We initiate coverage of Flex LNG with a BUY recommendation and target price of NOK 17.
The company has no owned vessels on the water in the current trough, but four MEGI LNGC newbuildings scheduled for delivery in 2018. Given our view that the trough is finally coming to an end in 2q17 and that the expansionary phase of the cycle is imminent, we find the setup of Flex extremely attractive. Adding the strong sponsor in Mr Fredriksen, we see additional upside from future accretive deals and positive bias from investment banker analysts.
Market update: 17 LNGCs are scheduled for delivery in 2q17 (adjusted for FSRUs), representing a staggering fleet growth of 4% in just one quarter. Depending on slippage, the orderbook less our estimated scrapping implies a quarterly net fleet growth of 2-4% until and including 1Q19, or around 10% annualized in 2017E and 2018E. Although concerning, the supply growth is more than offset by our demand forecast of 14% in 2017E and 13% in 2018E, leading to improving utilization ahead. However, looking at the history, LNGCs have usually been delivered in a timely matter, but LNG export projects have not. Thus, although our base case is for improving utilization, earnings and asset prices ahead, we will be watching project developments closely.
Given the weak seasonality of spot rates in 2q (May historically the low), we believe that the next months could offer an opportunity for the LNGC-hungry investor to increase exposure, ahead of what will eventually be better times for LNG shipping.
Valuation: Our target price of NOK 17/sh is based on a weighted average of current and future NAV, in combination with a mid-cycle EV/EBITDA in 2019E.