Dorian LPG Inventory: A Totally Lined 16% Yield At Present VLGC Charges (NYSE:LPG)

Introduction

After discussing BW LPG (OTCPK:BWLLF) (OTCPK:BWLLY) and Avance Gasoline (OTCPK:AVACF), it solely is sensible to take a look at US-listed Dorian LPG (NYSE:LPG). Dorian’s monetary 12 months resulted in March which means the corporate lately revealed its full-year outcomes and annual report. Dorian ended FY 2023 on a excessive word as its common constitution charges exceeded the outcomes posted by BW and Avance Gasoline, and I used to be clearly curious to see the free money move efficiency of Dorian.

FY 2023 was nice for Dorian, however the upcoming worldwide fleet growth makes it trickier

It’s fascinating to check Dorian’s This autumn outcomes (the March quarter) with the Q1 outcomes of its Scandinavian friends Avance Gasoline and BW LPG. Whereas the latter reported a decrease common TCE charge of lower than $60,000/day, Dorian LPG handsomely beat that consequence by reporting a complete fleet time constitution equal charge of simply over $68,000 per working day thanks to identify costs exceeding $70,000/day.

Evidently, this resulted in a really sturdy fourth quarter as Dorian noticed its income bounce to virtually $144M (a rise of just about 70% in comparison with the ultimate quarter of the previous monetary 12 months). This finally resulted in a internet earnings of $76M which labored out to an EPS of $1.90. An excellent consequence for a inventory buying and selling within the mid-$20 vary, that is for certain.

Nevertheless, I share the sentiment of fellow writer Geoffrey Seiler, and I’ve voiced the identical considerations in my articles on BW LPG and Avance Gasoline. Nevertheless, the VLGC constitution charges stay fairly sturdy, and undoubtedly stronger than I had anticipated, so it seems to be like the following few quarters could also be fairly resilient. VLGCs constitution charges are at present round $100,000/day (see beneath) and that’s properly forward of my expectations. This means that each Q1 FY 2024 and Q2 will probably be very sturdy for Dorian as the extra capability seems to be well-absorbed by the market.

That being mentioned, it might additionally make sense to take a look at Dorian from a extra conservative perspective by checking the corporate’s efficiency utilizing the full-year common constitution charge of simply over $50,000/day.

The full income throughout FY 2023 was slightly below $390M which resulted in an working earnings of simply over $198M which is greater than double the consequence generated within the previous 12 months.

And whereas the curiosity bills elevated (which clearly does not come as a shock), the underside line reveals a internet earnings of simply over $172M which is larger than the web revenue in FY 2022 and 2021 mixed. This implies the full-year EPS got here in at $4.31 primarily based on the weighted common share rely of 40.03 million shares. Utilizing the present share rely of 40.4M shares, the EPS could be $4.27. Which means in extra of 40% of the full-year internet revenue was generated within the last quarter with a mean TCE of slightly below $70,000/day. With present constitution charges near and typically even barely exceeding $100,000/day, Dorian LPG’s FY 2024 will seemingly be very sturdy as properly, even when/when the constitution charges lower in direction of the second half of its monetary 12 months as the common money price (together with curiosity & principal funds) will probably be round $25,000/day.

One of many details of my funding theses for VLGC homeowners is the flexibility to transform paper income into constructive money flows. In Dorian’s case there was no overhang from a non-recurring merchandise (just like the sale of a vessel) that boosted the earnings assertion so I used to be anticipating a reasonably sturdy conversion charge. And I used to be not upset.

As you’ll be able to see beneath, Dorian reported an working money move of $224M however this included a $26M funding within the working capital place whereas it additionally excluded $6.5M in financing prices that had been paid.

This implies the underlying working money move was roughly $244M which is principally ample to cowl the price of three newbuilt VLGC vessels. Contemplating the corporate at present owns 22 vessels (after the supply of the Cristobal earlier this week) with a mean age of round 8 years and depreciates these vessels over a 25 12 months interval, you might argue the sustaining capex (together with fleet renewal and regular common drydocking bills) needs to be lower than $100M per 12 months. Which suggests the underlying free money move end in FY 2023 was roughly $145M or simply over $3.5/share. And once more, that is primarily based on a mean TCE charge of simply over $50,000/day. For each $10,000/day added to that consequence would add about $1.5/share to the annual free money move consequence. Which means if Dorian’s common TCE charge this 12 months would are available in at $70,000, the sustaining free money move consequence per share will exceed $6 which bodes very properly for the present ‘irregular’ quarterly dividends of $1/share.

In fact we’ve got to ensure to not get forward of ourselves as it’s extra seemingly the constitution charges will transfer down within the longer run, nevertheless it undoubtedly does appear to be Dorian will probably be printing money this 12 months, even when the constitution charges drop by 50% within the second semester.

Funding thesis

I like the very fact Dorian LPG is paying a variable dividend which absolutely is determined by the monetary efficiency and well being of the corporate. In spite of everything, a dividend isn’t an ‘entitlement’ however is a mechanism for a corporation to share its income with its shareholders. And I believe it makes excellent sense that in dangerous years the dividend is decrease and in good years the dividend is larger. The latest dividend was $1/share which brings the LTM dividend funds to $4, which represents in extra of 15% of the present share value. And that dividend needs to be sustainable so long as the constitution charges stay above $55,000/day whereas the present constitution charges point out Dorian might have a surprisingly excessive dividend prepared for its shareholders within the close to future.

I used to ‘play’ the VLGC market with BW LPG and Avance Gasoline, and each corporations are very well-run. This meant I misplaced monitor of Dorian LPG, however I’ve lately began to jot down put choices once more. Whereas the inventory is buying and selling barely above NAV (however not a lot, contemplating newbuild VLGCs are about $90-95M nowadays), Dorian will make up for this by the sturdy earnings profile that may final for a number of extra quarters: if it generates $8 in earnings this 12 months and pays out $5, it is going to add $3/share to the NAV. Dorian is a well-managed firm and I’ve no subject paying a small premium over NAV.

Editor’s Be aware: This text discusses a number of securities that don’t commerce on a significant U.S. trade. Please pay attention to the dangers related to these shares.