Summary
Our thesis called for rising profits, cash flows, and dividend increases from FLNG.
FLEX LNG performed even better than expected and hiked its dividend by almost 90%, lifting the dividend yield well above 10% (more than 30% from our initial buy).
FLEX LNG has significant upside potential, as strong results and a high dividend yield should attract additional investors going forward.
This idea was discussed in more depth with members of my private investing community, Cash Flow Kingdom. Learn More »
alvarez/E+ via Getty Images Article Thesis
FLEX LNG ( FLNG ) has reported strong quarterly results, and thanks to a very strong outlook for the current quarter, the company decided to boost its dividend massively. We’ll review the quarter, the near- and longer-term outlook, and upgrade our fair value estimate based on the increased visibility of future earnings and higher dividends. Thesis Recap
We first covered FLEX LNG publicly in January 2021 , calling shares a buy based on strong LNG shipping rates and a very inexpensive valuation. We covered FLEX LNG again in June, explaining why we believe that dividends will increase and why that makes FLNG a strong income pick. Since our first article, FLEX LNG has now returned 166% (in 10 months), but we do not believe that the story ends here. In fact, FLNG has even managed to outperform our expectations, which is why we believe that shares have further upside potential. A Strong Third Quarter And An Even Better Q4
FLEX LNG is an LNG shipper with a modern fleet that benefits from strong LNG demand in Europe and Asia right now, and that has exposure to the long-term megatrend of growing natural gas consumption (for heating and for power generation), as natural gas usage grows while the world lowers its coal usage.
During the third quarter, FLNG managed to beat analyst estimates and its own guidance, generating revenue of $82 million, which was up by 24% from the previous quarter. It should be noted that LNG shipping markets are seasonal to some degree, thus the rise versus the second quarter was not too surprising. Due to the aforementioned seasonal patterns and the strong demand for LNG around the globe, charter rates rose by close to 20%, while higher charter days also had a positive impact on overall revenue growth. FLEX LNG managed to lower its operating expenses compared to the second quarter, which helped boost EBITDA and net profits considerably more, relative to the revenue growth rate the company generated.
FLNG’s adjusted earnings per share totaled $0.60, up more than 100% from the previous quarter. Importantly, FLNG managed to lower both its debt levels in absolute terms, as well as its debt/equity ratio during the quarter, thereby improving its balance sheet during Q3. FLEX LNG also has a sizable $3 per share cash amount on its balance sheet ($140 million in total), which does provide for financial flexibility, e.g. when it comes to share repurchases, and which de-risks both the dividend and an investment in FLNG in general.
The third quarter was pretty strong already, with EBITDA coming in at $260 million annualized, but the fourth quarter will be even stronger. FLEX LNG guides for revenues of around $110 million, which represents growth of around 30% versus the already pretty strong third quarter. Since most of FLNG’s costs are fixed and do not rise in line with revenue, one can expect that the fourth quarter will be massive from a profit and cash flow point of view. Based on management’s revenue guidance and the cost profile seen in recent quarters, I believe that earnings per share should come in at around $1.10, which will easily set a new record, and which means that FLNG will earn about $2.60 in 2021, as earnings per share during the first three quarters totaled $1.48.
FLEX LNG’s management has decided to fix more of its ships, as current charter rates are attractive. This will lock in strong earnings for a couple of years while also increasing the visibility of future revenue, profit, and cash flow, both for investors as well as for management: The Company has now secured attractive long-term time charters with a mixed portfolio of market rate and fixed rate contracts and at the date of this report, our Fleet has an aggregate of 33 years firm periods and with charterer’s options this could extend to over 69 years, if declared. This increased visibility of future cash generation has allowed the company to ramp up its […]
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