The company is too small for most institutional investors, and we see limited prospects for growth. Despite the share illiquidity and stretched liquidity position on our estimates, we believe there is upside to the share price based on the continued massive discount on steel and our positive sector view. We initiate coverage of Awilco LNG with a BUY recommendation and target price of NOK 6.9 (+7%).
Awilco LNG has a negative liquidity position in 2018/19 on our estimates, but we believe the company will find a solution given a net LTV around 60% and amidst a cyclical expansion. However, the company would find itself in a challenging position if our stipulated earnings improvement were to undershoot.
Given that the company is trading at a P/NAV of 0.43 and the historically lacking willingness of major shareholders to do a pro-rata equity issue, we do not expect the company to grow significantly in the near term. However, the company continues to be an attractive M&A target for other players in the industry.
Valuation: Our target price of NOK 6.9/sh is based on a weighted average of current and future NAV, in combination with a mid-cycle EV/EBITDA in 2018E/’19E.
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. We highlight Flex LNG (BUY/NOK 17) and GasLog (BUY/USD 18) as our top-picks in the sector.