Dorian LPG: Inelastic Supply Side And High Order Book Constrains (NYSE:LPG)

Note: I previously covered Dorian LPG (NYSE:LPG). In my previous take on LPG, I discussed its merits (fleet, financials, and valuation) and the LPG market, particularly the VLGC segment. I gave LPG a hold rating. Today, I comment on the last company report, the Dorian’s valuation, and the LPG market.

LPG market highlights

LPG demand has grown globally, driven by Asia, that accounts for 60% of seaborne demand and 58% of US exports. The table below from the last presentation shows the demand for Asian LPG.

China leads, followed by India. Asian LPG demand is projected to grow by another 9% FY24. Petrochemical demand is one of the prime drivers for LPG demand in China. YoY growth is 21%, while the CAGR for the last eight years is 12%. India’s major catalyst is retail demand, which has achieved a 10% CAGR for the previous eight years.

The major supply source is located on the other side of the globe. The US became the undisputed leader in LPG exports, as seen in the chart below provided by BW LPG.

The US accounts for 45% of seaborne LPG supply. The growth rate of the US LPG exports FY23 is 13.0%, while the FY24 rate is expected to reach 7.3%. Middle East exports increased by 4.2% in FY23. In 2024, the exports are expected to remain the same.

On the other hand, the VLGC supply side is not attractive. The VLGC book is 30%. 40 VLGC were delivered in 2023, and 14 vessels are to be delivered in 2024. Four of those have already been delivered. Let’s look at the LPG carrier’s order book in detail.

Handysize (7% vs. 21%) and Small Gas Carriers (6% vs. 24%) have significantly lower order books than the percentage of ships older than 20Y. Conversely, MGC (27% vs. 11%) and VLGC (30% vs. 14%) have higher order books than the percentage of 20Y+ old vessels. Given those numbers and the inelastic supply side of shipping, I am not excited about the VLGCs.

I believe most of the Alpha in the VLGC segment has been harvested, and Dorian is no exception. The company operates a VLGC-only fleet of 25 vessels (21 owned + 4 chartered-in) at an average age of 8.0 years, well below the global average for LPG carries at 10.3 years old. Dorian ordered VLGC/VLAC with 93,000 cbm capacity from Hanwha shipyard in Korea, and the expected delivery is in 3Q26.

LPG last financial report

2023 was a strong year for the LPG segment in general. Dorian’s last report is an excellent confirmation. The table below shows LPG operational figures for 4Q23 and 9M23.

In 4Q23, the company achieved $76,337/day TCE, which is 46% higher YoY. Meanwhile, the daily OPEX grew by 2% over the same period. The fleet utilization declined to 93.6% in 4Q23 vs 97.8% in 4Q22. Looking at the big picture, Dorian scored $64,120/day TCE rates for 9M23, compared to $44,435/day for 9M22. The OPEX increased to $10,392/day 9M23 from $9,553/day 9M22. The utilization improved YoY, reaching 96.0% 9M23.

Higher rates, stable OPEX, and improved utilization resulted in strong financial results in 9M3.

Total revenue in 9M23 reached $419 million vs. $256 million in 9M22. Over the same period, voyage expenses dropped by 10% to $2.29 million. The OPEX increased by 15% to $60 million in 9M23. Dorian delivered a $228 million net income in 9M23, resulting in $5.68/share EPS. Quarterly figures were equally positive. The net income increased by 96% to $99 million in 4Q23. Over the same period, Dorian delivered an adjusted EBITDA of $133 million and $2.48/share EPS.

Dorian has maintained competitive profit margins over the last quarters.

LPG holds the leading position against its prime rivals in the VLGC segment, BW LPG and Avance Holdings. Dorian achieved superior margins due to its higher spot exposure. The company employed more than 90% of its fleet under spot contracts. For reference, BWLLF contracted 75% of its ships at spot rates and AVACF 71%. Dorian’s higher percentage of scrubber-fitted ships is another booster for its profitability, leading to wider profit margins.

LPG does not distribute regular dividends. However, the company pays special dividends. On February 24, LPG declared a $1.0/share dividend, resulting in a $11.5/share annual distribution FY23 or 10.4% TTM yield. BWLFF and AVACF distribute dividends with higher yields, 22.3%, and 28.8%, respectively.

Balance sheet

Dorian keeps its balance sheet neat and tidy. The company did not change its capital structure QoQ.

Dorian has $213 million cash, $564 million long-term debt, and $817 million total debt (including $167 million lease agreements). The capital structure has remained unchanged since 3Q23. LPG has 83.1% total debt/equity and 45.9% total liabilities/total assets. LPG delivered $224 million operating cash flow and $198 million operating income FY23. Over the same period, the company covered $25 million in net interest expenses.

Valuation

LPG stock picks are limited to several options. In the following paragraph, I describe Dorian’s competitors’ fleets.

Avance Gas Holding (OTCPK:AVACF) owns twelve VLGCs with an average age of 4.7 years. Six are scrubber-equipped, four are dual fuel, and two have conventional propulsion. The largest VLGC owner, BW LPG (OTCPK:BWLLF), runs a fleet of 45 VLGCs, 20 owned, 11 operated, six chartered-in, and eight as a part of BW subsidiary. The average age of the BW fleet is 8.7 years.

I added Navigator Gas Holdings (NVGS) and StealthGas (GASS) for more context. However, bear in mind those companies do not compete in the VLGC segment. GASS owns mainly small-sized gas carriers with a capacity of up to 14,999 cbm, while NVGS on Handysize vessels.

LPG is expensive compared to its peers, considering TTM EV multiples.

GASS trades at the lowest multiples. Looking at FWD figures, LPG seems reasonably priced. NVGS is the most interesting company in the group because of its Handysize-focused fleet and 50% ownership of Houston Ethylene Terminal.

Let’s look at the shipping investors triad: fleet specs, PNAV, and LTV.

LPG trades at 99% PNAV and comes with 40% gross LTV. Its direct competitors are AVACF and BWFF, considering their VLGC-only fleets. AVACF and LPG trade close to their NAV. Only BWLFF from VLGC owners offers a discount on its net asset value. GASS remains the cheapest in the group. Considering the supply glut with VLGCs, I am not keen to pay 100% or more P/NAV. As I mentioned in my previous article on Dorian, I missed the party, and now it is too late to join.

Final thoughts

Dorian maintains robust solvency and liquidity metrics, mitigating the financial risk. The average age of its fleet is 8Y, reducing the operational risk, too. The most pronounced risk is the supply side of VLGCs.

If we turn to the proverbial anecdote ” The hare and the tortoise,” the supply side in shipping is the tortoise, and the demand is the hare. This principle is valid for all tangible assets-based businesses. The supply is inelastic, unlike the demand. This dissonance leads to epic boom and bust cycles.

LPG as a segment, particularly VLGC, is in the last innings of its expansion phase. The percentage of VLGCs older than 20Y is 14%, while the order book is 30%. Regardless of the strong LPG demand and Panama Canal drought, in my opinion, the risk-reward is not skewed in investors’ favor. In other words, the downside risk grows while the upside potential diminishes. Other shipping segments, such as crude tankers, bulkers, and OSVs, bring better risk rewards.

I still have some exposure to the LPG theme via GASS and NVGS stocks. Both are niche bets on the shortage of small-size LPG carriers. Dorian is a good company with healthy financials and attractive dividend yields. Nevertheless, I prefer to park my cash in opportunities with favorable risk-reward. My verdict remains unchanged: I give LPG a hold rating.

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