Transportadora de Gas del Sur (TGS) finished work on an expansion of a natural gas processing facility late last year. The completed project more than doubles the amount of natural gas the company’s plant can process each day.
In April, natural gas distributors faced delays in transporting workers and shipping products to and from processing plants due to a strike by healthcare workers. Some of the protests blocked roadways used by energy companies and impacted production levels.
Additionally, the company is still suffering from the revenue-reducing consequences of the government-imposed natural gas price freeze in Argentina.
When considering these current stories about Transportadora de Gas del Sur, we need to determine which news topics will have a long-term and ongoing effect on the company and its share price. While inflation, price freezes, and supply chain disruptions are impacting the company in a negative way now, they may be short lived. Conversely, the company’s investment in expanding facilities could benefit the company’s long-term earnings potential.
While current news stories, good or bad, can sway our opinion about investing in a company, it’s good to analyze the fundamentals of the company and to see where it’s been in the past and in which direction it’s heading.
This article will focus on the long-term fundamentals of the company, which tend to give us a better picture of the company as a viable investment. I also analyze the value of the company versus the price and help you to determine if TGS is currently trading at a bargain price. I provide various situations which help estimate the company’s future returns. In closing, I will tell you my personal opinion about whether I’m interested in taking a position in this company and why.
Snapshot of the Company
A fast way for me to get an overall understanding of the condition of the business is to use our company rating score. It shows a score of around 84/100. Therefore, Transportadora de Gas del Sur is considered to be a good company to invest in since 70 is the lowest good company score. TGS has high scores for 10 Year Price Per Share, ROE, Ability to Recover from a Market Crash or Downturn, ROIC, and Gross Margin Percent. It has mediocre scores for PEG Ratio. It has a low score for Earnings per share. In summary, these findings show us that TGS seems to have above average fundamentals since the majority of categories produce good scores.
Before jumping to conclusions, we’ll have to look closer into individual categories to see what’s going on.
(Source: BTMA Stock Analyzer )
Let’s examine the price per share history first. In the chart below, we can see that price per share has been inconsistent at increasing over the last 10 years. Share price increased from 2013 to 2019, with a notable jump in 2018. Prices then declined in 2020, 2021 and 2022. Overall, share price average has grown by about 256.5% over the past 10 years or a Compound Annual Growth Rate of 15.17%. This is a notable return.
(Source: BTMA Stock Analyzer – Price Per Share History)
Looking closer at earnings history, we see earnings haven’t grown consistently over the past 10 years. Earnings were actually decreasing from 2011 to 2015. Then earnings surged in 2016 until 2018. But since 2018, earnings have been in a downward trend.
Earnings for Transportadora de Gas del Sur have been adversely impacted by a deepening financial and inflation crisis in its home country of Argentina. When the current administration came to power in 2019, it implemented price freezes across the energy industry in an attempt to fight inflation rates that topped 40%. Inflation is simultaneously costing the company more money to operate, while the price freeze is capping its revenue.
Consistent earnings make it easier to accurately estimate the future growth and value of the company. So, in this regard, TGS is not a good candidate of a stock to accurately estimate future growth or current value.
(Source: BTMA Stock Analyzer – EPS History)
Since earnings and price per share don’t always give the whole picture, it’s good to look at other factors like the gross margins, return on equity, and return on invested capital.
Return on Equity
The return on equity has been on a steady downward trend since 2017. This is especially worrisome since the most recent number was under 6%. For return on equity (ROE), I look for a 5-year average of 16% or more. So, in this regard, TGS meets my requirement, but the most recent ROE is well below this benchmark.
(Source: BTMA Stock Analyzer – ROE History)
Let’s compare the ROE of this company to its industry. The average ROE of 57 Oil/Gas Distribution companies is 1.28%.
Therefore, Transportadora de Gas del Sur’s 5-year average of 43.28% and current ROE of 5.76% are well above average for its industry.
