Avoid Gaztransport & Technigaz

| About: Gaztransport & (GZPZY)

Summary

Despite the price drop, GTT's share does not look undervalued.

The risk of a medium/long-term revenue drop is significant.

Huge uncertainty beyond 2020-2025.

Introduction

Gaztransport & Technigaz [GTT] (OTCPK: OTC:GZPZY) is the worldwide leader in containment solutions for the shipping and storage of LNG (liquefied natural gas). Created in 1994 by merging Gaztransport and Technigaz, the company has over 50 years of technological expertise in cryogenics and storage of LNG.

GTT entered in the stock market on February 27, 2014 on Euronext Paris and integrated the French stock market index SFB120 in June 2014. The share price traded in the range of €45-50 during 2014.

In the recent context of energy oversupply, oil and gas prices dropped, and the share price of GTT began to fall in mid-2015. Now the share is trading around €26. The market capitalization is about €950 million. The share is currently trading at a low multiple (price/earnings) of slightly more than 8.

Recent results

Last week, GTT issued the full year 2015 results and confirmed revenue target for 2016.

The total revenue equals €226.5 million for 2015, with €209 million from royalties. Revenues from Services increased to 17.1 million from 10.4 million in 2014.

Revenues, operating income and net income for the three last years are reported in the table below.

2013

2014

2015

Revenues

217.6

226.8

226.5

Operating income

140.5

138.9

139.3

Net income

118.7

115.4

117.3

Click to enlarge

(in millions of euro)

The company has a high net margin (above 50%) and distributed almost all its earnings to shareholders, the payout ratio is 83%. The dividend equals €2.66 for the fiscal year of 2015. The company already issued an interim dividend of €1.30 per share in September 2015.

GTT has no debt and negative working capital requirements, so the opportunity of investing in this company focuses on the revenue and the operating income expectations.

GTT operates in 4 different segments:

  • LNG carriers, which represent 80% of its revenue
  • FSRU (Floating Storage Re-gasification Unit)
  • FLNG (Floating Liquefied Natural Gas)
  • Onshore tanks

The market share of GTT represents 72% of the global active fleet. The main competitor, Moss represents 28% of the active fleet. For the recent orders, the current market share of GTT is about 80% for the LNG carriers.

GTT holds 690 active or pending patents. 25% of the revenues are dedicated to research and development. New technologies developed by GTT permit by example to reduce the boil-off rate, representing savings for the shipowner.

Near-term revenues

For the coming years, the order book reached 118 units (order book value of €619 million) up from 114 units in 2014 (591M). Orders are very rarely cancelled. It takes 3 years between order and vessel delivery. Most of the revenues of GTT are recognized 15 to 24 months after the order. In the near term (2016-2018 period), the expected revenues and earnings are good regarding the market capitalization of GTT.

The table below reports the expected revenues from current order book and number of orders to be delivered per year.

2016

2017

2018

2019

2020

Revenues
(€ million)

242

209

137

27

4

Order book by year of delivery
(units)

39

38

28

10

3

Click to enlarge

LNG demand forecast

On a long-term basis (2020-2030 period), fundamentals support higher energy consumption, driven by growing global population and GDP per capita, especially in Asia and other emerging countries. According to the IAE estimation, energy demand is expected to grow at 1.2% per year by 2035. With lower CO2 emission than other fossil energies and large reserves, the natural gas is expected to gain market share in the global energy consumption. Six months earlier, the IAE announced a forecast of 2% average growth of the global demand for natural gas between 2015 and 2020. In the same time, LNG will be growing faster, growth is expected to continue beyond 2020, albeit at a slower pace.

The main LNG consumer countries are Japan, South Korea and Asia. 70% of the LNG went to Asia in 2012 (and 21% to Europe). Global demand for LNG is expected to double by 2030 from 2015 (source: Poten and Partners, survey for GTT, reference document 2014). In the same document, GTT reported that the worldwide LNG transport is expected to grow from 1,266 bcm-miles transported in 2013 to 2,145 bcm-miles transported in 2025, representing an increase of 70%.

GTT long-term demand

There are currently about 420 active LNG vessels. LNG carrier lifetime exceeds 35 years (average economic life is 35-40 years). Looking at the age distribution of the current fleet, most of the vessels are relatively recent. In 2014, there were 373 active fleets, 328 were under 19 years, and two thirds were under 10 years (245 under 10 years). The vessels with small capacity (volume inferior to 150,000cm) are over-represented among the older vessels, 58% of active carriers had a capacity within 125,00cm and 150,000cm at the end of 2014 (source: IGU World LNG Report - 2015 Edition).

Poten & Partners projects between 239 and 307 orders between 2015 and 2024 for GTT and expects the group should get a market share of 85% (survey for GTT, reference document 2014). In addition to LNG carriers, GTT expects 25 to 35 FSRU orders, 2 to 3 FLNG orders, and 49 to 79 onshore storage orders over the 2015-2024 period.

Since most of the new carriers have a capacity of 160,000cm and more, the order of 239 new carriers by 2024 plus the 373 existing at the end of 2014 would roughly double the global fleet capacity.

If we suppose the forecasts are right and knowing that the average revenue per carrier is about €7.5 million, the order of 239 units (plus 30 FSRU/FLNG units) would represent a total revenue of about €2-2.5 billion for the 2015-2024 period. So, with a margin of 50%, GTT may generate net earnings of €1-1.25 billion for the next decade.

Moving forward in 2024, with the market anticipation presented above, the global active fleet would exceed 600 vessels:

- 373 (active fleet in 2014)

- plus 239 (GTT orders for 2014-2024)

- plus 50 (20% share market of concurrence)

- minus 40 vessels laid-up

Knowing the age distribution of the current fleet, half of the vessels will be under 20 years, and more than one third under 10 years. In this context, the group may encounter a severe order decline beyond 2025 (and even before) except if the LNG and LNG carrier demand growth remains strong after 2024 (I would not bet on such a far-off event).

The presented figures do not include revenues of services but they represent less than 10% of the revenues.

Conclusion

Natural gas is the fastest growing fossil fuel worldwide. On a long-term basis, the natural gas demand will remain strong according to expert forecasts. Environmental policies will encourage the coal-to-gas switch since gas generates lower carbon emissions.

At this point, I consider GTT should be able to return at least €1 billion to shareholders over the next decade. Beyond this horizon, the sustainability of the LNG carrier demand is unpredictable. In case where the LNG demand would stabilize in 8-10 years, the risk of a revenue decrease is real since most of the active vessels will not have to be replaced.

However, there are also some positive points. In the high-case scenario (307 LNG carrier orders in the next decade), earnings could reach more than €1.5 billion. Also, regulation policy and reduction of sulphur emissions for maritime shipping may increase LNG as a marine fuel. Use of LNG for vessel propulsion may be a share catalyst for GTT. In this case, the shareholder return could be satisfying.

I started to analyze GTT's business because of the recent share drop. Retrospectively, and according to the analysis I reported in this article, I did not find any element justifying the share price range of €45-50 observed last year. The current market capitalization (€950 million) looks fair.

Despite that good revenues should be recorded in the near term, I consider that uncertainties beyond 2020-2025 are too significant to buy GTT at the current share price. The risk/reward is not attractive.

The investigation of South Korea's Fair Trade Commission opening an inquiry is an additional plea to remain outside GTT.

I may reconsider the opportunity of investing in GTT if the share drops significantly in the coming quarters.

Disclosure: I/we 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.