AVANCE GAS Higher utilisation into 2018e We reiterate our BUY recommendation and NOK28 target price, finding the stock attractive at 0.58x our current NAV of NOK36. We forecast US LPG production to increase by 7.6m tonnes in 2018e or ~2.0x our estimated level for 2017e which, notwithstanding uncertainty around US domestic consumption, should leave sufficient volumes for exports to lift rates.
We have only made marginal estimate changes and raised 2017e net profit by 3% to USD-56.5m (up from USD-58.3m), while we have cut 2018e by 3% to USD-10.5m (down from USD-10.1m), and cut 2019e by 1% to USD35.9m (down from USD36.3m). We forecast VLGC spot rates of USD11k/day for Q4 2017e, increasing to USD21k/day for 2018e and USD31k/day for 2019e, putting us 21% below consensus EBITDA for 2018e and 4% above for 2019e. US LPG production is coming, with just a slight time lag. 75% of US LPG production derives from gas plant production, which lags behind PADD 3 US shale oil production. Hence, LPG volumes should still be coming – most likely by Q4, which should lead to a revaluation of the LPG peer group in our view, as we need to see higher production and exports for utilisation to rise into 2018e. We forecast US LPG production to increase by 7.6m tonnes in 2018e or ~2.0x our estimated level for 2017e which, notwithstanding uncertainty on US domestic consumption, should leave sufficient volumes for exports. A rule of thumb shows for every 3.5m tonnes of US LPG export (based on the incremental distribution mix), you need 15 VLGCs, and the 2018 orderbook counts for 10 units. Sufficient liquidity until Q3 2019e even assuming a repetition of 2009. Avance Gas had USD123m of liquidity as of Q2 2017, including its USD65m revolving credit lines. Based on our rate forecasts, its cash balance should start to build in H1 2018, while our sensitivity analysis suggests that based on a VLGC spot market rate of USD10k/day, its cash balance would decline below USD50m in Q3 2019. 2017 has thus far been the second-weakest year in LPG history, and rates look set to average USD15,500/day. VLGC spot rates averaged USD8k/day in 2009. We reiterate a BUY recommendation and target price of NOK28, based on a 15% discount to our 1-year forward NAV of NOK33, on a VLGC resale price of USD70m. We calculate a current NAV of NOK36/share (unchanged).