World War III and pirates seem to be the most serious risks to the long-term valuation of Stealthgas, Inc. (GASS). In the short term, I only wonder how long its stock will be so mispriced. Disclosure: I am long GASS.
Stealthgas Inc. is a company composed primarily of LPG carriers that are chartered for varying lengths of time under different types of charters to transport said LPG (liquefied petroleum gas). Two of the most important/common LPGs are propane and butane. The uses of LPGs vary from heating & cooking to chemical feedstocks and automotive fuel. Pervin & Gertz estimate that world demand for LPG will increase by 20 million tons by 2014 (a 3% annual growth).
I suppose I could go into a very detailed analysis of Stealthgas and its history, but my purpose here is to present a rather abbreviated investment thesis. Feel free to call me out if I am wrong, but it is my understanding that there are no giant red flags waving that Stealthgas will not be operating profitable through 2014. 2014 is going to be my arbitrarily set time horizon for value realization - perhaps to simply sync with the favorable forecasts of the global LPG industry given by Pervin & Gertz.
Recently, the stock has been trading in between $3.50 and $4.82. I think it’s a steal below $5 for a lot of reasons. The first is the direction TCE rates are trending. TCE stands for Time Charter Equivalent and as the company says in its filings, the TCE rate
is a measure of the average daily revenue performance of a vessel on a per voyage basis. Our method of calculating TCE rate is consistent with industry standards and is determined by dividing voyage revenues (net of voyage expenses) or time charter equivalent revenues or “TCE revenues” by voyage days for the relevant time period.
The TCE rate measurement is not a perfect fit for GASS because a lot of its ships are on bareboat charters or operating in the spot market.
The TCE rate can still be calculated though and the last eight charters GASS secured have an average daily TCE rate of $10,000 a day (found here and here). That's a 41.5% increase over the average for GASS in 2010 and if it keeps locking in similar rates for the next year or two, GASS is definitely positioned to show its best earnings ever. The expenses seem to scale some with the revenue, but I highly doubt they can keep up with a 41.5% increase in the TCE rate.
Other favorable facts are that as of the last earnings call (May 16, 2011):
fixed employment for our fleet for the remainder of '11 is about 63% of our available days. We've about 40% already fixed for 2012. While the equivalent full re-coverage numbers at the same time last year were about 60% and 25% respectively.
This doesn’t include 5 new charters that have been announced since. At $4.22, the stock trades below 10x 2010's $0.51 EPS. Also, the supply of ships in the market GASS operates in, handysize LPG, will actually decrease very slightly in 2013 after a very small increase in 2012.
This is all nice: it provides an assurance of future revenues and the uptick in TCE rates and employment is probably indicative of a stronger couple of years ahead and perhaps a stock valuation closer to the net asset value (NAV) or book value per share that according to the last 20-F filing (a foreign company’s 10-K) is $14.21. That seems really nice relative to its sub $5 stock price, but if its assets (mainly ships) can’t produce the cash-flow to back up that valuation, then perhaps it deserves the low valuation. The good news is that it appears the assets might start throwing off more cash in the future and actually be worth their carrying value.
For now, the market seems to think they deserve a discount.
In 2011, Stealthgas has sold four ships for approx. 82.48% of the value they were carried on the balance sheet for (this will be a $5.5 million loss). Not surprising considering the disappointing recent history of their ability to produce cash relative to their full value. (To figure out the percent loss on the sale of the ships, the $5.5 million loss is mentioned in the last earnings call, and the $25.9 million they are sold for is mentioned in the 20-F).
It should be said these ships were old relative to the rest of the fleet. The four were built in 1991, 1995, 1996, and 1999, which makes an average age of 15.75 while the total LPG fleet has an average age of 10.9 years as of June 1, 2011. The sector average is 18.5.
