Value Investors Club / NAVIGATOR HOLDINGS LTD (NVGS)

Description

Navigator Holdings (“NVGS”) is the owner and operator of the world’s largest fleet of handysize

liquefied gas carriers. NVGS transports liquefied petroleum gas (“LPG”), petrochemical gases and

ammonia for energy companies, industrial users and commodity traders. The key driver of NVGS’

revenue stream is the rate at which it charters its vessels. In the third quarter of 2014, that Time Charter

Equivalent (“TCE”) rate averaged about $30,000 per day. Importantly, that rate has held firm through

the fourth quarter of 2014 and 2015. Even so, because of the Company’s association with the energy

sector, its shares have traded down by almost 50% despite the fact that the company’s fundamental

business prospects have not really changed. At today’s level, just under $18 per share, NVGS trades at

around 9x earnings and 6x cash flow. Given the growth prospects for the transport of LPG, limited ship

supply in NVGS’ niche, and ship asset values (as indicated by new build costs) that are considerably in

excess of where the stock is trading, we think NVGS could double over the next year or so.

Background

NVGS was originally formed in the late 1990s to build and operate 5 semi-refrigerated LPG vessels. Semi-

refrigerated refers to the fact that both pressure and cooling are employed to maintain the ship’s cargo

in liquid form. The Company was over leveraged and filed chapter 11 in 2003. The company emerged

from bankruptcy in 2006 and the Lehman Brothers, as the largest creditor, became the largest

shareholder in the company. Following Lehman’s comeuppance, in 2012, WLR Group (Wilbur Ross)

acquired the Lehman stake. By that time the Company’s fleet had expanded to 12 vessels. In 2012, NVGS

agreed to acquire 11 vessels from Maersk. With additional newly built ships, NVGS currently has a fleet

of 27 with 12 additional vessels on order, all of which are fully financed with existing cash and credit

facilities. In its handysize market segment, NVGS is the market leader with a 25% share. The next largest

operator, Ultragas, has about 10%. The handysize market generally is described as vessels with 15,000

to 25,000 cbm (cubic meters) of cargo capacity. These vessels may complete medium to long haul

voyages that may be uneconomical for smaller vessels and yet the vessels may also enter ports that may

be restricted to larger vessels.

David Butters, the Company’s CEO since 2008, was responsible for Lehman’s investment in Navigator.

He was a very successful investor while at Lehman and was responsible for managing “partner capital”

for much of his time at the firm. Importantly, he is the Company’s third largest shareholder with over

$30 million of stock at today’s price. He should be motivated to make the Company successful.

The Business

LPG consists primarily of propane and butane and is a relatively clean energy source that is used as a

heating, cooking and transportation fuel and as a petrochemical and refinery feedstock. LPG is a by-

product of oil refining and gas extraction. Its availability in the past was limited by the flaring of natural

gas at the wellhead. As a by-product of other processes, LPG use was generally local (in the US) with

some exports and some burning off. Today, with an increased focus on clean fuels, goals to reduce

waste and pollution, and the vast increase in the production of LPGs in the US owing to shale activity,

commercial usage of LPGs is being transformed. LPGs are now available in the US in such large quantities

that their prices in the US as compared to prices in Asia and Europe allow for commercial export of LPG

in huge volumes. Importantly, from a regulatory standpoint, such exports are substantially more facile

as compared to exports of crude or natural gas. Notably, prices from the US are competitive with prices

from the Middle East.

To get a feel for the magnitude of the change, consider that US exports of propane and propylene

increased from 121 mbpd in December 2009 to 522 mbpd in December 2014 (other months show the

same trend but the EIA puts out the data in monthly format). On top of this, in 2015 alone, around 700

mbpd of US LPG export projects are anticipated to come online. The product will need to get shipped.

The most common destination will be Asia.

In addition to US to Asia volumes, Middle East to Asia trade is important. Qatar is the most important

Middle Eastern producer. Other important producers are Africa and Australia.

A significant development in the use of LPG that is worth mentioning is the potential to use ethane

(another LPG component besides propane and butane) for use as a feedstock substitute for naphtha in

the petrochemical industry. Ethane is not only a potentially lower cost feedstock it also can improve the

yield of value added products in the petrochemical processes in which it is used. NVGS is particularly

focused on developing opportunities in the ethane transport market and has contracted for 4 ethane

carrier new buildings to be delivered through 2017. In addition, 5 of NVGS’ existing vessels are currently

the 5 largest ethylene-capable vessels in the world (of a reported total of only 15). Ethylene capable also

means that the vessels may transport ethane, which has a slightly higher boiling point.

