BW LPG Ltd: Undervalued 26%-Yielder Reports Strong Q3 Results
December 16, 2024
Outlook for BW LPG Ltd Bullish on Record Demand
While the marine shipping industry has done well in 2024, this was buoyed in large part by transit restrictions in the Panama Canal and tensions in the Red Sea. These issues have forced vessels to take longer, more costly routes, with the costs passed onto their customers. One area within the marine shipping industry that has performed exceptionally well is the transportation off liquified petroleum gas (LPG)— and that area includes BW LPG Ltd (NYSE:BWLP).
Despite periods of volatility, industry tailwinds support BW LPG growth over the coming years. Global demand for LPG is expected to climb from $208.66 billion in 2023 to more than $270.0 billion by 2029, expanding at a compound annual growth rate of 4.7%. (Source: “Global Liquefied Petroleum Gas (LPG) Market Overview, 2024-2029: Technology Innovation Revolutionizes Production and Distribution, Sustainability and Circular Economy Initiatives Reshapes the Industry,” Research and Markets, May 7, 2024.)
On the liquified natural gas (LNG) front, global exports hit a record high in the first quarter of 106.4 million tons and remained near that level in the third quarter at 100.9 million tons. (Source: “Global LNG Exports Hit A Record High in Q1,” OilPrice.com, November 29, 2024.)
Things continue to bode well for LNG in the fourth quarter, with demand expected to rise five percent, hitting 218 million metric tons. Increased demand is projected to come from Northwest Europe, Italy, and North Asia. Smaller markets in the Middle East and Southeast Asia are also expected to help support LNG demand in the fourth quarter and into 2025. (Source: “Global LNG Winter Outlook 2024-25: Slightly Bullish Start,” BloombergNEF, September 20, 2024.)
And strong demand for liquefied gasses is great news for BW LPG Ltd.
Most people haven’t heard of BW LPG before, but that’s because it just began trading on the New York Stock Exchange on April 29, 2024. It’s been listed on the Oslo Stock Exchange since 2013 though. (Source: “BW LPG Limited – Commencement of trading and admission to trading on NYSE,” BW LPG Ltd, April 26, 2024.)
BW LPG is a world leader in LPG shipping, boasting an operating fleet of 44 Very Large Gas Carriers (VLGCs) with a total carrying capacity of over three million cubic meters (CBM) of chargeable weight. One CBM is equal to 167 kg or 368 pounds. Three million CBM then is equal to 1.1 billion pounds. (Source: “Our VLGC Fleet,” BW LPG Ltd, last accessed December 3, 2024.)
To meet the increased demand for LNG, BW LPG is expanding its fleet. In November alone, it took delivery of five of the 12 VLGCs it acquired from Avance Gas Holding Ltd back in August for $1.05 billion.
Year-to-date, 20 new VLGC vessels have been delivered. There are plans for the delivery of two more throughout the remaining months of 2024 and 13 in 2025.
There will be no new deliveries of VLGCs until at least 2027.
BW LPG Ltd Produces Strong TCE Income
For the third quarter ended September 30, BW LPG reported daily time charter equivalent (TCE) income of $46,800 and TCE income of $46,500 per calendar day, with 98% fleet utilization. (Source: “Earnings Presentation Q3 2024,” BW LPG Ltd, December 2, 2024.)
TCE income for the quarter was $145.5 million, with the India subsidiary delivering stable TCE income of $32.9 million. This resulted in net profit after tax (NPAT) of $120.0 million.
During the quarter, BW LPG signed a new seven-year, $460.0-million revolving credit facility and voluntarily prepaid, plus it cancelled a $400.0-million facility in October. The company ended the quarter with available liquidity of $750.0 million.
Looking ahead, management expects the market to remain solid for the remainder of 2024 and 2025, though it anticipates that rates will fluctuate, which is typical. During the third quarter, spot rates swung from as low as $23,000 per day to $50,000 per day.
With normalized export volumes, freight rates in the U.S. Gulf have found equilibrium around the $40,000/day range. This is without congestion in the Panama Canal.
The next phase of U.S. export growth is set to start in the second half of 2025, fueled by export terminal expansion. Middle East export volumes will enter their planned expansion stage in 2026.
The Houston-Chiba (Baltic) futures market for 2025 is currently trading at around $40,000 per day, although with limited liquidity.
$0.42-Per-Share Quarterly Dividend
Returning capital to investors through its reliable dividend is a big part of BW LPG’s business plan. It aims for an annual payout ratio of 50% of net profit after tax (NPAT). But that could jump to 75% to 100% of NPAT should certain net leverage ratio targets be met.
Since its IPO in 2013, the company has paid out more than 71% of its earnings as dividends. In 2023 alone, BW LPG paid out 98% of earnings. (Source: “Why invest in BW LPG,” BW LPG Ltd, last accessed December 3, 2024.)
Those good times have continued in 2024. In the third quarter, BW LPG declared a dividend of $0.42 per share, or $3.28 per share on an annual basis, for a forward yield of 26.73%. The third-quarter payout represents 100% of shipping NPAT. (Source: “Key information relating to the cash dividend for Q3 2024,” BW LPG Ltd, December 2, 2024.)
While the year-to-date payout of $2.00 is below the $2.56 the company paid out in the first three quarters of 2023, the annual payout will still be the second highest since BW LPG first paid a dividend in 2013.
BWLP Stock Overview
BWLP stock performed well in the first half of the year, rising 43%. The stock actually hit a record high of $20.39 on May 31. Like much of the broader marine shipping industry, BWLP shares have been under pressure over the last number of months.
As of the time of writing (December 3), BWLP stock is down five percent year to date and 7.5% on an annual basis.
Despite the near-term dip, the outlook for BWLP remains solid, with robust demand growth in China, India, and Southeast Asia.
From 2023 through 2026, China LPG imports are expected to grow from 33 million tons to 44 million tons. India is expected to increase its LPG imports from 20.4 million tons in 2024 to 23.2 million tons by 2030. Imports from Southeast Asia, meanwhile, are forecasted to climb from 13.6 million tons in 2024 to 16.8 million tons in 2027. (Source: “Earnings Presentation Q3 2024,” BW LPG Ltd, December 2, 2024.)
Again, new vessels and increased global demand for LPG should help juice BW LPG Ltd’s bottom line and free cash flow (FCF) and help drive its stock higher over the coming quarters.
Chart courtesy of StockCharts.com
The Lowdown on BW LPG Ltd
BW LPG is the world’s leading owner and operator of VLGC vessels. It has a strong balance sheet and is expanding its fleet, which should help it capitalize on growing global demand for LPG.
Thanks to its solid FCF and NPAT, it is able to provide investors with a reliable dividend. This includes a $0.42-per-share payout in the third quarter, for a forward yield of 26.73%.
While BWLP shares are down from their May record levels, a solid 33.1% of all outstanding shares is held by insiders, which should entice insiders to deliver better results.
The 149 institutional owners that hold 33.46% of all outstanding BWLP shares are betting on the stock. The top three holders include Folketrygdfondet, with a 6.54% stake of BW LPG stock, Acadian Asset Management LLC (2.42% stake), and The Vanguard Group, Inc. (2.22% stake).
Should BW LPG be able to deliver consistently stronger profits, FCF, and NPAT, BWLP stock could trend higher and take its dividend with it.