Almost everything said previously is sort of irrelevant to the investment thesis I’m laying out which will be based only upon the recent transaction of sold ships and balance sheet data. To illustrate the margin of safety offered by purchasing the stock below $5, disregarding all previous favorable indicators for the future of the company, the following thought scenario is laid out:
Total Liabilities: 388,952,529
Fleet Value: 603,065,011
Shares outstanding: 21,099,319
80% of fleet value = .8(603065011) = 482452008.8
80% of fleet value minus total liabilities: 482452008.8 - 388,952,529 = 93,499,479.8
80% of net fleet value per share = 93,499,479.8/21,099,319 = $4.43
As of last Friday's market close you could purchase GASS for $4.22.
Now we shouldn’t ignore that most liquid of assets:
Cash and cash equivalents: $33,919,980; Per Share: $1.60
If my math doesn’t deceive me this would put the value of a discounted Stealthgas fleet plus cash at above $6. From here on out, let's just pretend that an odd takeover deal is struck just to realize some of the value in the company, or even a liquidation lasting a couple years, though depreciation would play a factor in that scenario that I am not currently accounting for. It is not likely that either of the scenarios will manifest themselves, but I think they are very useful ways to show just how large the discount is on GASS shares at below $5.
Of course, in these pretend circumstances, GASS has other current and non current assets that would contribute:
Value of current assets minus cash and cash equivalents: $16,687,909
Value of current assets minus cash and cash equivalents per share = $0.79
Non-current assets minus fleet = $29,666,640 (of which the lion’s share is advances for vessels under construction)
Non-current assets minus fleet per share = $1.40
Even if you wanted to discount these other assets, it doesn't really change the conclusions, when the cash and 80% of the fleet value puts the valuation over $6 dollars per share. But just to for the sake of setting forth a bizarrely cheap takeover valuation with no goodwill and assuming only 80% of the balance sheet valuation of the fleet, Stealthgas would have a value of $8.22 per share.
For some reason, I am really comfortable buying it under $5. Just to assure you I am not somehow being too liberal with my valuation, I reiterate that the market is improving, and in the past the discrepancy between the carrying value and sale price has been much smaller than this most current transaction. In fact, 2009 GASS actually realized a gain on the sale of vessels. The EPS for 2010 was $0.51 and if 2011 isn't substantially better (though it might be, my conservative expectation is incrementally better), the much improved TCE rates will definitely show through in 2012 and this could mean a return to pre-recession earnings well above $1 per share.
Stealthgas' 4 largest customers are indicative of a very stable client base; in 2010 the 20-F noted: "43% of our revenues were derived from our four largest charter customers, Petredec, Vitol, Navig8 and Shell." When I worry about this company, which isn’t often, my worries revolve around pirates (which is actually a real risk and is listed as such in its 20-F) and a China at war, making operations in Asia unfeasible (where a majority of its ships are charted).
The business underlying the valuation, by all accounts, is worth more than said current valuation. Stealthgas operates well above breakeven and in the near future will continue to do so by a more substantial margin. Perhaps the recognition of the $5.5 million dollar loss will provide the opportunity to buy the stock at an even more attractive price. I hope so, because this might be the last chance investors will get to see prices in the range they have been in recently. (For full disclosure, I equally hope the stock goes to $100 for any reason, rational or otherwise, as soon as possible...though $8-$14 seems like a more reasonable range to expect in the next couple of years).
*Source on LPG global outlook and industry is a Pervin & Gertz report published in the Oil & Gas Journal June 6, 2011. (Requires subscription, though one can access it through such databases such as LexisNexus or ProQuest).
*Sources on Stealthgas include: 2010 20-F filing, 2011 1st quarter presentation and earnings report, and 1st quarter 2011 earnings call transcript, and PR reports available on the company's website and EDGAR.
*Seeking Alpha user Milwaukee Private Wealth Management has two great articles covering GASS.
*I apologize for any attempted stylistic deviations from an entirely straightforward detached presentation, I thought the length warranted some minor attempts at irony/sarcasm.
Disclosure: I am long GASS.