Fearnley Securities has upgraded Singapore owner BW LPG in a positive read of the VLGC sector, despite recent rate plunges.
The investment bank views resilient demand and a low orderbook as key to a recovery in 2021.
Fearnley now has the BW Group company as a buy, up from hold, while reiterating hold recommendations on John Fredriksen's Avance Gas and another rival, Dorian LPG.
VLGC spot rates have collapsed towards $10,000 per day from $60,000 in April.
Fearnley admitted the recovery trajectory is uncertain, but says there is value to be found in "rock solid" BW LPG.
Analysts Espen Landmark Fjermestad, Peder Nicolai Jarlsby and Ulrik Mannhart said that following their February downgrade of the sector, rates held up better than expected in the early stages of the Covid-19 crisis, but have since dropped to opex levels in tandem with a deteriorating product market.
Orderbook shrinks
Although a near-term rate revival seems unlikely, due to unworkable product margins, volume reductions and a tonnage influx, "both a lighter supply situation and more resilient demand makes us hopeful for a late 2021 recovery," they added.
The orderbook stands at 12% of the fleet, down from 43% in 2016.
Near-term, the VLGC market looks daunting, with essentially no product differentials and lower volumes, they said.
"We expect this to continue and do not rule out a potential product shortage entering the winter, particularly if it proves to be a cold one and production declines further," the analysts added.
"Longer-term, the revival of US production remains pivotal and Brent above $40 per barrel has certainly improved prospects, but we still expect the next 12-18 months to prove challenging with rates mostly below cash breakeven levels."
The analysts are less concerned about dwindling demand due to the pandemic, viewing residential needs as resilient.
Three years in the clear
Avance Gas has the highest leverage of the trio, though liquidity could be put to the test should rate expectations come in short, Fearnley said.
Fearnley has BW LPG, with a $360m liquidity buffer, as its top pick.
It estimates the company can endure three years of 2017/18-level rates, effectively leaving the equity "a (cheap) long-dated option on a market recovery."
"Dorian LPG also looks robust liquidity wise but pricing makes us favour BW LPG," it added.
Fearnley is lowering VLGC spot rate estimates from $45,000 to $29,000 over the whole of 2020.
For 2021, it expects headline rates of $25,000, with softer utilisation as well.
Ebitda estimates have been cut by 44% and 48%, respectively.
Asset values falling
And VLGC values have also been revised down, with a newbuilding now assessed at $70m from $72.5m, and a resale at $70m, against $76.5m previously.
The analysts said the main challenge in valuing VLGC names is the lack of secondhand activity.
"As a result, equities have at times with weak earnings traded at large discount to underlying steel values," they added.
"Given the challenging and uncertain market, we continue to expect shares to trade at major discounts to underlying values."
And they said: "Because of the sticky nature of VLGC asset values, we do not see major downside from here, although the equities are certainly valued lower."
