Gaslog: Earnings in line with estimates; maintain Neutral view

TIN news:  Market to remain soft although higher vessel days aided 1Q17 earnings: Gaslog (GLOG) reported revenue of USD 128m in 1Q17, up by 23% y/y owing to an increase in operating days as four vessels namely Gaslog Greece, Gaslog Gibraltar, Gaslog Glasgow and Gaslog Geneva, were delivered after 1Q16. There were 2,070 operating days in 1Q17 compared to 1,643 days in 1Q16. The increase in revenue was also supported by lesser off-hire days, but was offset by the expiration of two time charter agreements in 2016. The reported revenue was broadly in line with our estimate of USD 131.7m. On the earnings front, the company reported EBITDA of USD 89m, which compared well with our estimate of USD 88.6m. Management guided towards similar revenue in the next quarter although expenses could increase due to the planned maintenance of vessels, as well as higher finance fees. We downgraded the stock to Neutral at the start of the year, and the price correction since then is in line with our expectations. We reiterate our Neutral view and have trimmed our fair value to USD 16 per share from USD 18 earlier as we believe recovery is now delayed towards end-2018, with rates remaining under pressure this year on account of double-digit fleet growth.

Outlook remains soft as supply-side headwinds persist: We believe tonnage oversupply in the LNG shipping sector will continue to weigh on recovery in the market as a large orderbook will make sure that new vessels planned for delivery in FY17-18 check the improvement in freight rates. New liquefaction capacities in Australia and the US will be the major sources of LNG supply, while Asian countries, especially China and India, are expected to drive the demand for LNG. The US will be the main supplier of LNG cargo as planned capacity comes on stream. Despite new liquefaction capacity, which will come online in 2017, the business outlook remains tepid as new tonnage supply will outweigh additional demand. With the orderbook-to-fleet ratio of 29% at end-March 2017, we expect 9m cbm of new tonnage to be delivered in 2017, translating into ~13% growth in the fleet. Even though freight rates have recovered from the lows seen last year, we expect them to remain below the long-term average. Meanwhile, the long-term outlook stays positive as the fleet growth is expected to slow down from next year, and the tonne-mile demand will improve due to increasing US exports, thus assisting recovery towards the end of next year.

Dropdown of Gaslog Greece to increase cash flow: Gaslog completed the dropdown of Gaslog Greece to Gaslog Partners LP (GLOP) for USD 219m. In order to fund this dropdown, GLOP successfully completed an equity offering of 3,870,000 common units at a public offering price of USD 20.50 per unit, raising net proceeds of USD 78m. Gaslog Seattle and Gaslog Greece have been dropped down to GLOP in the last six months, and with GLOP’s ability to recycle capital, management believes it will support GLOG’s business expansion plans. With the completion of the dropdown of vessels in the pipeline, GLOG will receive greater cash flows from GLOP in the forthcoming quarters. GLOP has increased its distribution to USD 0.50 per unit in 1Q17 from USD 0.478 per unit a year ago.

Securing funds to improve visibility: GLOG completed its public offering of USD 250m of 8.875% senior unsecured notes due in 2022, of which USD 150m of the net proceeds were used for the partial prepayment of the junior tranche of the credit agreement originally due in April 2018. GLOG also has five vessels on order, of which three will be delivered in 1Q18, and two in 1Q19. All the vessels have been fixed on long-term charter. The delivery of these five vessels will expand the fleet owned by GLOG to 17, and 27 if we include GLOP’s fleet as well. The pending capex for the five newbuildings is USD 936m at end-1Q17, of which USD 664m will be funded from undrawn capacity under the financing agreement, whereas the remaining will be funded from cash balance, cash from operations and borrowings under the new debt agreement. At end-1Q17, GLOG had USD 533m of cash on its balance sheet.

Value and risk: We maintain our Neutral view on GLOG although have revised our fair value to USD 16 per share as we believe the supply-side headwinds will cap the recovery through the year, and rub-off effect of higher crude prices after OPEC announced production cut was short-lived. We do not expect any earnings surprises on the upside, and hence expect GLOG to remain range-bound in the absence of any drivers in the short term. The key upside risk is a rally in crude prices although that looks unlikely given the oversupplied oil market, especially amid higher production in the US.

Source: Company, DFRS