A cyclical security investment
I am investing into Gaslog Ltd. ($GLOG), a liquid natural gas transportation company. Currently, with natural gas prices at their lowest in the past decade the value of Gaslog is also at an all time low. Now, from a macro economic perspective, this is counter-intuitive. As the price of a commodity goes down, the use of the commodity should go up and LNG shippers like Gaslog should go up. Therefore, the price of Gaslog right now is extremely low based on demand and not supply factors.
With lack of industrial demand for natural gas and discounting of supplies, it is no wonder why natural gas is trading at such a high discount. However, as demand for natural gas will increase post corona virus, this security should soar.
I didn’t do too much analysis to figure out that this security is greatly underpriced right now. I just looked at their balance sheet to come up with a fair assumption of what the stock price should naturally be at.
I will be conservative with the book-value price calculation by only taking into account tangible fixed assets, subtracting all of the debt and other liabilities and then divide the total number of shares outstanding by the sum of the above calculation.
Tangible Fixed Assets= $4,401,977,000
Total Liabilities= $3,336,179,000
Total Shares Outstanding= 80,706,008
subtract only tangible fixed assets $4,401,977,000 from total liabilities $3,336,179,000 and you get a sum of $1,065,798,000. Divide the sum by shares outstanding and that yields a book value of $13.21. Far above the $2.75 that it is currently trading at on July 12, 2020.
The largest threat to this investment would be a fleet of Chinese LNG tankers. This threat is extremely real and will likely dominate the competition once the fleet is up and running. I say this confidently because this is exactly what happened when China produced a giant fleet of Dry Coal tankers.
Leading up to 2010, China was a net importer of Dry Coal, with demand growing every year. My favorite investor, Jamie Mai, was going to make a trade to bet on the security of Dry Coal tankers to increase, yet reversed his opinion when he realized China had a fleet coming to the market that would be large enough to make them a net exporter of coal.
For this reason, the hold on this investment is until it returns near to book-value valuation or before China starts flooding the market.
I am going to move forward and buy now, for the following reasons.
- I am optimistic about the return of industrial demand for natural gas
- Liquid Natural Gas continues to grow in demand when looking back over the last decade (google)
- My margin of safety on the investment is huge. Even if my analysis is extremely off, I have plenty of room to be wrong. (My calculated book value is far higher than market value).
- In the event of a bankruptcy, the company has the fixed assets to cover any debt services.
- The company historically pays out dividends of around $0.50. Securing shares at a lower price now will ensure more cash flow from dividends later.
Thanks for reading.
Robert Ota
