Accelerating LNG Shipping Will Capture Asia And Africa Demand

Key Takeaways

• Robust demand for LNG shipping and asset discipline positions Cool for outsized long-term revenue and earnings growth through premium vessel rates and strategic share repurchases.
  
• Structural shifts in global energy and decarbonization trends will underpin sustained vessel utilization, improved margins, and continued market outperformance.
  
• Structural shifts toward renewables, regulatory challenges, and financial headwinds threaten Cool's LNG shipping market, profitability, and long-term viability due to rising costs and shrinking demand.

Catalysts

Acquires, owns, operates, and charters liquefied natural gas carriers (LNGCs).

• Analyst consensus points to backlog and rate normalization as revenue drivers, but this significantly underestimates how prolonged and steep spot and term charter recoveries could be as long-haul LNG trade shifts to Asia and new supply comes online, dramatically boosting revenue well above current expectations.
  
• Whereas analysts broadly highlight demand from new LNG projects and vessel upgrades, current guidance does not account for a potential acceleration of asset scrapping and near-term vessel shortages, which could enable Cool to command premium rates for both newbuilds and upgraded ships, sharply expanding EBITDA margins and earnings growth.
  
• LNG shipping volumes could surge beyond consensus as more countries prioritize energy security amidst global geopolitical shifts, leading to multi-year charter durations at structurally higher rates, supporting long-term revenue compounding.
  
• Cool's disciplined approach to asset acquisition, combined with a strong balance sheet and strategic share repurchases at a discount to NAV, sets the stage for outsized accretive growth-potentially enabling a step change in future earnings per share as new capacity is absorbed.
  
• The accelerating adoption of natural gas and LNG in emerging Asian and African economies, alongside decarbonization policies, will structurally raise shipping demand and vessel utilization, underpinning higher baseline revenue and sustained improvement in net margins for years to come.

Cool Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Cool compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Cool's revenue will grow by 1.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 22.0% today to 20.9% in 3 years time.
• The bullish analysts expect earnings to reach $70.7 million (and earnings per share of $1.34) by about July 2028, up from $70.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 11.8x on those 2028 earnings, up from 5.0x today. This future PE is greater than the current PE for the NO Oil and Gas industry at 7.3x.
• Analysts expect the number of shares outstanding to decline by 1.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.92%, as per the Simply Wall St company report.

Cool Future Earnings Per Share Growth

Risks

• Accelerating global adoption of renewable energy, electric vehicles, and evolving net-zero policies could structurally reduce demand for LNG and erode Cool's core shipping markets, negatively impacting long-term revenues and vessel utilization.
  
• Exposure to volatile spot charter rates and overcapacity in the LNG shipping sector, especially as newbuilds enter the market, increases risk of prolonged periods of low rates, which could significantly compress operating margins and EBITDA during downcycles.
  
• Cool's capital-intensive fleet renewal needs and reliance on sale-leaseback arrangements with Chinese lessors, coupled with high debt levels and rising interest expenses, may constrain financial flexibility and put persistent pressure on net earnings and free cash flow.
  
• The risk of asset obsolescence due to rapid adoption of more environmentally friendly vessel technologies, combined with potential stricter shipping regulations and carbon pricing, could necessitate costly retrofitting or lead to early vessel retirements, driving up costs and threatening net margins.
  
• Regulatory uncertainty including potential escalation of climate-related litigation, ambiguous rules around Chinese-backed lease structures, and evolving port or environmental fees threaten to increase compliance costs and operational complexity, with the potential to weigh on future earnings.

Valuation

• The assumed bullish price target for Cool is NOK116.85, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Cool's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK116.85, and the most bearish reporting a price target of just NOK60.12.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $337.6 million, earnings will come to $70.7 million, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 12.9%.
• Given the current share price of NOK67.9, the bullish analyst price target of NOK116.85 is 41.9% higher.
• 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.