Return on Invested Capital
The return on invested capital has also been on a decline. This decline has been in effect since 2018. Five-year average ROIC is good at around 24%, but the most recent ROIC is lacking at less than 6%. For return on invested capital, I also look for 16% or more. So, TGS passes the five-year average, but the most recent year’s data is worrisome.
(Source: BTMA Stock Analyzer – Return on Invested Capital History)
Gross Margin Percent
Overall, the gross margin percent – GMP – increased between 2016 and 2018 with a slight dip in 2019 before rebounding in 2020. Five-year GMP is good at around 48%. I typically look for companies with gross margin percent consistently above 30%. So, TGS has proven that it has the ability to maintain acceptable margins over a long period.
(Source: BTMA Stock Analyzer – Gross Margin Percent History)
Looking at other fundamentals involving the balance sheet, we can see that the debt-to-equity is less than 1. This is a good indicator, telling us that the company owns more than it owes.
TGS’s Current Ratio of 1.71 is satisfactory, indicating it has an adequate ability to use its assets to pay its short-term debt.
Ideally, we’d want to see a Current Ratio of more than 1, so TGS exceeds this amount.
According to the balance sheet, the company appears to be in good financial health. In the long term, the company is on solid footing in regards to its debt-to-equity. In the short-term the company’s financial situation is also stable.
The Price-Earnings Ratio of 10.1 indicates that TGS might be selling at a low price when comparing TGS’s PE Ratio to a long-term market average PE Ratio of 15. The 10-year and five-year average PE Ratio of TGS has typically been between 14.3 and 13.5, so this indicates that TGS could be currently trading at a low price when comparing to TGS’s average historical PE Ratio range.
TGS does not currently pay a regular dividend.
(Source: BTMA Stock Analyzer – Misc. Fundamentals)
This analysis wouldn’t be complete without considering the value of the company vs. share price.
Value Vs. Price
Transportadora de Gas is currently in a unique situation because of the government price freeze on their chief product. Therefore, determining the value of its stock is quite challenging and honestly an educated guess mixed with speculation, for analysts and investors.
Therefore, first I’m going to provide a “normal” valuation based on the past 10 years performance. Then I’ll provide a much more conservative valuation analysis which takes into consideration Transportadora’s current price-freeze dilemma, which is eroding its revenues.
For the first valuation analysis, I will be using the EPS ttm of 0.44 (in USD converted from Argentine Pesos). I’ve used various past averages of growth rates and PE Ratios to calculate different scenarios of valuation ranges from low to average values. The valuations compare growth rates of EPS, Book Value, and Total Equity.
In the table below, you can see the different scenarios, and in the chart, you will see vertical valuation lines that correspond to the table valuation ranges. The dots on the lines represent the current stock price. If the dot is toward the bottom of the valuation range, this would indicate that the stock is undervalued. If the dot is near the top of the valuation line, this would show an overvalued stock.
(Source: BTMA Wealth Builders Club )
According to this valuation analysis, TGS is undervalued.
- If TGS continues with a growth average similar to its past 10 years earnings growth, then the stock is undervalued at this time.
- If TGS continues with a growth average similar to its past 5 years earnings growth, then the stock is undervalued at this time.
- If TGS continues with a growth average similar to its past 10 years book value growth, then the stock is undervalued at this time.
- If TGS continues with a growth average similar to its past 5 years book value growth, then the stock is undervalued at this time.
- If TGS continues with a growth average similar to its past 5 years total equity growth, then the stock is undervalued at this time.
- According to TGS’s typical PE ratio relation to the S&P 500’s PE Ratio, TGS is undervalued.
- If TGS continues with a growth average as forecasted by analysts, then the stock is overpriced.
This analysis shows an average valuation of around $6.00 per share versus its current price of about $4.24, this would indicate that Transportadora de Gas is undervalued.
A More Conservation Valuation Analysis
Now I’ll provide a much more conservative valuation analysis which includes the possibility that the government price freeze will continue until at least the November 2022 mid-elections in Argentina, or possibly longer. For this valuation, I am forecasting zero growth instead of a forecasted growth based on the past 10 and 5 years’ factual data.
