Gaztransport (GTT), Cheniere (LNG), Swatch
Gaztransport – Dodged the bullet..
Paris, 29 January 2016 – GTT (Gaztransport & Technigaz) announces that it received today a notification from the Korea Fair Trade Commission informing the company that an inquiry has been opened into its commercial practices with regard to its Korean shipyard clients.
The result: The stock price dropped ~20% in two days:
As I have mentioned, the Korean shipbuilders were in parallel trying to develop a competing technology, but so far without success. It looks now that they try another option in order to cut into the nice margins of GTT.
At that point in time, I have no clue how serious this is. In any case, this clearly increases the risk.
That’s what I wrote 2 weeks ago about how to value GTT:
Under those assumptions my results were the following:
10% discount rate: 20,80 EUR per share
15% discount rate: 14,26 EUR per share
So now one could clearly challenge my “model” and tweak it somehow, but in general it looks like that GTT is not a bargain at current prices (34 EUR). To me it rather looks like that the current valuation already implies a certain value for the LNG ship fuel “option”. Therefore GTT at current prices is not interesting to me as an investment.
I think we are now, with this “open conflict” closer to the 15% requiement, so the current price at around 24-25 EUR still does not look so attractive.
I found some research on Bloomberg from JPM. They expect that this inquiry can go on for up to 10 years and referred to a similar issue with Qualcom. More interesting were their pricing assumptions. They have a price target of 48 EUR based on these assumptions:
We value GTT using a DCF biased triangulation of DCF, PE and EV/EBITDA. Due to GTT's niche business model, it has few close peers. Hence we assign a lower weightage for the multiples based valuation (25% each) and use a peer group consisting of O&G engineering companies and LNG ship-owners. Our Dec-16 €48 price target is based on the triangulation of: (i) DCF (50% weightage) using 10.4% WACC and 3% TGR from 2020E; (ii) our 2017 earnings and 13x PER; and (iii) our 2017 EBITDA forecast and 10x EV/EBITDA. Our target multiples are at ~10% premium to GTT's peers considering its advantaged business model and above average revenue visibility.
“Triangulation” sounds fancy, but the main issue is the following: In none of the 3 approaches they actually account for the inherent cyclicality of the business. I personally think this is a big mistake and clearly results in a value which is too high at the high point of the cycle (now) and too low at the low point of the cycle (in a few years maybe….). Plus 10% WACC with the risk above looks “optimistic”.
Cheniere Energy (LNG)
I came across Goldman research for Cheniere the other day. They have a price target now of 52 USD (down from 90 USD 18 months ago). I looked at Cheniere 1 year ago and didn’t like it at 75 USD, so maybe it’s worth a look now at 29 USD ?
In typical sell side fashion, they produce a lot of smart sounding stuff including a couple of pages of numbers.
The one million Dollar quote was however the following:
Bearish investors viewed our discount rate (7.5%) and interest rate (5%)
assumptions as too low given recent midstream volatility and Cheniere’s
current debt yield of ~8%. We estimate each +/- 100bp discount rate
change impacts NPV by $2, and each +/- 100bp change to interest rates
impacts NPV by $1.50.
I found this quote absolutely hillarious. So nowadays one is called a bearish investor if one uses current, observed market rates to value a company ? It is bearish to assume that the cost of equity should be higher for an ultra-high leveraged company than its obeserved cost of debt ? Funnily enough, the current yield on the outstanding convertibles is ~11%. If we use the GS sensitivities from above, I think the current price seems like a “fair” price.
For me this is a clear sign that especially for leveraged Energy companies, there still seems to be systematic “over optimism” at play and the Energy bear market seems to have a good way to run until the “optimists” use more reasonable assumptions.
One other thought: Most of the research focuses on the “guaranteed” revenues of the 20 year contracts. I am not so sure about this. First of all, a “Guarantee” is only as good as your counterpart and the creditworthiness of the off-takers (all energy companies) is rapidly deteriorating. Secondly, I do not know if the contract counterparts of Cheniere are actually fully guaranteed subsidiaries of the big energy companies or lightly capitalized subsidiaries.
Thirdly, one would really need to look at the contracts themselves. Often those companies include some fine print which might allow countereparts to “wiggle out” of a contract if they really want to. Overall, in my opinion, assuming “Guranteed” revenues AND using a low discount rate in combination is very optimistic.
Swatch Group released 2015 results yesterday. Sales in Swiss Franc were lower in 2015 than in 2014, operating earnings were down-17%, net income was down -21%.
According to them, the reduction in sales was exclusively due to the siginficant downturn in Hongkong. The results are of cours a function of the strng Swiss Franc, where they have all their costs. They also want to release some smart watches in 2016, but I am not sure if they are not too late with that effort.
In parallel they announced a 1 bn CHF share repurchase agreement. AT first, this sound like a smart capital allocation strategy.
At a second glance however, I am not so sure. In an internview, Hayek said he is doing it to “punish short sellers” who have “Manipulated his share price”. Additionally, Swacth will not commit to cancel the shares but keep them for potential “other uses”.
I think for the time being I will remain on the side lines. I would consider buying at a level of around 290 CHFs if gets to that.
One interesting comparison is Richemont. They issued a Q4 trading update a couple of days ago. Their sales at least were better than Swatch witzh a light gain. As Richemont only sells luxury watches, one can assume that the lower prce sgement of Swatch (Swatch, Tissot) indeed might have been negatively effected by msat wtaches and/or fitness trackers.