Ammonia-capable Retrofits Will Open New Markets, But Oversupply May Pressure Future Freight Rates

Key Takeaways

• Significant fuel savings from energy-saving initiatives enhance net margins via reduced operational costs and quick recovery periods.
  
• Strategic fleet investments and U.S. terminal expansions position the company for revenue and earnings growth through market expansion and robust freight demand.
  
• Geopolitical risks, potential oversupply, and high operational costs could pressure future freight rates, revenues, and margins for DorianG.

Catalysts

Engages in the transportation of liquefied petroleum gas through its LPG tankers worldwide.

• Dorian LPG is achieving significant fuel savings, greater than 10%, from energy-saving devices and silicon paints during drydocking, resulting in payback periods of less than a year and ongoing operational cost reductions. This will positively impact net margins.
  
• The expected production growth and terminal expansions at Targa and Nederland in the second half of 2025 should support a robust freight market, which will likely enhance future revenue.
  
• Preparation for emerging ammonia projects, including retrofitting vessels to be ammonia-capable, adds commercial optionality and positions the company for potential market expansion, supporting future earnings growth.
  
• The company maintains a strong balance sheet with high financial flexibility, enabling strategic capital allocation towards fleet renewal and expansion, potentially boosting revenue and earnings.
  
• Anticipated capacity expansion at U.S. Gulf terminals alongside high export supply from North America should positively affect the freight market, contributing to revenue growth.

DorianG Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming DorianG's revenue will decrease by 8.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 38.7% today to 36.5% in 3 years time.
• Analysts expect earnings to reach $116.9 million (and earnings per share of $2.7) by about April 2028, down from $161.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $156 million in earnings, and the most bearish expecting $90.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.3x on those 2028 earnings, up from 5.3x today. This future PE is greater than the current PE for the US Oil and Gas industry at 11.4x.
• Analysts expect the number of shares outstanding to grow by 5.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.06%, as per the Simply Wall St company report.

DorianG Future Earnings Per Share Growth

Risks

• The potential geopolitical risks and volatile political environments, including developments in regions like Ukraine, Iran, and the Middle East, could significantly disrupt the trade and negatively affect the company's revenue and earnings.
  
• High inventory levels and record production levels could lead to an oversupply, which may place downward pressure on freight rates and impact future revenues and margins.
  
• The heavy drydocking schedule and associated capital expenditures increase operational costs and could negatively affect net margins, especially if market conditions do not improve as expected.
  
• The sizeable order book with 107 VLGCs on order, representing 20% of the current fleet, presents a risk of oversupply, which could affect future freight rates, revenues, and profitability.
  
• The dependence on the success of emerging ammonia projects introduces execution risk, as delays or underperformance could impact expected revenue streams and the company's financial position.

Valuation

• The analysts have a consensus price target of $32.0 for DorianG 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 $320.3 million, earnings will come to $116.9 million, and it would be trading on a PE ratio of 17.3x, assuming you use a discount rate of 8.1%.
• Given the current share price of $20.03, the analyst price target of $32.0 is 37.4% 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.