggregate, which increases its flexibility for working capital and interest expense management.

FLNG has no debt maturities coming due until 2028. These are at SOFR + rates, but management has an interest rate hedging program in place. As of March 31, 2023, FLNG had fixed interest rates on an aggregate notional principal of $820M.

Performance:

FLNG has outperformed the S&P 500 and the marine shipping industry by a wide margin over the past year on a price and total return basis. It has lagged the S&P so far in 2023, but continues to outpace its industry.

Analysts' Targets:

At its $31.22 5/24/23 closing price, FLNG is 7.5% below street analysts' average price target of $33.76, and ~13% below their $36.00 highest target.

Valuations:

FLNG's outperformance over the past year has led to premium valuations vs. the marine shipping industry's averages. On the technical side, it has been flirting with the oversold line on its slow stochastic chart recently. Its 9.61% dividend yield is higher than the 8.54% industry average.

Parting Thoughts:

With those one-off expenses behind it, 2023 drydockings completing in June, and its favorable long term charter rates, FLNG should have plenty of support for continued strong dividends in 2023. It also has a strong cash position, with the completion of its balance sheet optimization program, and continues to be a long-term holding of ours.

All tables furnished by Hidden Dividend Stocks Plus.

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