Deutsche Bank (DB) has initiated coverage of StealthGas (GASS) with a Buy rating and $14 price target, and named it top LPG/LNG pick.
StealthGas’ fleet of 40 LPG vessels makes it the largest owner of LPG ships in the world. The company is set to enhance its position through the delivery of 19 new LPG vessels, the majority of which will be delivered before the end of 2015. DB estimated that these acquisitions should translate to a more than doubling of earnings power in 2016 versus 2013, which combined with favorable demand/supply dynamics seen emerging in the LPG space, should drive considerable upside in the stock.
According to an analyst, following two equity offerings in 2014 that have raised $80M in proceeds, GASS has a cash balance of $134M (as of 2Q14). With the vast majority of newbuildings on order already funded largely with new debt, GASS is free to use much of its cash stockpile (plus estimated annual cash flow from operations of ~$90M) for the additional acquisitions or debt paydown.
DB also estimates average annual LPG demand growth has averaged high single-digits since 2010. The relatively recent strength has been driven by fast-rising U.S. exports resulting from the U.S. shale boom. If U.S. exports are bound for long-haul routes which require large vessels, the hub-and-spoke model of the LPG trade should drive increased “last-mile” demand for smaller ships, which is where GASS’ exposure is mostly focused. Further, this segment of the market has historically shown good consistency in rates vs. the “boom and bust” characteristics of other segments of the market, which gives increased confidence in out-year forecasts.
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