New LNG Projects Will Drive Shipping Demand, But Low Rates And Geopolitical Risks Persist

Key Takeaways

• Strategic growth through fleet expansion is supported by a $1 billion backlog and increased LNG project demand, enhancing revenue and margins.
  
• Financial flexibility from withheld dividends allows opportunistic growth and acquisitions, improving future earnings potential and strategic positioning.
  
• Geopolitical tensions, low rates, and supply chain issues threaten revenue stability and growth in the chartering market.

Catalysts

Engages in the acquisition, ownership, operation, and chartering of liquefied natural gas carriers (LNGCs).

• CoolCo has a firm backlog of over $1 billion, providing solid revenue visibility and a potential revenue upside if charter rates normalize, which may drive revenue growth.
  
• The company is expecting a ton-mile development growth of 17% in 2026 due to new LNG projects, which is likely to increase earnings through higher utilization of vessels.
  
• CoolCo is poised to benefit from new LNG supply projects, leading to increased demand for shipping, thereby potentially enhancing revenue and operating margins.
  
• Upgrades to TFDE vessels are leading to increased daily earnings, which should improve net margins as newer technology increases efficiency and desirability among charters.
  
• Financial flexibility created by not declaring a dividend enables opportunistic growth and potential acquisitions, which could drive future earnings growth through strategic fleet expansion.

Cool Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cool's revenue will grow by 1.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 30.4% today to 22.6% in 3 years time.
• Analysts expect earnings to reach $77.0 million (and earnings per share of $1.44) by about May 2028, down from $98.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.1x on those 2028 earnings, up from 3.4x today. This future PE is greater than the current PE for the NO Oil and Gas industry at 4.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.74%, as per the Simply Wall St company report.

Cool Future Earnings Per Share Growth

Risks

• The chartering market is experiencing historically low spot market rates, which are below economic breakeven, impacting revenue potential and financial stability.
  
• The lack of a traditional winter market has added pressure on short-term hiring conditions, which could affect revenue and earnings consistency.
  
• The presence of a high number of sublet vessels in the market, chartered without much regard for rates, negatively impacts revenue forecasts and market sentiment.
  
• Global geopolitical tensions, regulatory hurdles, and supply chain bottlenecks pose risks to future revenue growth and project executions.
  
• A lack of newbuild orders in a low-rate environment could restrict future capacity growth, impacting long-term revenue prospects.

Valuation

• The analysts have a consensus price target of NOK85.552 for Cool based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK119.92, and the most bearish reporting a price target of just NOK56.35.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $340.0 million, earnings will come to $77.0 million, and it would be trading on a PE ratio of 8.1x, assuming you use a discount rate of 12.7%.
• Given the current share price of NOK65.0, the analyst price target of NOK85.55 is 24.0% 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.