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HMLP: A Unique Low Risk LNG Infra MLP, Exhibiting Strong Growth Prospects And A Current 8.7% Dividend Yield (1.07X Coverage)

Summary

HMLP = Only listed FSRU pure play (Floating Storage & Regasification Units)

Stable low-risk LNG infra MLP with solid growth prospects

Trading at 8.7% div yield - 10% est. distrib CAGR between 17-20.

DropDown Story (DD) with large pipeline (See below)

Potential for some yield compression as FSRU fleet grows and HMLP diversifies client credit risk.

  • FSRU:
    • Short lead time and cost-effective regas solution to meet needs in growing LNG international mkts.
    • 50% cheaper ($0.3/MMBtu) and 2X quicker (6M to 3Y) than onshore regas terminals.
    • Benefit if LNG is competitive vs oil which is case currently: LNG 5$/MMBtu in Singapore vs ~$9.5 for brent.
    • Currently, just a handful of FSRU providers which means high returns (unlevered charter yield ~10.8%).
  • Data:                            
    • IPO Aug-14, one capital increase since then (Dec-16)
    • $19.85 current mkt price, $653.3M market cap
    • 9.8X T12M P/E, 8.7% div yield ($0.43/qtr) vs 7.1% for Alerian MLP index, 1.07X distrib coverage.
    • Stock = 32.911M units = 19.755M common units + 13.156M subordinated units (owned by sponsor).
    • Analysts: 8 buys /0 hold /0 sell, 12M TP $21.73 ie +9.5% Price + 8.7% Carry = +18.2% 12M TRR
  • Sponsor:      
    • HLNG, owns 46.4% of HMLP (100% sub units and 10.7% of LP units).
    • Recently awarded 2 X 20Y fixed rate contracts with Ghana & Pakistan, 3 FSRUs on order, drop down to HMLP expected to start mid-18.  
  • Assets:        
    • HMLP owns 5 of the 20 operating FSRUs in the world.
    • Fixed rate LT charters
    • 12.2Y average charter remaining duration, earliest expiry 2025.
    • Avg vessel age 3.8Y.
  • Latest drop-down:  
    • 51% of “Grace” FSRU occurred in Jan-17 ($370M val, $188.7M check for this portion).
    • Expected annual EBITDA contrib of ~$40 million (9.25X multiple), with a daily rate of $150k/day (267 days).
    • Funding: 50% Equity ($94.3M) /  50% Debt. In Dec-16, HMLP offered 5.5M units. Finally placed 6.59M shares at $17.6 raising $116M. Increased LP units count by 50%.
  • Next drop-down:     
    • Remaining 49% of Grace, requiring ~$90M equity (partly funded by $21.7M excess of Dec-16 round)
    • Timing market dependant, but likely 3Q17 (Mgmt said rather sooner than later)
    • Market expecting Mgmt to lower the DD multiple (look for 9X vs 9.25X prev).
    • Then gap in DD until mid-2018 (Ghana & Pakistan)
  • Stable revs:               
    • Long Term Fixed Contracts,
    • No direct commo expo. Indirect via opex & contract renego terms.
    • DD occur after FSRUs go on LT contracts.
  • Growth:      
    • Visible Growth with 5 chartered FSRUs at the sponsor to be dropped down over time (excl remaining 49% of Grace).
    • Grew distrib by 4.2% after 51% Grace DD in 1Q17
    • Expect another 4% distrib increase by year end, following the DD of Grace’s 49% reminder.
  • Risk:                              
    • Macro
    • Strong rally in Gas/LNG prices
    • Concentration, Credit Risk & Re-charter risk
    • Frequent cap increase to fin DD.
    • DD valuation (HMLP/HLNG nego)
    • Delayed DD (Chile)
    • HLNG not being able to negotiate favourable terms on new contracts

Disclosure: I am/we are long HMLP.