Preferred Hoegh LNG Partners: 14.4% Return as Balance Sheet Improves (OTCMKTS:HMLPF)

VaselineSeptember 1, 2024

0 4 minutes read

Preferred Hoegh LNG Partners: 14.4% Return as Balance Sheet Improves (OTCMKTS:HMLPF)

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Introduction

Although the main entity Hoegh LNG Partners was delisted upon acquisition, the preferred shares are still traded, but over the counter, with (OTC:HMLPF) as the ticker symbol. It goes without saying that the lack access to a level 1 list it hurts the stock price of preferred stock. That said, since the delisting, Hoegh LNG Partners has continued to pay preferred dividends while still publishing detailed financial statements quarterly.

I still have a long position in these preferred shares, and because of the increased risk of dealing with an unlisted entity, I like to keep a close eye on Hoegh LNG Partner’s financial performance. As soon as I see signs of substantial damage, I’m willing to post bail.

This article is meant as a continuation of my previous description of Favorite Hoegh LNG Partners Stocks You Can find here.

Stock price chart — I’m looking for Alpha

The partnership remains profitable – and that’s good news for preferred stockholders

In the second quarter of 2024, Hoegh LNG Partners reported total revenue of approximately $37.4 million, a slight decrease of approximately $0.5 million compared to the second quarter last year. On top of that, the ship’s operating expenses increased by about $2.4 million, so I was already bracing myself for a weaker set of results. Fortunately, Hoegh also had some positive accomplishments: administrative expenses were reduced by 50%, while net interest expense also decreased by $0.2 million.

Income statement — HMLPF Investor Relations

This resulted in pre-tax income of $21.5 million and net profit of $20.7 million at the Hoegh LNG Partners level, meaning plenty of profit was generated to cover preferred dividend payments of 3 .9 million USD. Net profit attributable to common unitholders of Hoegh LNG Partners was $16.8 million.

Expanding the view to include Q1 results, we see a similar result. The partnership needed less than 20% of its earnings to cover preferred dividends: of the net profit of $37.2 million, about $7.75 million had to be paid as preferred dividends. And that’s a good enough report for me.

One of the main risks of owning a preferred security that no longer trades on a major exchange after a buyout is that the new owner tries to extract as much cash as possible from the entity. This is allowed because preferred shareholders are entitled to preferred dividends but have no say in how the capital allocation plans are executed.

In the case of Hoegh LNG Partners, this does not happen. According to the cash flow statement below, second quarter reported operating cash flow was approximately $16.7 million, but this includes a net investment of $7.8 million, so the underlying operating cash flow was of approximately USD 24.5 million.

Total capex was $1.24 million, resulting in net free cash flow of over $23 million. A good result, but what really matters here are the funding activities outlined above. As you can see, the only cash distributions that were made during the quarter (and throughout the first half) were cash payments to preferred stockholders. All other cash flows were used to repay the debt.

At the end of the second quarter, Hoegh LNG Partners had about $53 million in cash, $25.6 million in short-term debt and about $222 million in long-term debt, for a net debt of approximately 195 million dollars. On a total of $552 million in owned vessels, debt to owned assets is quite low. In addition, the balance sheet contains approximately $248 million in investments and finance leases.

With total liabilities of $293 million against $988 million in assets, I have no problems with the balance sheet from a preferred stockholder’s perspective. Of the $695 million in equity, only $176 million is made up of preferred stock, meaning that there is approximately $520 million in equity that sits below the preferred stock. And of course, the common equity will absorb the first losses when problems arise.

Preferred stock still pays a generous dividend

There are 7.09 million preferred shares outstanding (for a total preferred capital of $176 million) providing an annual distribution of $2.1875 per share, payable in four equal quarterly installments of just under $0.55 per quarter. To date, the company has continued to pay the preferred dividend, which is a yield of 8.75% on the principal amount of $25 per preferred share.

Since the preferred stock is currently trading at $15.15, the current yield is approximately 14.4%. And given the strong results of Hoegh LNG Partners, it is surprising to see such a high return, and I think the only reason is that the shares are listed on the expert market, and not every retail broker allows their clients to buy on this exchange. Shareholders can sell at any time (even with brokers who do not allow any buy orders), but the pool of potential buyers is limited.

investment thesis

I have a long position in Hoegh LNG Partners preferred stock and still have an active order to buy more shares in the $12 range. I’m considering increasing my limit order given A) the partnership’s balance sheet becomes safer because cash flow is being used to reduce debt rather than enriching common unitholders, and B) because interest rates in the markets financials are now slowly declining, I wouldn’t mind increasing my exposure to a 14% yielding bond. That said, while the partnership works well, this is a higher risk security, so the overall weighting in my portfolio will remain very low.

Editor’s Note: This article discusses one or more securities that are not traded on a major US exchange. Please be aware of the risks associated with these stocks.

VaselineSeptember 1, 2024

0 4 minutes read