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Investment Insights: Gaztransport & Technigaz

In the below note, we’ll discuss the reasons why we view Gaztransport & Technigaz (GTT) as an exceptional investment opportunity.

GTT is the world’s No. 1 Liquified Natural Gas (‘LNG’) cargo containment systems provider. The company designs,  owns and licenses the specialist technology used in the construction of LNG carrier tanks.

Natural gas makes up approximately 25% of the world’s energy demand. It can be transported in its natural gas form on land by pipeline, or the gas can be liquified and transported over sea by vessel (carrier).

Transporting natural gas in a liquid state requires cooling the gas to below minus 163oC temperatures. To achieve this temperature, the carrier holds must be coated with a special cryogenic lining, or membrane. This system ensures a perfect seal between the liquid cargo and the vessel’s hull, while limiting evaporation of the cargo (‘boil-off’).

GTT charges royalties for the membrane technology and for consulting services during the building of the ship. Over 90% of GTT revenue relates to high margin royalty payments. The group has gross margins of 95%.

GTT’s competitive advantage stems principally from its intellectual property (‘IP’). The firm holds over 2,466 patents in 60 countries, and typically files over 100 patents yearly.

Sales depend directly on the number of LNG tankers being built. The cost for GTT technology within the overall price of an LNG tanker is relatively low at around 3-4% of the total construction price.

GTT is not required to purchase any of the raw materials used to build the ships.

This is an asset-light business model with attractive fundamentals. Sales have grown at a 10-year compound annual growth rate of 13% and the free cash flow margin has averaged 47% over ten years.

The company has been in operation for almost 60 years. It listed on the public equity markets in early 2014. Since IPO, it has delivered a total return of over 380% (17% annualised).

GTT’s membrane technology offers efficiency, safety and cost reductions which are significantly better than those of competing technologies.

The technologies developed by GTT have made it possible to reduce the CO2 emissions of LNG carriers by nearly 50% in 10 years.

The failure of an un-tested, unreliable system can be very expensive. There are high indirect switching costs linked to the potential  risk of failure in trialling a new technology.

A leaking tank could represent a significant cost, limited to not just the €200m price of the tanker itself but also the extensive clean-up costs and associated penalties for other third party damage.

As at 31 December 2022, 606 LNG carriers of over 100,000m3 were in operation. Out of these, 485 were equipped with GTT technology. Since the end of 2015, all orders made for LNG carriers larger than 50,000m3 have used GTT technology.

Over a quarter of the workforce sits within the Innovations Division of the company and the business actively patents a huge number of designs. Over 10% of sales are consistently dedicated to R&D.

GTT is an effective monopoly IP business with highly attractive fundamentals derived from a royalty based model.

As of the end of September 2023, GTT’s order book (excluding LNG as Fuel) stands at 302 units. This provides good visibility over the next four years.

The Group estimates that it should receive between 400 and 450 orders for LNG carriers between 2023 and 2032. The order estimate is supported by forecasts of strong demand growth, growing fleet renewal and a desire for greater flexibility from LNG players.

More stringent environmental regulations for ship owners and an aging overall fleet are driving a faster replacement cycle, to the benefit of GTT.

Management expect replacement orders will grow from 25% of the total order mix currently, to 50%.

GTT also offers optionality through investments in digital services offered to the global merchant fleet, hydrogen electrolyser production and LNG as fuel.

LNG as a fuel has shown very solid progress to date. It operates on a similar model to the core business with high margin royalty payments, and it has strong support from the energy transition.

Digital services and the hydrogen business represent a small source of revenue at this stage but could represent significant upside.

Growth for the core business is supported by the overall demand, and the corresponding level of supply, of LNG globally.

Demand for LNG over the past ten years has grown at an average of 4.5% per annum to 388m tonnes per annum (‘MPTA’). In 2021, natural gas represented 25% of the total primary energy demand by fuel type. This is compared to oil and coal which represent 30% and 28% respectively. The share of gas in the global energy mix is growing.

Developed markets have seen a consistent switch from coal to gas given abundant reserves, competitive pricing, reduced carbon footprint and lower emissions of pollutants. Furthermore, natural gas is complementary with renewable energies. Gas-fired power plants have fast response times, which means they can compensate for the intermittent nature of renewable energies.

There has been a consistent shift toward LNG versus piped natural gas given it provides greater flexibility, security of supply and reduced dependency on a single supplier. Europe’s reliance on Russian piped gas is the most obvious recent example.

“The market’s heightened focus on long-term energy security, has led to significant long-term LNG contracting in the past 18 or so months. These contracts signal the need for further investment in liquefaction capacity.” ­– Cheniere Energy Q3 2023 Earnings Call, Chief Commercial Officer.

According to Wood Mackenzie, growth in LNG demand should be sustained in the coming years, with an increase from c.400 MTPA to over 700 MPTA by 2040, a c.4% annual growth rate.

70% of the increase in future consumption will come from Asia, and particularly China. In 2021 China became the leading LNG importer, overtaking Japan.

India, the world’s most populous nation at c.1.4b, is expected to be the second largest consumer of LNG. The Indian government has set a goal to increase the share of natural gas in the country’s total energy mix to 15% by 2030, from about 6%.

The demand and supply dynamics of LNG over the long-term are favourable. Energy security, geography, efficiency and reliability are critical factors underpinning the growth in LNG.

Written by Archie Tulloch, Investment Analyst, Middleton Enterprises

Archie@middletonenterprises.com

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