Drewry Maritime Financial Research

Santosh Gupta

Maritime Sector, Equity & Credit Research

With no ties to other players in the shipping, finance or banking world, we provide a uniquely impartial view of the markets and companies we cover. Our parent organization, Drewry is a leading independent provider of research services to the maritime and shipping industry, employing over 100 professionals across an international network of offices in London, Delhi, Singapore and Shanghai. Combining our market-leading resources with seasoned sector expertise DFRS offers a highly differentiated and comprehensive range of investment and financial research services to lenders and prospective investors in publicly listed maritime and shipping companies. The full service of reports, supporting resources and sector orientated webinars provides our clients with the most complete picture of the organisations under coverage as is possible. We have been charting and analysing the world’s maritime markets for more than 40 years. This unrivalled intelligence and understanding provides the foundation of our research service. Our analysts have access to one of the most up-to-date, comprehensive and reliable sources of market insight and research data available today. We look at globally listed companies within the following sectors: Port Operators, Container Shipping, Container Manufacturing & Leasing, LNG Shipping, Dry Bulk Shipping and Tanker Shipping. Combine in-depth sector expertise with financial analysis focusing on over 50 stocks globally.

Equity Bottom-Up

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<h2>Downgrade to Neutral on multiple headwinds ahead</h2>
<p style="text-align: justify;">We have downgraded Gaslog to Neutral on account of weak industry prospects, a plunge in Gaslog Partners’ share prices and subdued valuations. We have also revised our spot rate forecasts as the tonne-mile demand is getting weaker with the coronavirus outbreak creating uncertainties on China’s LNG demand. Gaslog Partners’ share price has declined 60.5% following the company’s announcement to reduce the dividend by about 78% during its recent 4Q19 results. We have arrived at a fair value of USD 6.4 per share for Gaslog.</p>
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<h2>Industry prospects are getting weaker</h2>
<p style="text-align: justify;">We expect lower LNG charter rates during 2020-22, compared with 2018 and 2019, on account of the vast increase in liquefaction capacity in the market amid sluggish growth in demand in the major LNG-importing countries. We expect LNG shipping charter rates to be lower in 2020 than in 2019 owing to abundant LNG supply, low LNG prices and shrinking tonne-mile demand expected during this year.</p>
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<h2>Gaslog’s EBITDA margins to decline as spot exposure increases</h2>
<p style="text-align: justify;">We expect Gaslog’s EBITDA margins to decline to 63.6% in 2022 from 69.4% in 2019 as the number of vessels in the spot fleet is expected to increase from 6 vessels at the end of 2019 to 12 vessels by the end of 2020. Gaslog has six vessels coming off fixed charter in 2020. We believe the company will find it challenging to employ these vessels in the time charter market due to sluggish LNG shipping prospects. Consequently, we expect these vessels to trade in the spot market and earn lower earnings. As five of these vessels are less energy-efficient (steam turbine vessels with average age of more than 10 years), we expect their spot earnings to be about 35% lower than those of TFDE vessels, resulting in lower utilisation rates. Meanwhile, Gaslog recognised an impairment loss of USD 162.1mn on its six steam turbine vessels in 4Q19 due to negative market conditions.</p>
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<h2>Steep decline in Gaslog Partners’ share price restricts its ability to raise funds</h2>
<p style="text-align: justify;">We believe the recent steep decline in Gaslog Partners’ share price and the cut in its dividend, in addition to a weak market for LNG shipping, will restrict the company’s ability to raise fresh equity. Gaslog has traditionally used Gaslog Partners’ equity issue to finance its dropdown of vessels. Gaslog Partners did not do any equity issuance under its ‘At-the-market’ programme in 2019. As we value Gaslog Ltd’s stake in Gaslog Partners at market value, a sharp decline in the latter’s share price will adversely affect the former’s fair value.</p>
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<h2>Downgrade to Neutral with a fair value of USD 6.4 per share</h2>
<p style="text-align: justify;">We have downgraded Gaslog to Neutral in the wake of multiple headwinds ahead. Gaslog’s stock price has already declined 37.7% YTD (as of 19 February) and we see limited downside from this level. We have arrived at a fair value of USD 6.4 per share based on blended valuation. We have used a mix of DCF and NAV to arrive at the fair value. The key upside risks include an unexpected increase in crude oil prices, a better-than-expected win of fixed charter contracts and a sustained rise in spot freight rates. The main downside risks are a sustained drop in LNG shipping spot rate prices, a prolonged impact from coronavirus and the shutdown of many LNG liquefaction projects.</p>
<p> </p>
<h2>Weak industry prospects due to sluggish demand</h2>
<p style="text-align: justify;">We expect lower LNG charter rates during 2020-24, compared with 2018-19, on account of the vast increase in liquefaction capacity in the market amid sluggish growth in demand in major LNG-importing countries. Furthermore, over 200 vessels will be added to the fleet by 2024, while 26 vessels are estimated to have been removed from the effective fleet for conversions and scrapping. We believe 2020-22 will be the period when LNG trade rebalances with vast incoming vessel supply, liquefaction capacity from different regions and slower growth in demand in major LNG centers.</p>
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Downgrade to Neutral on multiple headwinds ahead
We have downgraded Gaslog to Neutral on account of weak industry prospects, a plunge in Gaslog Partners’ share prices and subdued valuations. We have also revised our spot rate forecasts as the tonne-mile demand is getting weaker with the coronavirus outbreak creating uncertainties on China’s LNG demand. Gaslog Partners’ share price has declined 60.5% following the company’s announcement to reduce the dividend by about 78% during its recent 4Q19 results. We have arrived at a fair value of USD 6.4 per share for Gaslog.
 
