Acquisition Of Avance Gas Ships Will Expand Fleet But Leverage Increase May Pressure Margins

Key Takeaways

• Fleet expansion and refinancing boost financial flexibility, enabling growth opportunities and improved financial management.
  
• Stabilized U.S. export levels and increased demand in Asia enhance market position and support revenue growth.
  
• Market volatility, increased leverage, and dependency on infrastructure developments pose significant risks to BWG's revenue stability and profitability.

Catalysts

An investment holding company, engages in ship owning and chartering activities worldwide.

• The acquisition of Avance Gas ships is expected to expand BWG's fleet capacity significantly, which can facilitate increased revenues through more shipping contracts and better fleet utilization.
  
• The increase in U.S. export capacity, expected from second half of next year, could boost shipping demand and subsequently time charter income, potentially increasing overall earnings.
  
• The company’s improved market position due to the stabilization of U.S. Gulf export levels and reduced Panama Canal congestion could lead to better freight rates, enhancing net margins.
  
• The refinancing of the $400 million credit facility with a larger $460 million 7-year facility provides BWG with greater financial flexibility, which could be leveraged to pursue further growth opportunities and manage debt, positively impacting net margins.
  
• The anticipated growth in LPG demand in Asia, especially in India and China, suggests a favorable long-term market for BWG's shipping services, supporting future revenue growth prospects.

BWG Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BWG's revenue will decrease by 41.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.2% today to 33.6% in 3 years time.
• Analysts expect earnings to reach $245.5 million (and earnings per share of $1.64) by about February 2028, down from $474.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.6x on those 2028 earnings, up from 4.2x today. This future PE is greater than the current PE for the GB Oil and Gas industry at 4.8x.
• Analysts expect the number of shares outstanding to grow by 0.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.77%, as per the Simply Wall St company report.

BWG Future Earnings Per Share Growth

Risks

• The market volatility and fluctuating charter rates pose a risk to BWG's revenue stability, as demonstrated by significant rate swings from $20,000 to $50,000 per day. This could lead to unpredictable revenue streams from their time charter operations.
  
• The profitability and cash flow from BWG's trading activities are subject to high levels of volatility and uncertainty, as highlighted by a net accounting profit driven by mark-to-market valuations, which may not translate into realized gains. This could impact earnings if unrealized gains fluctuate unfavorably.
  
• BWG's increased net leverage ratio from 12% to 21% and future expected increase to 30%-35% due to the Avance Gas fleet acquisition means heightened financial risk and potential pressure on net margins and earnings if market conditions worsen or financing becomes more costly.
  
• The sensitivity of the VLGC market to minor changes in freight rates, exacerbated by factors like the Panama Canal transit slots, indicates that small market disruptions could lead to significant impacts on BWG's operating margins and profitability.
  
• The dependency on infrastructure developments and export capacity increases in markets like the U.S. Gulf and the Middle East introduces potential execution risks that could affect BGW's long-term revenue growth projections if these expansions face delays or underdeliver.

Valuation

• The analysts have a consensus price target of NOK179.382 for BWG based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $730.2 million, earnings will come to $245.5 million, and it would be trading on a PE ratio of 12.6x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of NOK146.6, the analyst price target of NOK179.38 is 18.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.