Platou projects VLGC crash

RS Platou Markets has downgraded shares in three of the world’s four largest VLGC owners amid concerns shipping’s runaway train will soon come crashing to a halt.

BW LPG, Dorian LPG and Avance Gas were all cut from buy to neutral as a large orderbook looms imposingly on the track ahead.

In downgrading BW LPG, analysts Frode Morkedal and Herman Hildan said: “The LPG carrier market is like a run-away train, current earnings are record high, but eventually the train will derail and hit a mountain of supply in 2016.

“The question is how long to stay with the shares to ride rising earnings estimates and dividends to come before exiting?”

Morkedal and Hildan says the downgrade comes with BW close to their target price of $15 per share. However, they advise against shorting the stock.

“Just as evidenced with dry bulk back in 2007 and 2008, the collapse is unlikely to happen before rates start to fall, which on our cards is not before late 2015.”

In downing Avance the analysts say its $0.50 dividend in the first quarter of this year could grow to $3 per share in 2015 as its eight newbuildings arrive.

“The 2016 outlook is significantly weaker given the mounting supply growth; hence this dividend is likely to come down sharply in 2016,” they said.

Morkedal and Hildan say Dorian, a takeover target for Avance, will ride out the downturn with a strong balance sheet and low breakeven costs.

“But the fleet is not arriving fast enough before rates are likely to come down late 2015 and into 2016,” the analysts said.

In the Norwegian finance house’s quarterly report, Jorn Bakkelund of RS Platou Economic Research wrote that during the first five months of the year 62 new LPG carriers were registered in the orderbook, with three quarters of the new carrying capacity coming into the VLGC market.

Bakkelund says VLGC rates will average $59,000 daily this year and $56,000 daily in 2015.

With the orderbook biting in 2016, rates will come down to $29,000 daily, he predicts.

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