GasLog (GLOG, Financial), which owns, operates and manages vessels in the liquefied natural gas market, is trading at attractive valuations and can be considered as a value buy. This article discusses the company’s second quarter results and the factors that make GasLog a compelling buy at these levels.
GasLog released 2Q15 results on Aug. 6, 2015, and the stock surged by 6% on August 7, 2015. I believe that this is just the beginning of a sustained rally for this undervalued stock offering a current dividend yield of 3.6%.
Coming to the results analysis, GasLog reported 2Q15 revenue of $104.4 million, representing a growth of 43% as compared to 2Q14 revenue of $73.2 million. For the same period, GasLog reported EBITDA of $64.5 million, representing a growth of 38% as compared to 2Q14 EBITDA of $46.6 million. Strong growth in revenue and EBITDA was due to an increase in average number of owned vessels during the quarter to 18.7 to 11.3. Overall, the results were robust, and I expect strong growth to continue in the coming quarters on long-term charters.
However, I must mention that during the quarter, GasLog sold three 145,000cbm vessels to GasLog Partners (GLOP, Financial) for a consideration of $483 million. This is a part of the dropdown option to GasLog Partners and the stock decline before quarterly results can be attributed to this dropdown that will impact the company’s near-term revenue outlook. However, through the company’s ownership in GasLog Partners, GasLog will continue to benefit in the form of higher distribution payout for GasLog Partners. GasLog currently owns 43% stake in GasLog Partners.
It is also important to note that in the second quarter of 2015, GasLog Partners announced time charter of three vessels with 9.5 year contract with a subsidiary of BG Group. The company also has the option for six further vessels and considering the potential demand for LNG vessels in the coming years, I believe that this option is likely to be exercised. With the company already having a charter backlog of $4.0 billion, the revenue visibility is firm and translates into multi-year steady cash flow in addition to cash flow growth from new vessels. Therefore, GasLog has strong growth visibility even in the coming quarters and this will help the stock trend higher.
From a financial health perspective, GasLog has $2.4 billion in debt as of June 2015 and a net debt of $2.0 billion. I don’t see debt as a concern as long-term charters would mean that cash inflow will be steady and debt servicing will be smooth. For the first half of 2015, GasLog reported an EBITDA of $128 million and I expect steady EBITDA trend. Therefore I consider the company’s balance sheet risk as low and I also believe that GasLog can leverage further for growth.
The reason I am talking about leveraging is the point that the LNG industry is likely to see big growth in the years to come. According to the company’s investor day presentation, the LNG demand is set to double from current levels by 2025. This incremental demand will be positive for the LNG industry and long-term charters will continue to flow in the coming years. In particular, strong demand is likely from China and this will result in long distance LNG trade.
Even from a dividend perspective, GasLog is an interesting stock to consider and I believe that GasLog Partners is also an interesting MLP to consider. I expect continued dropdown of vessels to GasLog Partners in the coming years and the distribution yield will therefore be robust. GasLog Partners currently has a distribution of $1.74 per share and a attractive distribution yield of 8.7%.
Therefore, investors who are bullish on the LNG industry can consider exposure to GasLog for strong growth in the coming years. Investors looking for high distribution yield can consider exposure to GasLog Partners and it’s important to mention here that GasLog Partners has long-term charters, providing cash flow and distribution stability.