Investment Highlights

1. Growth in LPG shipping volumes is projected to be strong for the next few years – 15% or so per

annum through 2016. While ship operators are well aware of the opportunity, supply of new

ships is anticipated to match demand through 2017 for the industry in general. However, the

order book for new builds is skewed toward larger gas carriers rather than the handysize market

in which NVGS specializes.

2. Day rates for NVGS’ vessels have held firm over the last six months indicating that the price

turmoil in the commodity market has not (so far) impacted demand for LPG transportation.

3. Ironically, at this point, the fall in crude prices may translate into a positive for NVGS through

lower fuel costs.

4. NVGS is a cheap stock. A projected income statement for NVGS is a relatively straight forward

affair once the prognosticator chooses a charter rate per vessel. Most of the analysts who cover

the stock build up revenues on a vessel by vessel basis using charter and utilization rates then

layer on costs for which the Company has generally been helpful in determining. Using Street

estimates for 2015, EPS should come in around $2 per share or a total of about $110 million.

That equates to a PE of less than 9x on a stock price of $17.75 or total equity market

capitalization of just under $1 billion. Adding back depreciation and amortization of about $50

million then subtracting $10 million for dry docking (a proxy for maintenance capital

expenditures) gets free cash flow (prior to “expansion” capital expenditures for new vessels) of

about $150 million or $2.70 per share. That’s about 6.5x. That number is a bit inflated because

new vessels acquired during the year will contribute to earnings in 2015. Even so, that’s still

pretty cheap, especially when one considers that a roughly half of NVGS’ fleet is chartered

pursuant to agreements that typically go for up to a year although in some cases extend to 5 or

10 years in duration. The EBITDA multiple for 2015 is less than 7x.

A note on comparables: Some of NVGS’ comparables in the VLGC (very large gas carrier) market

(Dorian, Avance, BW LPG) trade at lower multiples than NVGS. This is because anticipated vessel

supply is much more meaningful and TCE rates are anticipated to come under pressure from

elevated (some might say “spiked”) levels. EBITDA from VLGC companies is expected to decline

over the next year or two. In addition, this sector of the market is most at risk from the

cancellation of large scale export projects.

On the small gas carrier side, StealthGass (GASS) also trades at lower multiple in part because of

the shorter time to market of potential new vessels. However, we think GASS is also attractively

priced.

Risks

1. The infrastructure that is in the process of being built to facilitate the transport of LPGs gets

delayed and, as a result, the vessel market becomes short term oversupplied and day rates

move down. This is what happened in the market for LNG transport vessels during 2013 and

2014.

2. Ship owners overbuild. This is a real risk, however, it is somewhat mitigated by the fact that LPG

vessels are specialized and the number or shipyards that can build the vessels is less than that

available to build (say) dry bulk carriers. In addition, the number of qualified, experienced

operators for LPG vessels is also somewhat limited. Even so, NVGS’ segment of the market is

unquestionably attractive at this point with the company reporting mid-teen IRRs on new builds

for which they have already secured long-term charters.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

1. NVGS reports fourth quarter earnings on March 17. We think the results will be good and will

reinforce the comments made in our investment thesis. In addition, we think the commentary

regarding prospective TCE day rates will reflect a more positive outlook than the Street

consensus.

2. At some point, NVGS will implement a dividend policy. This should attract many income

oriented investors that have been drawn to other ship operating entities and MLPs.

3. Once it reaches critical mass, and has significant long term contracts, NVGS will develop an MLP

along the lines of GLOG/GLOP or GLNG/GMLP. This should be extremely positive for the stock.

Just look at what recently happened when Great Plains (GPRE) filed for an IPO of their

downstream ethanol transportation and storage assets.

show sort by

			2015	2016
Price:	17.75	EPS	2.00	2.25
Shares Out. (in M):	55	P/E	8.9	7.9
Market Cap (in $M):	982	P/FCF	6.5	5.1
Net Debt (in $M):	380	EBIT	145	180
TEV (in $M):	1,362	TEV/EBIT	9.4	7.5