VLGC Fleet Upgrades May Reduce Costs Despite Revenue Decline Forecasts

Key Takeaways

• Anticipated U.S. export volume increase and terminal expansions could drive revenue growth and improve margins by the end of 2026.
  
• Fleet enhancements and LPG dual fuel technology may reduce costs and stabilize earnings amid rising Asian LPG demand.
  
• BWG faces potential revenue and earnings challenges from lower spot market rates, geopolitical risks, increased leverage, and unsustainable dividend payments.

Catalysts

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

• BW LPG is anticipating a significant increase in VLGC export volumes from the U.S. due to terminal expansions, potentially driving TCE and revenue growth towards the end of 2026.
  
• The company's recent acquisition of Avance Gas vessels has enhanced its position as a leading VLGC operator, which could improve fleet synergies, reduce costs, and positively impact net margins.
  
• The introduction of LPG dual fuel propulsion technology on a significant portion of the fleet may lead to cost savings and efficiency improvements, thereby enhancing net margins.
  
• BW LPG's time charter strategy, with a substantial proportion of fleet days fixed at favorable rates, provides stability against spot market volatility, potentially stabilizing revenues and earnings.
  
• The growth in demand for LPG in Asia, particularly India and China, alongside infrastructure improvements, is expected to increase trade flows, potentially boosting future revenues.

BWG Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BWG's revenue will decrease by 41.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.9% today to 37.5% in 3 years time.
• Analysts expect earnings to reach $275.1 million (and earnings per share of $1.82) by about April 2028, down from $354.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $309 million in earnings, and the most bearish expecting $241.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.3x on those 2028 earnings, up from 3.9x today. This future PE is greater than the current PE for the GB Oil and Gas industry at 4.3x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.82%, as per the Simply Wall St company report.

BWG Future Earnings Per Share Growth

Risks

• The spot market rates for BW LPG were lower in Q4 compared to the previous quarter, which could potentially impact future revenues if these rates do not improve (Revenue Impact).
  
• The VLGC market is currently facing a seasonal downturn with reduced cargoes for export from the U.S., suggesting a risk of sustained lower spot rates, affecting overall earnings (Earnings Impact).
  
• The increased net leverage of 33% due to borrowings for fleet expansion could strain financial resources and affect net margins if interest rates rise or earnings decline (Net Margin Impact).
  
• BW LPG's exposure to geopolitical risks such as potential U.S. tariffs on Chinese-built vessels could disrupt trade routes and increase operational costs, impacting revenue and profits (Revenue and Earnings Impact).
  
• The payment of dividends exceeding net profit due to the inclusion of Product Services results may not be sustainable if trading profits decline, which could impact long-term shareholder returns and financial stability (Net Margin Impact).

Valuation

• The analysts have a consensus price target of NOK167.1 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 $733.0 million, earnings will come to $275.1 million, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 7.8%.
• Given the current share price of NOK97.35, the analyst price target of NOK167.1 is 41.7% 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.