Valuation of Höegh LNG Holdings: The Impact of Changes in the Useful Life of FSRUs

Eirik Andersen & Endre Austrheim Bruland

Student thesis: Master thesis

Abstract

The primary purpose of the thesis is a valuation of the company, including the impact changes in the useful life of FSRUs has on the valuation and accounting estimates. A net asset value (NAV) approach is applied to the valuation, as we perceive this as the most frequently used model by ship-owners and equity analysts when valuing shipping companies.
The recent decrease in gas prices makes LNG import more affordable, creating higher expected demand for LNG and FSRU services. This is especially true for emerging markets, and we expect a 70 % increase in LNG volume in the market by 2022. Höegh is one of few major FSRU operators in the world, giving the company a temporary competitive advantage. Profitable margins attract more players to the market, which could lead to a substantial increase in rivalry within the FSRU segment in the future.
As NAV is valuing the company based on the free cash flows generated by vessels during their useful life, the model does not meet “going concern”. This led to supplementing a terminal value to meet this criterion. The analysis shows that significant value lies in the terminal and that NAV overestimates the impact of changes in useful life, as reinvestment in assets is not taken into account.
It is assumed a risk averse attitude regarding FSRUs useful life, thus the target share price is based on 30 years useful life and a NAV model supplemented with a terminal value. The equity value is estimated at 14,668 billion Norwegian kroner, corresponding to a price target of 190,79 NOK per share.

EducationsMSc in Auditing, (Graduate Programme) Final ThesisMSc in Finance and Accounting, (Graduate Programme) Final Thesis
LanguageNorwegian
Publication date2016
Number of pages142