Industry prospects are getting weaker
We expect lower LNG charter rates during 2020-22, compared with 2018 and 2019, on account of the vast increase in liquefaction capacity in the market amid sluggish growth in demand in the major LNG-importing countries. We expect LNG shipping charter rates to be lower in 2020 than in 2019 owing to abundant LNG supply, low LNG prices and shrinking tonne-mile demand expected during this year.
 
Gaslog’s EBITDA margins to decline as spot exposure increases
We expect Gaslog’s EBITDA margins to decline to 63.6% in 2022 from 69.4% in 2019 as the number of vessels in the spot fleet is expected to increase from 6 vessels at the end of 2019 to 12 vessels by the end of 2020. Gaslog has six vessels coming off fixed charter in 2020. We believe the company will find it challenging to employ these vessels in the time charter market due to sluggish LNG shipping prospects. Consequently, we expect these vessels to trade in the spot market and earn lower earnings. As five of these vessels are less energy-efficient (steam turbine vessels with average age of more than 10 years), we expect their spot earnings to be about 35% lower than those of TFDE vessels, resulting in lower utilisation rates. Meanwhile, Gaslog recognised an impairment loss of USD 162.1mn on its six steam turbine vessels in 4Q19 due to negative market conditions.
 
Steep decline in Gaslog Partners’ share price restricts its ability to raise funds
We believe the recent steep decline in Gaslog Partners’ share price and the cut in its dividend, in addition to a weak market for LNG shipping, will restrict the company’s ability to raise fresh equity. Gaslog has traditionally used Gaslog Partners’ equity issue to finance its dropdown of vessels. Gaslog Partners did not do any equity issuance under its ‘At-the-market’ programme in 2019. As we value Gaslog Ltd’s stake in Gaslog Partners at market value, a sharp decline in the latter’s share price will adversely affect the former’s fair value.
 
Downgrade to Neutral with a fair value of USD 6.4 per share
We have downgraded Gaslog to Neutral in the wake of multiple headwinds ahead. Gaslog’s stock price has already declined 37.7% YTD (as of 19 February) and we see limited downside from this level. We have arrived at a fair value of USD 6.4 per share based on blended valuation. We have used a mix of DCF and NAV to arrive at the fair value. The key upside risks include an unexpected increase in crude oil prices, a better-than-expected win of fixed charter contracts and a sustained rise in spot freight rates. The main downside risks are a sustained drop in LNG shipping spot rate prices, a prolonged impact from coronavirus and the shutdown of many LNG liquefaction projects.
 
Weak industry prospects due to sluggish demand
We expect lower LNG charter rates during 2020-24, compared with 2018-19, on account of the vast increase in liquefaction capacity in the market amid sluggish growth in demand in major LNG-importing countries. Furthermore, over 200 vessels will be added to the fleet by 2024, while 26 vessels are estimated to have been removed from the effective fleet for conversions and scrapping. We believe 2020-22 will be the period when LNG trade rebalances with vast incoming vessel supply, liquefaction capacity from different regions and slower growth in demand in major LNG centers.


Gaslog Ltd - Downgrade to Neutral on Multiple Headwinds Ahead