Navigator Holdings: Developing On-Shore Terminal Roots To Fuel Growth (NYSE:NVGS)

Orla/iStock via Getty Images Thesis Navigator Holdings (NYSE:NVGS) is continuing to grow its on-shore terminal foothold through expansions of its existing ethylene export terminal and its recent announcement of participation in a joint venture to develop an ammonia export terminal. Investments in on-shore terminals serve NVGS as a powerful 1-2 punch by allowing the company to participate in more than one aspect of the NGL and petrochemical value chain. First, the new terminals have an immediate impact to the bottom line. Second, the terminals bring more product into the shipping market which drives increased demand in the company’s main shipping business. Incremental shipping demand is poised to continue the multi-year bull run in shipping rates for the company’s handy-sized vessels that can transport multiple types of cargos. The excess free cash flow from this business is being used to pay down debt, finance terminal growth projects, and reward shareholders with dividends and buybacks. The continued growth in shipping rates and higher levels of contracted terminal capacity continue the NVGS long term growth story. I previously covered NVGS in August of 2023 to cover the company’s first dividend announcement. With the ethylene terminal expansion ready to enter service in December 2024, and an improved financial condition, I continue to rate NVGS as a BUY for long term growth oriented investors. Ethylene Export Terminal Expansion Will Enter Service in Q4 Due to the contracted business model of the Morgan’s Point Export Terminal, NVGS’s JV with Enterprise Products (EPD) produces a steady income for NVGS. Despite this being a relatively small percentage of total earnings (less than 10%), the terminal allows NVGS to increase demand for its vessels which is the company’s bread and butter. NVGS EBITDA Sensitivity (NVGS Investor Presentation) Since 2019, the Morgan’s Point Export Terminal has been highly successful and operated near full capacity since 2022. The expansion project is expected to increase total capacity by 50% with an additional flex option. This flex option allows the facility to triple its ethylene refrigeration capacity by converting an existing ethane refrigeration train to also be able to refrigerate ethylene. In the image below, the purple dashed line indicates the projected increase in shipping volume associated with this project. The full scale of the project is expected to increase ethylene transportation mileage by roughly 20%. Ethylene Export Terminal Expansion (NVGS Investor Presentation) The ripple effect of this new supply into the export market will consume the capacity of approximately six vessels once phase two is complete. That figure could balloon to over 20 vessels once the expansion project is at full capacity. For context, the global fleet of handy-sized vessels stands at approximately 127 vessels. The additional volumes that need transported through this terminal will put further pressure on the shipping industry. Navigator’s fleet utilization has fluctuated around 90% since mid 2022, implying sparse excess capacity available in the market. During this time, NVGS has seen shipping rates expand by nearly 50%, with the handy-sized ethylene vessels leading the pack for highest time charter rate ($39,450/d). These vessels also have one of the lowest operating expenses in the fleet, at a cost of $8,800/day. Since my original analysis, shipping rates have improved considerably, up roughly 10% fleet wide. The continuation of this dynamic will serve as the largest driver for EBITDA growth for Navigator over the near term. Handy Sized Shipping Rates (NVGS Investor Presentation) Improved Financials Grow Both The Top And Bottom Lines In my original analysis, also I detailed NVGS’s aggressive debt reduction plans. Since then, the company will have paid off an additional $123 million in debt by the end of Q2. By focusing on the balance sheet, NVGS has grown net income at an even higher rate than shipping rates are lifting EBITDA performance. Data by YCharts This trend should continue for the near term as the company plans to reduce debt in advance of several 2025 loan maturities. The company is targeting to make $60 million worth of additional loan payments in 2024. This will allow the company to save an additional $6 million in annual interest expenses, or approximately a 5% improvement in net income on an annual basis. Debt Reduction and Restructuring (NVGS Investor Presentation) Driving Long Term Success Debt reduction may not be the most exciting topic, but it is vitally important for the long term success of Navigator’s shipping business. Earlier, you may have noted how low rates were in the 2017-2018 time frame. Similar market environments can be crushing to just about any business, and only the strong will survive. Navigator is currently very profitable with a cash break even rate of just under $21,000/d. However, the EBITDA breakeven is about half of that value. Interest expenses and debt repayments consume more cash than the company’s operating expenses. By reducing debt, the company is also reducing its breakeven rate, thereby reducing its risk of operating in a cyclical shipping business should rates decline. Cash Break Even Waterfall (NVGS Investor Presentation) Free Cash Flow Analysis Q1 represented a record quarter