HomeMost PopularStealthGas: Operating Stealthily in the Shipping Industry

StealthGas: Operating Stealthily in the Shipping Industry

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Liquefied natural gas tanker ship in sea

Amid the complexities of the global shipping sector, certain players operate under the radar, despite being pivotal to the industry. StealthGas Inc. (NASDAQ:GASS) is one such company quietly making waves in the LPG sector. As geopolitical tensions and regulatory challenges shape the LPG market, StealthGas stands out for its operational excellence and strategic flexibility. With a robust fleet and prudent management, the company has navigated tumultuous waters and established a strong presence in the current market landscape. In this analysis, we delve into StealthGas’s performance, financial health, and future prospects, revealing why we consider this stock undervalued. Our findings provide compelling evidence pointing to significant potential upside. We rate GASS as a ‘Strong Buy’ with a price target of $7.

The Company’s Profile

StealthGas serves as a global conduit for transporting liquefied petroleum gas and its derivatives. Its expansive independent LPG carrier fleet, ranging from 3,000 to 8,000 cubic meters, allows the company to transport various gases such as propane, butane, and propylene. These vessels are primarily active in the EU/Mediterranean Sea area, where the LPG segment has thrived due to geopolitical tensions and EU energy regulations. StealthGas’s historical reliance on debt has transformed in the face of changing market dynamics, driving the company to a more favorable position. It has paid off a significant portion of its debt, resulting in record profitability.

Similar to the oil tanker market, the LPG sector experiences distinct supply and demand variations. As older LPG ships reach the end of their operational lives, rates for LPG shipments rise. The limited expansion of the worldwide LPG fleet has benefited GASS, especially due to its low leverage.

Operational Review for the First Half of The Year

StealthGas achieved record-breaking performance in the first half of 2023, with the highest H1 profitability of $10.5 million. The company capitalized on rising asset prices by actively selling vessels, with four ships already sold and two smaller LPGs set to be sold for approximately $35 million. Despite operating with fewer vessels, StealthGas experienced a slight increase in net voyage revenues, reaching $67.2 million. The company secured employment for 80% of the remaining days in 2023, ensuring $90 million in future revenue. Unlike its industry peers, GASS does not operate vessels in the spot market, which limits its ability to benefit from higher rates but also mitigates downside risks as its ships are locked into profitable contracts.

In Q2, StealthGas experienced a 5% decline in adjusted net income. However, over a six-month period, the company achieved significant profit growth, increasing from $20 million to $28 million (+40% YoY). Notably, GASS reduced its debt substantially, decreasing from $316.6 million in June 2022 to just $166.7 million by June 2023. This reduction resulted from robust earnings and vessel sales. With a total debt equivalent to 15.8 quarters of net income, long-term debt of $16.6 million due within the upcoming year, and a healthy cash reserve of $48.1 million, StealthGas boasts a strong financial position. This allows the company to prioritize investor returns and fleet expansion over debt repayment. The net debt standing at $83.9 million further enhances the potential for future investor returns. The solid financial foundation enables GASS to fund expansion through debt rather than equity dilution and has secured $30 million for a new vessel.

StealthGas’s liquidity, including restricted cash and short-term investments, reached $55.1 million at the end of the quarter. This decline from the previous year’s $95.7 million can be attributed to strategic debt repayment. The company’s investments in joint ventures decreased to $38 million after receiving a dividend of $19.2 million from the sale of a vessel. While StealthGas gained a non-cash profit of $2.9 million from the sale of two vessels, it also recognized a non-cash impairment of $2.8 million for two vessels set for delivery in January 2024. Despite a threefold increase in interest and finance costs in the comparative periods, the company’s aggressive debt repayment strategy resulted in a slight reduction in these costs.

Operationally, in Q2 2023, GASS observed a 12% reduction in calendar days but maintained steady net revenues at $33.1 million. Over a six-month period, despite a smaller fleet size, costs increased marginally by 1% compared to the previous year. The quarterly operating expenses rose to $13.4 million, primarily due to inflationary factors, particularly noticeable in Q1. Contracted days for 2023 remain high, projecting $90 million in revenues until 2026. All vessels scheduled for drydocking in 2023 have been serviced, indicating preparedness for productive upcoming quarters. The drydocking costs for Q2 amounted to $1.5 million, totaling $2.6 million over the past six months. This increase was primarily due to drydocking three Handysize vessels in the fleet. As larger vessels, they naturally incur higher expenses during drydocking, which occurs every five years.

The Fleet

GASS has been strategically selling its older ships, reinvesting the proceeds, and utilizing its improved capital structure to finance the purchase of new, larger, modern, and more efficient vessels. These acquisitions will be operational in the coming quarters, contributing to increased capabilities, revenue, and profit generation.

The larger vessels, known as VLGCs, command higher rates, with rates reaching $100,000 per day in June of this year. The transition to modern vessels not only expands GASS’s top-line revenue but also protects the company from forthcoming regulations affecting various global vessels.

Returning Capital

The question of when investors can expect a return arises in any investment. Historically, due to its high leverage, GASS has not been able to return cash to investors through dividends or stock buybacks. During a recent earnings call, when asked about capital return, Harry Vafias, the CEO, responded:

“As we have discussed before, we are in a fortunate position that we can do both. We will buy back stock. We have another approximately $10 million to spend. And we have also to rebuild the Company because we have sold a lot of tonnage over the last two years.”

When evaluating a company’s capital returns, we examine a modified version of the total shareholder yield, considering Dividends and Stock Buybacks relative to trailing twelve month Net Income. Over the past 12 months, GASS has not spent any money on dividends but has the ability to purchase approximately $10 million worth of stock. With a trailing twelve month net income of $41.7 million, this results in a modified shareholder yield of approximately 24%. This metric illustrates the percentage of net income allocated to benefit investors versus reinvesting in the company.

Currently trading at $184 million, GASS’s approval of $10 million in stock buybacks has the potential to reduce the total outstanding shares by around 5%, requiring only a fraction of net income. This makes GASS an attractive buy at its current price. Furthermore, with forward valuations indicating an EV/EBITDA of 3.66 and a price-to-book ratio of 0.34, significant upside is expected from current levels. If the elevated rates and high profitability persist, we anticipate a similar percentage of net income being allocated to stock buybacks.

Conclusion

While risks exist in the volatile and capital-intensive shipping market, GASS’s low leverage, prudent management, new fleet, and market dynamics work in its favor. We believe that the company’s lack of dividends, small market capitalization, and presence in the Oil and Gas sector have resulted in underinvestment and undercoverage by many market investors. Despite the stock’s recent 83% YTD performance, we see further upside potential. With a low float and the prospect of positive earnings surprises and upcoming ship deliveries, we consider GASS a strong buy with a target price of $7. At $7, the P/E ratio will align more closely with industry peers.

Our Trading Strategy

We perceive limited downside risk at the current stock price and see little reason to hedge below this level. A further drop in price is likely to prompt management to initiate their stock repurchase program, supporting the stock. Additionally, the absence of dividend payments is favorable for long positions. Downside risks that could impact the LPG market include supply-demand imbalances or a warmer winter with lower energy demand. From a trading standpoint, we anticipate significantly greater chances of upside potential. With the stock trading at low valuations and relatively low implied volatility, we recommend initiating a synthetic long position. In this specific scenario, we suggest selling $5 Mar. 2024 cash-covered puts and using the proceeds to purchase $5 and $7.50 Mar. 2024 calls. This strategy provides limited downside protection and offers unlimited upside on a stock that we believe is consistently undervalued.

Source: Seekingalpha.com

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