Navigator Holdings: Nice Offering For LPG Leader

Nov.23.13 | About: Navigator Holdings (NVGS)

Navigator Holdings (NYSE:NVGS) made its public debut on Thursday, November 21. Shares of the owner and operator of handysize liquefied gas carriers ended their first day with gains of 5.2%.

While Navigator is a great company, being a leader in its field while nicely growing revenues and earnings, the valuation is too high for me to pick up some shares at this level.

I remain on the sidelines.

The Public Offering

Navigator is an owner and operator of what it claims is the largest fleet of handysize liquefied gas carriers. It provides transportation of LPG, petrochemical gases and ammonia for energy companies, industrial users and commodity traders.

By cooling the load, volumes will be reduced up to 900 times, depending on the cargo. US shale oil and gas provides companies like Navigator the possibility to export these gases to worldwide markets as the transportation is relatively cost-efficient.

Navigator Holdings sold 12.0 million shares for $19 apiece, thereby raising $228 million in gross proceeds. The firm itself sold 9.03 million shares thereby raising $171 million in gross proceeds while the remainder of shares were being offered by selling shareholders.

Initially, bankers and the firm set an initial price range of $17-$19 per share. Shares were eventually sold at the high end of the preliminary initial public price range. Note that the company furthermore boosted the offer size from 11.3 million shares to 12.0 million shares.

Some 22% of the total shares were offered in the public offering. At Thursday's closing price of $20.00 per share, the firm is valued at $1.09 billion.

The major banks that brought the company public were Jefferies, Morgan Stanley (NYSE:MS), Evercore, Fearnley Securities, Global Hunter Securities and Stifel.

Valuation

Navigator owns a fleet of 31 semi- or fully refrigerated handysize liquefied gas carriers, with a capacity between 15,000 and 25,000 cbm. This includes 8 vessels to be delivered before the end of 2015.

These ships are aimed at medium and long-haul routes which are uneconomical for small vessels, while ports might be to small for large vessels, or strained by onshore infrastructure capacity.

The company furthermore has the largest ethylene-capable vessel fleet, some five of them. The newly built ships all hold eco-design, making them more fuel efficient, allowing Navigator to ask premium prices in its contracts.

Since the current management team joined in 2006, Navigator has grown from 5 to 23 vessels in the water, to an expected 31 by the end of 2015.

For 2012, Navigator generated annual revenues of $146.7 million, up 65.1% on the year before. Net earnings grew by a similar 63.7% to $30.5 million.

Strong growth continued in 2013. For the first nine months of the year, revenues came in at $167.0 million, up 56.8% on the year before. Earnings rose by 38.6% to $30.1 million. Net interest expenses nearly quadrupled to $20.9 million resulting in earnings growth which lagged revenue growth.

The company operates with $46.0 million in cash and equivalents. Total debt stands around $563.8 million, resulting a net debt position of around $520 million.

Navigator stands to receive $171 million in gross proceeds from the offering. The net proceeds of little over $150 million will be used to finance the purchase of new shares and reduce the effective net debt position towards $370 million.

With the equity in the business being valued around $1.09 billion, Navigator is valued at 7.4 times annual revenues and 35 times annual earnings. Obviously operations are showing continued growth in 2013, putting these multiples down for this year.

Investment Thesis

As noted above, the offering of Navigator has been a modest success. The company priced the offering at $19 per share, some 5.5% above the midpoint of the preliminary offering range. Ever since, shares have seen a modest jump. At this point shares are trading some 11.1% above the midpoint of the preliminary offering range.

Strong growth so far this year is driven by the acquisition of 11 handysize gas carriers from A.P. Moller Maersk Group by the end of last year. Navigator hopes to continue to benefit from increased Middle East and US exports to Asia and Europe, among others.

This growth has resulted in a weighted average vessel usage of 18 ships so far this year, being used 93.7% of the time. The large modern fleet and lower fuel costs boost current profitability. Note that average rental yields per day came in at $28,7k so far this year, up 13% on the year before.

At this pace annual revenues of $225 million are attainable as earnings could come in around $40 million. Given that Navigator effectively only operates 18 ships, it could grow revenues and earnings by another 70% at current rates until 2016. This would imply annual revenues of around $380 million and earnings of $70 million.

Obviously there are some risks to this offering. The debt, cyclical nature of the industry and of course terrorism acts could have a huge impact on the firm. The current multiples are steep and the valuation at little over a billion seems steep as well, compared to estimated earnings power of $70 million in 2016 based on today's market circumstances. The lack of current dividends is a disappointment as well given the solid profitability of the business.

It is rare to see a profitable and nicely growing business going public these days. Therefore it is even more so unfortunate that the company trades at a premium valuation leaving me little choice but to leave Navigator on the sidelines.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.