{"id":92014,"date":"2024-09-11T02:10:43","date_gmt":"2024-09-11T06:10:43","guid":{"rendered":"https:\/\/ifintechworld.com\/?p=92014"},"modified":"2024-09-11T02:10:48","modified_gmt":"2024-09-11T06:10:48","slug":"dorian-lpg-stock-great-market-dynamics-for-this-top-performer-nyselpg","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=92014","title":{"rendered":"Dorian LPG Stock: Great Market Dynamics For This Top Performer (NYSE:LPG)"},"content":{"rendered":"
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Investment Thesis<\/h2>\n

Since I took up Dorian LPG (NYSE:LPG<\/span>) coverage a year ago and gave it a Hold rating, the stock has had a total return above 40 percent. Just three weeks after I posted that analysis, Hamas conducted the most severe <\/span>attack on Israel in years. A month later, the Houthi rebels of Yemen <\/span>hijacked a cargo ship in the Red Sea and effectively closed off the Suez Canal for most of the world’s shipping.<\/span><\/p>\n

That’s how quickly the basis of a thesis could fall apart.<\/p>\n

Three quarters later, it seems unlikely that the Red Sea transit will be possible in the short to medium term. While the Panama Canal has returned to some normalcy, with a new reservoir planned to improve reliability, it will remain a problem for LPG shippers. Those factors and muted fleet growth in the coming years will support a business such as Dorian’s.<\/span><\/p>\n

U.S. LPG exports are set to increase, and demand from essential markets in China is forecast to grow, too. Combined with Dorian’s healthy balance sheet, the business looks promising.<\/p>\n

The recent equity raise rattled markets, sending the share down 10 percent, but for reasons explained below, this reaction was overblown. Dorian’s move was sensible, providing an entry point for investors, as the price was pushed down to approximately its NAV. My verdict: LPG is a Buy.<\/p>\n

Short Company Overview<\/h2>\n

Dorian LPG is an NYSE-listed LPG shipping company incorporated in the Marshall Islands. It owns and operates 25 VLGCs, having an average age of 8 years, deployed in a pool co-owned with MOL, providing scale.<\/p>\n

Two arbitrages underpin a business such as Dorian LPG’s:<\/p>\n

The East-West arbitrage <\/strong>is the difference between LPG prices in the U.S. and Asia. A widening arbitrage provides healthy freight rates.<\/p>\n

The LPG-naphtha spread<\/strong>. Steam crackers use a mix of feedstock to produce essential substances such as olefins, ethylene, and propylene, which have many uses. When LPG is cheaper to use as a feedstock than naphtha, there is a basis for LPG exports.<\/p>\n

About 50 percent of LPG is used for cooking and heating in residential and commercial settings. This is a relatively stable demand, as cooking and heating are primary needs. Approximately 40 percent of demand comes from the petchem industry (steam crackers and PDH plants (propane dehydrogenation)). The remaining LPG is used in niche segments such as autogas, farming, and off-the-grid businesses.<\/p>\n

Debt: No Balloon Payments Coming, and LPG Can Amortize<\/h3>\n

As many shipping companies have done during the last few years, LPG has greatly de-leveraged its business. As of fiscal Q1 2025 (June 30, 2024), it had long-term debt of $690 million on total assets of $1.9 billion (debt-to-capital ratio of 36%). Add its $353 million cash on hand, and we’ll see a net debt ratio of just 19%.<\/p>\n

LPG’s debt is structured around amortizations rather than balloon payments:<\/p>\n

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\"Future<\/span> <\/picture>
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Future debt payments (FY 2023 report, p. F-23)<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Additionally, it expects payments of about $40 million annually on its operating leases (Note 8, FY25 Q1 report). In summary, it has a debt service requirement of roughly $90 million in 2025-2026 and $130 million in 2027.<\/p>\n

Let’s review the past few years’ cash flows to get an idea of how LPG can sustain these payments:<\/p>\n

<\/span><\/p>\n\n\n\n\n\n\n\n\n\n
<\/td>\nFY2023<\/strong><\/td>\nFY2022<\/strong><\/td>\nFY2021<\/strong><\/td>\n<\/tr>\n
Cash Flow From Operations<\/td>\n388.4<\/td>\n224.1<\/td>\n118.7<\/td>\n<\/tr>\n
– Cash Flow From Investing<\/td>\n(34.8)<\/td>\n(76.3)<\/td>\n68.8<\/td>\n<\/tr>\n
= Free Cash Flow<\/td>\n353.6<\/td>\n147.8<\/td>\n49.9<\/td>\n<\/tr>\n
For context:<\/em><\/td>\n <\/td>\n <\/td>\n <\/td>\n<\/tr>\n
Average TCE ($\/day)<\/td>\n$65,986<\/td>\n$50,462<\/td>\n <\/td>\n<\/tr>\n
Average BLPG1 Ras Tanura-Chiba ($\/ton)<\/td>\n$105<\/td>\n$87<\/td>\n <\/td>\n<\/tr>\n
Fleet utilization<\/td>\n93.9%<\/td>\n95.0%<\/td>\n <\/td>\n<\/tr>\n<\/table>\n

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