Below are the results of this more conservative valuation.
This analysis shows a much lower average valuation of around $4.09 per share versus its current price of about $4.24, this more conservative valuation would indicate that Transportadora is overpriced.
According to the facts, Transportadora is financially healthy in a long-term sense in having enough equity as compared with debt, and in the short-term because the current ratio indicates that it has enough cash to cover current liabilities.
The company’s growth has been impressive across various categories. For example, 10-year annual growth rate has been 42% (earnings), 15% (book value), and 45% (cash flow).
Five-year annual growth rate numbers are as follows: 47% (earnings), 53% (book value), and 50% (cash flow).
As stated earlier in the article, share price has also grown by 15% annually, over the past 10 years.
In addition, let’s look at the chart below of the annual price growth of natural gas in Argentina prior to the government’s price freeze. Price growth from 2016 to 2017 was about 31% ($4.34 to $5.70). Then from 2017 to 2018, price growth was about 28% ($5.70 to $7.29).
After more than two years of frozen prices, “TGS wanted to increase its rates by 59 percent.” This rate hike seems reasonable considering the price of natural gas in Argentina was increasing by approximately 30% annually in years prior to the price freeze. This 30% per year increase is also in-line with Argentina’s high inflation rates, which have been fluctuating between 30% and 50% since 2019.
Argentina Inflation Rates by Year
Other long-term fundamentals are good, including Gross Margin Percent, and 5-year averages for ROE and ROIC. But the most recent 2 years’ ROE and ROIC have been decreasing. This is a result of net income decreasing because of the government price freeze, while the company’s expenses have been increasing due to increasing inflation rates of Argentina.
Up to this point of my research, it seems that most of the issues with TGS’s loss of around 80% of its share price since the beginning of 2018 was due to the outside influence of the government’s price freeze. In other words, I gather that the company Transportadora de Gas is not responsible for the stock’s recent poor performance, and if the price freeze is eased, then it’s likely that TGS will climb again in earnings and stock price. At that point, it’s not unreasonable to expect annual returns of 15% or more.
One last thing I wanted to check on was the relation of TGS earnings, Argentina natural gas revenues, and Argentina inflation rates. By comparing this data, it will help me to see how much the rise in inflation has increased the company’s revenues and earnings. Let’s look at the comparison below.
Source: BTMA Wealth Builders Club
From the chart, we can see that inflation has far outpaced revenues and earnings. If revenues and earnings stayed more in-line with the movement of inflation during the inflation spike of 2014 to 2018, then this would be worrisome for TGS. This would indicate that TGS’s earnings growth would be mostly dependent on Argentina’s inflation. In that case, if inflation were to reduce, then TGS’s earnings would likely reduce accordingly. But the information in this chart tells me that TGS’s revenue and earnings are based more on the company’s business workings. Therefore, even if inflation levels decrease, TGS earnings will still be able to rise independently of inflation rates.
At this point, there’s much speculation as to when the government will ease the price freeze and, or by how much TGS will be able to increase its prices. There are a few things that are more certain. First, TGS has a total shareholder equity of roughly $640 million. In a most recent quarter, TGS lost about $24 million in earnings because of the price freeze. If the pricing regulation and company loss continues at the same rate, then TGS could still live off of its equity for about six years. Do I foresee the pricing restrictions being removed or at least eased in less than six years? Yes, I do. Even with the pressure from the price regulations and inflation, TGS has continued to pocket earnings annually and is maintaining its gross margin. Therefore, it’s likely that the investment will continue to earn shareholders money, if the status quo persists.
Moving forward, even if the company experiences zero growth, the stock would still be valued at around $4.09, which is close to the current share price. Finally, the company produces and transports utility and energy products, which are a necessity of life and business. Overall demand will at least maintain, if not grow over the coming years.
From my objective analysis of this company, I consider TGS to be an opportune investment that is worth the small risk. If bought at a bargain price, the investment could offer a big payoff for the patient investor who is willing to wait for pricing regulation pressures to improve.