- By Ishan Majumdar
Navigator Holdings Ltd. (NVGS), the U.K.-based operator of liquefied gas carriers, was recently in the news after good earnings results and a ratings upgrade from Morgan Stanley.
The company had a rough 2018 with the adverse impact of the U.S.-China trade dispute resulting in a couple of loss-making quarters and an eventual plummet in stock price. While the recent upgrade, coupled with some positive words by management in their earnings call, have increased investor optimism and the share price, its future does not appear rosy enough for long-term investors.
The intrinsic value of NVGS
US-China trade war has strongly impacted Navigator's business
Navigator Holdings' liquified gas carriers and seaborne transportation services cater to energy companies, industrial users and commodity traders. The company reported revenue of $78.2 million for the fourth quarter of 2018, a 2% increase from $76.7 million in the same quarter last year. The growth was largely a function Navigator raising average time charter equivalent rates and adding vessels to the fleet. These steps helped offset a fall in fleet usage.
Nonetheless, it reported a net loss of $3.9 million for the quarter and about $5.7 million for the entire year. The biggest reason for the company's mediocre performance was the U.S.-China trade war. Traders across the globe have hesitated to enter long-term contracts, impacting revenue stability of shippers like Navigator. The company also saw a shift in trade patterns. While it previously focused on North and South Asia including China, it is generating more work in Taiwan and Indonesia. The management is hoping this trend will change and it will sign more long-term contracts to stabilize revenue.
The Marine Export Terminal and the energy transfer pipeline opportunity
One of the things increasing optimism about Navigator Holdings is its Marine Export Terminal opportunity. Recently, management announced that it successfully financed the planned terminal and is building it with Enterprise Products Partners (EPD) in a joint venture expected to be complete by the end of 2020. Navigator executed a credit agreement for a maximum principal of $75 million. This completes its portion of capital for the terminal construction. This terminal is located in Morgan Point, Texas, and is expected to supply ethylene to international markets. Completion of the refrigeration unit is expected by the end of 2019.
One of the other key infrastructure projects that Navigator is counting on to raise its revenue potential is Energy Transfer (ET)'s Mariner East Pipeline Project for distribution, storage and export of ethane. While bureaucratic concerns are currently holding up the project, Navigator expects two of the pipelines to be operational by the end of 2019, which would boost Navigator's business.
Weak fundamentals and an unattractive valuation
Most of the current upside momentum that Navigator has gained can largely be attributed to the potential of a trade deal between the U.S. and China. However, in terms of long-term investment prospects, Navigator Holdings remains weak. The stock has an operating margin of 13.38% and a negative net margin with no real revenue growth over a three-year horizon and declining Ebitda. It does not have significant reserves to provide a dividend or carry out buybacks like many other shipping companies. Its Altman Z-Score is as low as 0.95, which puts the company in the "distressed" zone.
The company's stock trades at an enterprise value-revenue multiple of 4.44 and an enterprise value-Ebit ratio of 35.01, which are both significantly higher than the industry average despite weak fundamentals. Also, it is evident from the chart that while the stock has gone through some ups and downs, it has been completely flat in the past year. In fact, it has lost more than 50% of its value over the past five years and has been a losing proposition for long-term investors.
The only positive factor associated with Navigator Holdings today is that it might experience a sentiment-driven jump if the U.S. and China sign a trade deal. The company's margins are at historical lows, and the stock price performance has been weak with no real yield to justify the flat movement. While momentum players might keep the company in their radars while tracking the U.S.-China news, it is best for long-term investors to avoid this stock.
Disclosure: No positions.
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This article first appeared on GuruFocus.
The intrinsic value of NVGS