Refinancing And $17 Billion Backlog Will Aid LNG Shipping Despite Market Volatility

Key Takeaways

• Flexible refinancing terms increase borrowing capacity, enhancing financial flexibility and opportunity capitalization in the LNG market.
  
• Share buyback and reduced dividend focus on shareholder value and EPS growth during stock undervaluation.
  
• Oversupply, volatile spot market reliance, and unrealized losses risk financial strain and reduced revenue stability.

Catalysts

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

• Cool Company Limited has secured refinancing of its $570 million facility with more flexible terms and additional borrowing capacity, allowing the company to better capitalize on emerging opportunities in the LNG market, which could positively impact future earnings and financial flexibility.
  
• The company has a significant $1.7 billion backlog, which provides revenue visibility and stability, helping to support future revenue growth even during short-term market volatility.
  
• The current LNG market conditions are expected to improve as new projects come online in 2025, increasing shipping demand and potentially leading to higher revenue and improved net margins for Cool Company Limited.
  
• The anticipated retirement of older steam turbine vessels from the market is likely to reduce competition and increase demand for more efficient shipping options provided by Cool Company Limited, which can positively impact future revenue and margins.
  
• Cool Company Limited's introduction of a $40 million share buyback program and reduced dividend demonstrates a strategic focus on shareholder value and EPS growth, especially given the current undervaluation of its stock.

Cool Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cool's revenue will decrease by 0.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 27.8% today to 14.4% in 3 years time.
• Analysts expect earnings to reach $48.5 million (and earnings per share of $0.87) by about February 2028, down from $92.8 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $69.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.0x on those 2028 earnings, up from 4.8x today. This future PE is greater than the current PE for the NO Oil and Gas industry at 5.4x.
• Analysts expect the number of shares outstanding to grow by 1.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.07%, as per the Simply Wall St company report.

Cool Future Earnings Per Share Growth

Risks

• The company is experiencing a mismatch in the LNG and LNG shipping markets, with disappointing rates in the short-term spot market, which could negatively impact revenue.
  
• A significant number of new ships entering the market without corresponding demand could lead to oversupply, suppressing freight rates and thus reducing potential earnings.
  
• The short-term dry docking schedules are heavily clustered, which may lead to increased operational costs and less free cash flow, impacting net margins.
  
• Unrealized losses from interest rate swaps and reduced dividend payouts suggest potential financial strain, possibly affecting net income.
  
• A large portion of the fleet is trading in the volatile spot market due to a lack of long-term charters, which presents earnings uncertainty and potential downside risk to revenue stability.

Valuation

• The analysts have a consensus price target of NOK121.91 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 NOK146.4, and the most bearish reporting a price target of just NOK101.54.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $337.5 million, earnings will come to $48.5 million, and it would be trading on a PE ratio of 17.0x, assuming you use a discount rate of 12.1%.
  
• Given the current share price of NOK95.35, the analyst's price target of NOK121.91 is 21.8% 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.