for NVGS with an EBITDA of $74 million. The continued strength of the company’s shipping segment was more than capable of offsetting the lower utilization of the export terminal. Terminal throughput was affected by lower NGL production attributed to winter storms that caused production interruptions in several basins. This record level of earnings is allowing the company to check multiple boxes on its balance sheet. The company was able to self fund the capital payments required for the terminal expansion while also allocating over 40% of its EBITDA to debt retirement. All of these were accomplished while building its cash reserves to $172 million. Note: Q2 will likely see a lower cash build due to higher dry docking expense and a $16 million payment due for the ethylene terminal expansion. EBITDA $74 million Net Interest Expense ($17.4) million Tax Expense ($1.2) million Terminal Expansion CAPEX ($8) million Debt Retirement Expense ($32.7) million Share Repurchases ($0.8) million Cash Build (Burn) $14 million Click to enlarge Returning Cash to Shareholders Navigator’s shareholders are rewarded at a rate of 25% of net income. By nature, this return program is variable and is dependent on the performance of the business. The program includes a fixed quarterly dividend of $0.05/share with any remaining capital being allocated to share repurchases to equal 25% of the quarter’s net income. Shareholder Return of Capital (NVGS Investor Presentation) After a solid performance in Q1, investors will see a continuance of the dividend as well as an increase to $2 million of share repurchases. While the total yield here is not overly impressive at a total cash yield of 1.78%, the company is still prioritizing building cash reserves and balance sheet health in the near term. This was discussed by analyst Climent Molins (Value Investor’s Edge) and Mads Peter Zacho (CEO) during Q1’s conference call. Climent Molins You’re currently distributing 25% of net income via repurchases and dividends. Is there any appetite for incremental share repurchases on top of the 25% given the prevailing discount to NAV. Mads Peter Zacho I mean, share buybacks is a very efficient tool for returning capital to shareholders. And Navigator is in a position where it’s generating good cash flow. Our balance sheet is strong. So it’s a very valid question you’re asking here. Last year, we bought back $50 million worth of shares plus some after each quarter. And we think that worked well for Navigator and for Navigator shareholders. And we do have authorization to do more with the — yes, about $20 million extra authorization that we have. So it is clearly something we’re looking at. We also have a stated goal of taking part in consolidating our segment here. and we are expanding the terminal as we just discussed. And that will require more ethylene vessels to service the new terminal expansion here. So for us, I mean, it’s really for us to plan out what we are looking to deploy in terms of capital of CapEx and schedule it well. So it is a great tool for us, and we just need to get the timing right. While the cash returns to shareholders are not industry leading, NVGS looks to be on a strong growth run for the next several years. The recent announcement of the company’s participation in an ammonia export terminal JV continues this trend in future growth. I expect this project (and any others in the works) to take priority over cash returns to shareholders. Therefore, NVGS is a good fit for investors who may not be looking for high yield investments but is still looking for long term growth in US energy exports. Risks As previously discussed, I view NVGS’s debt management is fundamental for its success. History has shown that shipping rates can be quickly affected by new supply coming to the market. Driving the business’s breakeven as low as possible is important for long term resiliency. In the near term, there does not appear to be much risk to rate contraction with 27 vessels over the age of 20 years and only 11 handy-sized vessels on order. Longer term, I believe this will change, particularly if rates continue to steadily rise. Shipyard’s are nearly full with the massive demand for vessels in the LNG sector. Over 160 LNG vessels are scheduled to enter service in 2025 and 2026 followed by another 100 vessels in 2027 and 2028. This is handicapping vessel supply with limited shipyard availability. As this backlog works its way through, many sectors, including the handy-sized fleet may see rate compression. If NVGS is unable to drive down its break even rate by being too aggressive in growth projects, it could find itself in a low margin environment once the handy-size fleet gets replenished. Investor Key Takeaways Navigator Holdings is continuing its growth strategy by growing its presence in export terminals. This will increase the company’s contracted revenue stream, giving the business increased earnings and stability. Increasing volumes into the export market will continue to drive shipping rates higher for the Navigator fleet NVGS is using the excess free cash flow provided by the current shipping market to substantially improve its debt profile, improving its long term potential. I maintain my BUY rating for NVGS based on improving cash flows from both improved shipping rates and reduced interest expenses.

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