NVGS - Navigator Holdings Keeps Chugging Along And Providing Value

2023-12-07 23:16:26 ET

Summary

• Navigator Holdings' stock price has been steadily rising over the past year, trading at a premium compared to the energy sector.
• The company operates a versatile fleet of liquefied gas carriers, playing a pivotal role in the transportation of essential gases.
• NVGS has seen improvements in its financial state and earnings, with strong market opportunities and a focus on dividends and buybacks.

Investment Rundown

During the last 12 months, the share price of Navigator Holdings Ltd. ( NVGS ) has been on a steady rise. With a focus on fleet shipments for liquified natural gas, the company saw a big boom of demand in Europe last year as the war in Ukraine began.

The company continues to make strong investments and in the last quarter, the announcement about acquiring a stake in Axzan Fuel Solutions came up and seems to have enticed the markets as the stock price has continued its upward trend since. One of the concerns that investors may have with NVGS revolves around the debt maturities and the need to raise the EBITDA very well to service the debt they have then. I don't see that as a problem as the ROA has been improving very well over the past few years and I see that trend continuing. The market opportunities are strong for the business and with 25% of the company's net income being used towards a dividend and buybacks, I think investors are getting a good deal here, making NVGS a buy.

Company Segments

NVGS operates liquefied gas carriers, boasting a versatile fleet that spans across international waters. The company specializes in delivering seaborne transportation services for a spectrum of petrochemical gases, liquefied petroleum gases, and ammonia. Catering to the needs of energy companies, industrial users, and commodity traders, NVGS plays a pivotal role in facilitating the efficient and secure movement of vital gases critical to various industries.

With a fleet comprising 56 semi- or fully-refrigerated liquefied gas carriers, NVGS has positioned itself as a key player in the maritime transportation of essential gases. The company's vessels are strategically designed to meet the stringent requirements of transporting gases, ensuring the integrity and safety of the cargo throughout the journey.

One of the key changes the company has been able to make over the past few years is improving its financial state by a good amount. The debt levels seem to have stabilized somewhat but the rise in interest expenses has put pressure on the bottom line of NVGS. I think in the short-term there might be some decent challenges presented to the company but underlying that is a strong long-term demand for liquified natural gas around the world.

Markets They Are In

NVGS strategically deploys its fleet through a combination of spot and medium-term contracts, tailoring its approach based on vessel size. The smaller vessels primarily engage in the spot market, providing flexibility in responding to market dynamics. In contrast, larger assets operate under higher fixed-time charte r cover agreements, offering stability and predictability in revenue streams.

A notable feature of NVGS's contract structure is the staggered maturity of agreements across its vessels, ensuring a diversified timeline for contract expirations over the next few years. However, it's noteworthy that certain contracts are set to extend well into the future, with some vessels not coming off-contract until 2025-2026. One of the key market opportunities right now is the ammonia market in Europe which saw a lot of disruption following the war in Ukraine.

Earnings Highlights

On November 13 NVGS released its last earnings report which showed a significant climb in the bottom line for the business as the utilization rate of the vessels in the last 12 months has improved and stabilised. Adjusted EBITDA reached $72 million and on an annual basis that means NVGS could reach record EBITDA levels once again. One of the shipping trends the company commented on was the improved utilization rate every quarter, going from 89% to 93.4%. Last year the rate was at 84.9% which to me indicates that strong demand is perhaps going to continue from here on out. NVGS has 56 vessels 32 vessels were in the last quarter under time charters and 15 vessels were on spot and contracts instead. This puts NVGS in a very flexible position where they can react to positive market trends like increased spot prices and deliver higher quarterly earnings. On the other hand, it can also lead to some QoQ decreases now and again, but the time charted vessels I think help offset some of that.

Exports are still increasing and I think NVGS is a solid bet on capturing and getting exposure to this trend both from the US but also internationally. The 5-year average for the p/e is slightly invalid to compare against as its 62 which for almost any company is unreasonable to pay. The FWD p/e is at 12 right now, up from the 8.6 it has TTM. This comes as higher interest rates are putting pressure on the bottom line. I still have a lot of conviction with NVGS and will be willing to pay a 14x earnings multiple at least. My reasoning for this comes down to the increased profitability that NVGS has had on its assets and that justifies a premium given the improved performance I think. This gives us an upside potential of 16.6% from here and with a lot of the earnings going to shareholders, I am happy to pay the premium. What I think could invalidate this thesis is if NVGS fails to continue its rising ROA over the coming years up until 2025 and beyond. With a strong asset base consisting of 56 vessels its curricula that a high utilization rate is maintained to ensure earnings are coming in. NVGS has continued to add more vessels and this has increased the depreciation and amortization for the company to over $100 million TTM, and with a high utilization rate that may increase further. This puts pressure on the FCF but should we see better than anticipated results in the Q4 results on that remark, I would expect us to see an FWD p/e of 14 quite quickly as the market continues to be positive towards NVGS. In any case, it's a good bet on continued gas and ammonia demand in Europe.

When we look at a peer to NVGS we have Nordic American Tankers Limited ( NAT ) for example. A company that trades below the p/e of NVGS by a fair but, just 7x on a FWD basis. With this, the company also has a higher dividend yield of 6%. What seems to be the cause though for the lower valuation I think comes back to the lack of future earnings potential of the company. Despite good margins, it has been losing asset value which eventually will lead to lower earnings as well in my opinion. I say this because tanker companies are reliant on their assets, such as vessels to drive revenue and growth. With the steady decline that NAT has been on in this regard, I am worried about the long-term prospects. On the other hand, I think NVGS is far more appealing with its solid asset base which seems to be expanding consistently, and new acquisitions add to the thesis in a positive way.

Risks

Investors should carefully consider the composition of the NVGS vessel fleet, taking into account vessels under various time charters, such as those dedicated to ammonia, LPG, and other petrochemical products. The diversity in charter types introduces a layer of complexity that investors need to assess for potential impact on the company's financial performance. There still seems to be a strong underlying demand for ammonia in the coming years as the market size is set to reach over $124 billion in 2030.

Particularly crucial is the consideration of NVGS's expectations regarding ammonia growth, especially in the European market. Should these growth projections fall short, it could have adverse effects on the company's revenue streams and overall utilization rates.

In the years ahead, a pivotal aspect to closely monitor, especially until 2025, is the sustained growth and retention of EBITDA for NVGS. This holds particular significance as the company faces impending debt maturities starting in 2025. Effectively servicing this debt requires not only maintaining but also strengthening EBITDA, a critical financial metric. The risk arises that if NVGS doesn't manage to grow strongly from the TTM of $219 million then in 2025 it may face the decision of diluting shares to meet the nearly $300 million of debts that are maturing then. Over the last 5 years, the EBITDA has grown faster than the assets of the business indicating stronger returns on them and I think this will carry NVGS to a point where EBITDA can cover the debt maturing in 2025, making this risk not something that should warrant anything other than a buy here in my opinion.

Final Words

The shipping market can be quite difficult to get into and when starting you have to quickly get used to volatility earnings reports that may showcase significant YoY declines or increases. What is important to look for is a strong asset base with a business and I think NVGS has that right now. With $2.5 billion worth of vessels and equipment, the company is in a good position for long-term steady growth. The vessels are also in a place where they can adapt to market trends like improved spot prices and time charter prices. The management has made it clear that 25% of the earnings are going towards a dividend and buybacks, which enhances the value here further and ultimately leads to a buy.

For further details see: