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GBP97m
Research: Industrials
FY17 proved a very challenging period for Braemar, although both the Shipbroking and Logistics divisions proved quite resilient. The weakness in the Technical division has been decisively addressed, with a new management team implementing a restructuring programme expected to return the operation swiftly to profit in FY18. With potential for both oil and gas and shipping markets to recover, although timing and strength remain uncertain, medium-term progress seems likely. The strategy remains intact and the balance sheet supports ongoing investments to augment growth.
Braemar Shipping Services |
Awaiting favourable trade winds |
FY17 results |
Industrial support services |
10 May 2017 |
Share price performance
Business description
Next events
Analysts
Braemar Shipping Services is a research client of Edison Investment Research Limited |
FY17 proved a very challenging period for Braemar, although both the Shipbroking and Logistics divisions proved quite resilient. The weakness in the Technical division has been decisively addressed, with a new management team implementing a restructuring programme expected to return the operation swiftly to profit in FY18. With potential for both oil and gas and shipping markets to recover, although timing and strength remain uncertain, medium-term progress seems likely. The strategy remains intact and the balance sheet supports ongoing investments to augment growth.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
02/16 |
159.1 |
13.4 |
34.7 |
26.0 |
9.2 |
8.1 |
02/17 |
139.8 |
3.2 |
8.7 |
14.0 |
22.9 |
4.4 |
02/18e |
137.9 |
7.8 |
21.2 |
15.0 |
15.1 |
4.7 |
02/19e |
142.5 |
8.5 |
23.2 |
15.8 |
13.8 |
4.9 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items.
Main markets remained depressed
Both the depressed conditions in the shipping market and the oil and gas spending crunch sustained throughout FY17. The January trading update highlighted the issues in Technical that pushed the division into loss, as well as the reduced activity in the freight forwarding business in Logistics which offset progress in the Port Agency business. Shipbroking traded as anticipated, with robust operating margins of 12.5%. FY17 pre-tax profit of £3.2m was at the top of market expectations.
FY18 recovery, then steady growth
We expect profit recovery in FY18 to be driven by Technical which should benefit from a £6m cost benefit following last year’s restructuring. The outlook continues to look uncertain. In shipping, seaborne trade is expected to be outstripped by fleet additions, although there are some encouraging signs with respect to dry bulk rates and potential demolition of older tanker capacity. Oil & gas has probably stabilised following the spending crunch which has severely constrained activity levels, particularly in exploration and production. However, the oil price dynamics remain unhelpful, as do the political machinations with respect to global trade.
Forecasts broadly unchanged
Our new estimates following the results are broadly in line with our previous expectations although we have increased our FY18 EPS estimate by 3%. Our FY19 forecast sees modest growth as shipping and oil and gas markets should start to move off the current trough. We expect the dividend to be progressively rebuilt with an appropriate level of cover being maintained.
Valuation: Discount to peers remains
The 19% discount to the peer group is unlikely to close significantly until end market dynamics deliver sustained growth prospects. Our current DCF value for the company stands at 326p per share, reflecting the modest long-term growth rates.
Investment summary
Company description: Shipbroking and specialist services
Braemar is a broadly based international shipping services group employing 858 people at the end of February 2017. The largest source of income is shipbroking, where the group has a strong position in deep sea oil tankers and the offshore sector. Principal offices are in the UK, Singapore and Australia, supported by a number of strategically placed overseas offices. The group’s non-broking businesses offer a range of technical and logistics services from the UK and regional hubs in Asia Pacific, EMEA and the Americas. Technical services include specialist marine surveys involving site supervision, marine engineering, incident response and adjustment work for the insurance industry. Logistics work ranges from port agency to specialist freight forwarding.
Valuation: Need to rebuild credentials
Braemar is trading at a 19% discount to its peer group, or 10% excluding Clarkson, following a very difficult year which has seen profits decline, the rebasing of the dividend and a commensurate fall in the share price. The resilience of the core Shipbroking division in the extended recession for the shipping industry is encouraging, but the development of the diversified Technical and Logistics activities must also be seen to provide sustainable returns in order for the rating gap to close. Certainly the decisive management action in Technical should reverse the lossmaking position in the current year, and we are forecasting cautiously with regard to the shipbroking activities. Our capped DCF valuation based on this view is currently returning a value of 326p per share.
Financials
Results for FY17 were slightly better than market expectations that had been reset by the January trading statement. Underlying pre-tax profit fell from £13.4m to an adjusted £3.2m, £0.2m above our estimate. With trading conditions still challenging we raise our current year PBT estimate modestly from £7.7m to £7.8m. Net cash of £7.0m was some £2.0m better than we had anticipated although it benefited from some year end working capital positions which are expected to unwind in FY18. As also indicated in January, the dividend was rebased to 14.0p which provides strong yield support.
Exhibit 1: Estimate changes
Year to Feb |
EPS (p) |
PBT (£m) |
EBITDA (£m) |
||||||
Old |
New |
% chg. |
Old |
New |
% chg. |
Old |
New |
% chg. |
|
2017 |
8.0 |
8.7 |
+9 |
3.0 |
3.2 |
+7 |
4.6 |
5.1 |
+11 |
2018e |
20.6 |
21.2 |
+3 |
7.7 |
7.8 |
+1 |
9.3 |
9.4 |
+1 |
2019e |
N/A |
23.2 |
N/A |
N/A |
8.5 |
N/A |
N/A |
9.9 |
N/A |
Source: Braemar Shipping Services; Edison Research estimates. Note: PBT and EPS normalised, excluding intangible amortisation and exceptional items.
Sensitivities
Shipbroking profits are sensitive to movements in spot freight rates and the sterling/US dollar exchange rate. Volatile shipping rates will lead to varying gross margins although, with a relatively high proportion of employee remuneration linked to income generated, the impact is lessened. Similarly, with considerable revenues generated in US dollars and the cost base largely in sterling, the business is a beneficiary when the dollar strengthens, and vice versa. There is also a potential vulnerability to the loss of key personnel, who manage the group’s relationships with the oil majors, charterers and leading ship owners. Braemar has countered vagaries of the shipping cycle by developing its Technical and Logistics divisions by acquisition; these businesses are internationally based and tend to reflect the volume of shipping movements and offshore oil and gas work.
Company description: Specialist shipping services
Braemar is a leading international shipping services group. Its income is generated in the form of commissions, fees and/or hourly charges for its expertise. It is a purely services business, taking no equity interest in any ship or its cargo; there are no inventories in the group balance sheet. The key drivers to profitability are shipping rates, volumes of seaborne trade and oil and gas activity. Broking services profits can fluctuate with shipping rates, the sterling/dollar exchange rate and the volume of seaborne trade; profitability in the services divisions is subject to the volume of seaborne trade and activity in the oil and gas sector.
The group dates back to 1972, when Seascope Shipping was established as an independent shipbroker; it was admitted to the stock exchange in 1997. Its first acquisitions, Braemar Shipbrokers and Braemar Tankers in 2001, broadened the scope of the broking business. The group has subsequently extended into other types of shipping services.
Today, the group operates through three divisions. The largest, Shipbroking, was significantly extended in 2014 by the merger with ACM Shipping. The two services divisions, Technical and Logistics, were established by a series of acquisitions between 2007 and 2011, in response to the global recession and were aimed at reducing the impact of the shipping cycle.
Exhibit 2: Five-year financial record
Year to February (£000s) |
2013 |
2014 |
2015 |
2016 |
2017 |
Revenue |
|||||
Shipbroking |
46,362 |
40,866 |
53,589 |
70,699 |
63,132 |
Technical |
55,827 |
45,748 |
49,646 |
54,283 |
42,860 |
Logistics |
37,495 |
38,917 |
42,366 |
34,143 |
33,850 |
Group revenue |
139,684 |
125,531 |
145,601 |
159,125 |
139,842 |
Operating profit |
|
|
|
|
|
Shipbroking |
5,348 |
2,635 |
5,588 |
9,653 |
7,882 |
Technical |
6,425 |
6,905 |
6,289 |
5,201 |
-2,920 |
Logistics |
2,006 |
1,981 |
2,275 |
1,577 |
1,254 |
Subtotal |
13,779 |
11,521 |
14,152 |
16,431 |
6,216 |
Unallocated costs |
-2,951 |
-2,238 |
-2,621 |
-2,673 |
-2,721 |
Underlying operating profit |
10,828 |
9,283 |
11,531 |
13,758 |
3,495 |
Interest |
255 |
196 |
-293 |
-387 |
-303 |
Joint ventures |
62 |
-88 |
-22 |
0 |
0 |
Pre-tax profit |
11,145 |
9,391 |
11,216 |
13,371 |
3,192 |
Source: Braemar Shipping RNS. Note: Before amortisation of intangible assets and exceptional items.
Shipbroking (FY18e 45.7% of revenue; 61.4% operating profit)
Shipbrokers act as intermediaries between the various parties involved in the shipping of goods by sea. This usually involves bringing together ship owners and people wishing to transport raw materials, components/assemblies and finished goods from the country in which they are produced to those countries where they are to be consumed; the business also brings together parties wishing to buy or sell ships.
The global market leader, Clarkson, had broking revenue of £234m in 2016. The merger with ACM lifted Braemar towards the number two spot in the market. With revenues of £63m, the division is well under half the size of Clarkson, but is believed to be similar in size to Simpson, Spence & Young, the largest of a number of independent UK-based shipbroking groups. There are also sizeable competitors based in continental Europe, the US and the Far East.
Braemar’s areas of expertise are in deep sea and specialist oil tankers, dry cargoes and offshore oil production/exploration facilities. The majority of group broking revenue is generated in London, but there are key operations in Singapore and Australia and a further 10 strategically placed overseas locations, concentrating on the needs of their local areas.
The main sources of revenue in shipbroking are:
■
Spot charters: the spot market, the mainstay of shipbroking, involves single journeys, usually priced on a per day basis, with the broker earning a typical commission of 1.25% on the overall cost.
■
Time charters: in a time charter, a ship is hired for a predetermined period of time. The ship remains the property and responsibility of the owner, but the charterer controls the operation of the ship. The duration of time charters can vary from a few months through to several years; its advantage stems from the reliability of income and availability. Ship owners can secure a predetermined level of income to justify the order for a new ship, while the customer can avoid the risks involved in fluctuating spot rates. For the broker, time charters provide an order book and a degree of certainty of earnings.
■
Sale & purchase: sale and purchase operations bring together buyers and sellers of ships; they also manage transactions for both new ships and those sold for demolition. Teams deal with both ship owners and shipyards, often introducing the purchaser to those able to arrange finance. Braemar’s knowledge base across the sector and its close relationships with many ship owners mean that the team will frequently receive advance notice of certain deals.
■
Derivatives: a number of financial instruments have become available to the market, enabling ship owners and charterers to fix rates for a specified voyage at a defined future date. Braemar operates a successful and highly regarded joint venture with GFI Group, which is majority-owned by and operated as a division of US-listed, BGC Partners (BGCP).
■
Research: the ability of shipbrokers to provide appropriate advice to their customers is fundamental. The Braemar research capability, especially in tankers, is among the best in the industry and will be a key factor in developing the customer base.
Technical (FY18e 29.8% of revenue; 19.5% operating profit)
The Technical division comprises five distinct business units offering a comprehensive range of services, operating from three regional hubs in Asia Pacific, EMEA and the Americas.
■
Offshore provides a broad range of specialist services to the offshore energy sectors. The principal business is marine warranty surveying services (17% of divisional revenue). It is also involved in offshore installation engineering and naval architecture, and operates a structural, geotechnical and pipeline installation and dynamic positioning consultancy. All of the company’s income is generated in the Asia-Pacific region.
■
Marine is a marine and technical consultancy services business, offering marine surveys and audits, casualty investigations and risk management surveys. It usually works in conjunction with insurers assessing all types of ships from deep-sea tankers to yachts. Other services include assessment of environmental and emission risks.
■
Engineering is a marine engineering consultancy business, principally involved in the supervision of the design, construction and operation of LNG carriers. The company operates globally from offices in the UK and the US.
■
Adjusting is recognised internationally as a specialist in the resolution of insurance claims and contractual disputes associated with oil and gas, power generation and mining risks. It operates a global network of offices, able to respond quickly and effectively to incidents caused by extreme weather or other unexpected difficulties.
■
Environmental provides round-the-clock support to both industry and government bodies, co-ordinating and implementing a structured response to major potential environmental problems. There is a sound UK business and a growing operation in Africa, but the occasional major recovery contract following a shipping disaster can transform the performance on a short-term basis. Such contracts can be of very high value but relatively short duration, and are by nature essentially unpredictable and relatively infrequent.
Logistics (FY18e 24.5% of revenue; 19.2% of operating profit)
Cory Brothers provides a comprehensive range of port agency, freight forwarding and logistics services to ship owner, charters and traders from regional hubs around the globe. It is well represented in the UK and continues to invest in geographic expansion, notably the US and Singapore in recent years.
The higher-margin port agency business generates just 23% of divisional revenue profits and over 60% of profits, looking after the needs of ship owners, charterers and traders on a 24-hour basis, with services ranging from the arranging of supplies to crew transfers and customs documentation. In essence, the company organises the docking, unloading, reloading and also arranges the departure of the ship from the port. There is a constant need to update systems and policies and to have the latest technology in place to offer the modern and efficient service required by customers. Cory’s software system offers real-time co-ordination between the customer’s own systems and those of the port being used.
Cory’s freight forwarding/logistics operation supports its customers following the landing of goods in port. Services range from arranging customs clearance and warehousing to the onward transport of the goods by air, road, sea, express courier or by hand. The business has a global contact base offering experience in handling a comprehensive range of goods, including support for businesses as diverse as the inter-continental oil, automotive, nuclear, renewables and recycling industries.
Shipping market and cycle
Exhibit 3: Global shipping demand |
Exhibit 4: Global shipping supply |
Source: Braemar |
Source: Braemar |
Exhibit 3: Global shipping demand |
Source: Braemar |
Exhibit 4: Global shipping supply |
Source: Braemar |
During the early years of this century, the global shipping market grew as world trade expanded, driven by growth in emerging markets and the associated increased flow of raw materials and finished goods that stemmed from the shift in manufacturing capacity to low-cost territories. There was a minor dip in the volume of seaborne trade in 2009, but it was quickly reversed. Steady growth resumed this decade but, as was the case with industrial output, this was at lower rates than experienced prior to the financial crisis. In 2018 seaborne trade is expected to grow at just 2%.
There were shipping capacity shortages for several years up to 2009 which drove a growing order book for new ships, with lead times running several years into the future. The global recession effectively applied a two-year brake on the rate of growth in seaborne trade. Previously ordered new capacity continued to come on stream creating surplus capacity, with a direct impact on shipping rates and on the value of ships. Shipbrokers, who are remunerated by virtue of the cost of shipping movements, saw their income sharply reduced. The pace of new shipping orders has slowed considerably but the earlier than planned retirement of a number of older vessels has so far failed to materialise to a sufficient extent to rectify the oversupply situation. Instead, steaming at slower speeds has mopped up some of the excess capacity. In recent months the trade stance of the incoming US administration has created new uncertainties over future global trade flows. The combination is serving to further extend the shipping cycle with shipping capacity in most sectors remaining significantly above demand.
The unfavourable combination of weaker freight rates and slower trading volume development led to increased consolidation in shipbroking. The larger broking houses, which have major research teams, have taken an increasing share of the market. The Braemar/ACM merger was just one of three major shipbroking deals announced in that period; the pooling of resources to enable fixed-cost reduction and to be able to advise customers more effectively is a natural response to the challenges and uncertainties.
Strategy
There are four key elements to Braemar’s ongoing business strategy:
■
Continuous improvement in utilisation and efficiency: management has demonstrated a keen eye on operational performance in recent years with rapid responses to changes in market conditions that have included optimisation of resources in terms of location, quality and scale. We expect this tight control of costs and improvement in efficiency to be maintained as the group continues to develop.
■
Improve market coverage and the ability to service clients: much of the growth in recent years has come from overseas investment, especially in the Asia-Pacific region. Development of strategic services and logistical support across the regional hubs is clearly a priority, providing customers with a seamless global service offering. While shipbroking operations are largely London based, the vast majority of trading activity is globally based. We believe that well under 5% of group revenues relate to movement in the UK economy.
■
Diversify business operations: the development of the Technical and Logistics divisions reflects the continuing investment into other less cyclical shipping services, in turn reflecting a desire to reduce the impact of the shipping cycle. There is considerable scope to broaden the services offered in order to spread risk, reduce volatility and improve sustainability, with divisional companies working together more closely where appropriate. The roll-out of a new common accounting systems and investment in new improved management tools are expected to help develop these opportunities, and should also provide a common platform for the rapid integration of future acquired opportunities.
■
Grow scale through both organic and acquisitive development: the integration of ACM was completed in 2015. Organic expansion remains firmly on the agenda. Braemar continues to target the other key individuals or small specialist teams, both in the UK and abroad. At home, the group’s solid trading performance in a poor trading climate has strengthened its ability in attracting highly skilled operators whose ambitions are not being fulfilled in smaller struggling businesses. Meanwhile, offices in the Asia-Pacific region offer considerable potential in terms of attracting successful independent teams that can benefit substantially from exposure to the more comprehensive research and contact base of a larger group.
Core resilience in FY17
The downturn in the oil and gas industry severely impaired performance of the Technical division during FY17, which saw a significant reversal in operating performance. Both the core Shipbroking activity and Logistics proved more resilient although conditions across most segments were far from favourable. Overall revenues declined 12% to £139.8m in FY17, with underlying pre-tax profits falling from £13.4m to £3.2m. Underlying EPS of 8.73p were ahead of our much reduced expectations of 8.0p for the year, but represented a 75% decline on FY16. The executive management reaction to the Technical division’s issues was decisive and should rapidly return the operations to profit, although the challenging market conditions and continuing uncertainty predicate against undue optimism over the timing and strength of any recovery. As a result the full year dividend was reduced by 46% to 14.0p in line with indications from January, which is seen as a sustainable base from which to rebuild.
Exceptional items totalled £3.8m, broadly in line with management indications. These included both restructuring costs of £3.0m and gains from the Baltic Exchange share disposal of £1.7m, as well as continuing costs relating directly to the ACM merger. There was a £2.1m decrease in net cash from £9.2m to £7.1m.
Exhibit 3: FY17 results breakdown
Year to February (£000s) |
2016 |
2017 |
Change (%) |
Revenue |
|||
Shipbroking |
70,699 |
63,132 |
-10.7 |
Technical |
54,283 |
42,860 |
-21.0 |
Logistics |
34,143 |
33,850 |
-0.9 |
Group revenue |
159,125 |
139,842 |
-12.1 |
Operating profit |
|||
Shipbroking |
9,653 |
7,882 |
-18.3 |
Technical |
5,201 |
(2,920) |
|
Logistics |
1,577 |
1,254 |
-20.5 |
Sub-total |
16,431 |
6,216 |
-62.2 |
Unallocated costs |
(2,673) |
(2,721) |
|
Underlying operating profit |
13,758 |
3,495 |
-74.6 |
Interest |
(387) |
(303) |
|
Pre-tax profit |
13,371 |
3,192 |
-76.1 |
Source: Braemar Shipping RNS. Note: Before amortisation of intangible assets and exceptional items.
Shipbroking
In the absence of any acquired growth, Braemar’s shipbroking operation was resilient in the face of much tougher market conditions, notably in declining tanker and offshore rates. All segments remained profitable with continued expansion and strengthening of the teams, as well as prior year restructuring benefits also helping to mitigate the trading conditions. Underlying operating profits fell to £7.9m from £9.7m in the prior year, on an 11% fall in revenues; a creditable margin of 12.5%.
The performance of the largest department, deep sea tankers, experienced an unwinding of the favourable conditions seen in FY16 as tonnage expanded and the beneficial effects of lower oil prices wore off, lowering freight rates. Demand for oil was met increasingly from high local stocks levels reducing the demand for shipping of cargoes. Fleet growth was lower than expected as deliveries slipped, but asset values also continued to decline steadily for both new and used assets. The lengthening of average journeys also continues to be a positive although, but as stocking levels are consumed both crude and product tanker rates should see some recovery. The tanker market contributed 63% of divisional revenues, up from 62% the previous year.
In dry bulk cargo (up from 14% to 16% of revenues) freight rates hit an all-time low early in FY17, but recovered to two-year highs by December 2016. An optimised structure was put in place during H117 and key hires were made to strengthen the department. There are continuing signs of an improvement in dry bulk trade, although the fleet development leaves the supply demand balance uncertain which remains crucial to prospects.
Offshore (6% of revenues) remained particularly challenging due to very low activity levels in the sector as markets remain subdued. A profitable outcome was nevertheless achieved, and conditions while more stable are unlikely to recover sharply, although Braemar has retained an experienced core team to respond when the situation does improve.
A higher volume of demolition and second-hand vessels transactions in the Sale and Purchase operation (down from 18% to 15% of revenues), was offset by reduced average values. Tanker activity also remained subdued.
Technical
The Technical division was severely affected by the slowdown in exploration and production activity in the oil and gas sector. Revenues fell by 21% to £42.9m, incurring an underlying operating loss of £2.9m (FY16 profit £5.2m). The drop in oil prices led to a combination of reduced drilling activity, onerous debt levels incurred by producers and the lack of replenishment of maturing, long-term contracts, which in turn led to sharp falls in demand for construction and support vessels.
Braemar spent the year implementing a realignment of the division in response to the deterioration in performance after installing a new management team. £2.8m of the exceptional restructuring charges were incurred by the division which is expected to provide £6m of annualised saving in the current year, which should return the division to profitability.
The workforce at Offshore located in Asia Pacific has been scaled appropriately to meet lower levels of demand. Braemar Engineering, the consulting engineering activity, was refocused following the completion of a three-year support contract for LNG vessels in Nigeria and the more general downturn in the sector. Braemar Marine (formerly SA) has also responded to lower levels of activity for its specialist hull and machinery damage surveying and marine consultancy services.
Whilst Adjusting remained profitable in a challenging market, staff utilisation rates are being optimised by positioning staff to match project locations. The environmental consultancy and incident response business, Braemar Response, experienced routine workloads during the year with no significant project work. It also reset its cost base and refocused activities, closing its operation in West and Central Africa.
Logistics
Logistics proved to be the most resilient division during FY17, following the weak performance in FY16. Revenues were marginally lower at £33.9m (FY16 £34.1m) and an underlying operating profit of £1.3m was generated. Cory Brothers’ Ship Agency business achieved strong business development and improved performance during the year despite the challenging environment. It is continuing to try and expand its US and European presence, while maintaining the strong UK position. The divisional outcome was achieved despite a difficult market for the smaller specialist Freight Forwarding activity due to a lack of projects and price competition. The activity has undergone a detailed performance review and a business improvement programme is now in train.
Sensitivities
■
Currencies: with a majority of group costs incurred in sterling and substantial income in US dollars, exchange rate movements can have a considerable impact on profits in any specific year. Braemar carries out forward transactions to de-risk the sterling/dollar situation; at 28 February 2017, the group held forward currency contracts to sell $20.5m at an average rate of $1.325/£1, as well as option cover over a further $4.5m at $1.298/£1. Our profit estimates are based on the assumption that there is no material change in FX from current levels.
■
Key personnel: the business has few tangible assets. Its strengths lie in the strong relationships the group and key individuals have with ship owners, charterers (including the major oil companies), insurance specialists and traders. The defection of specific individuals or teams to a competitor could have an adverse impact on profits, especially in the short term. Management is fully aware of this risk and invests considerable time in staff motivation and retention; all shipbrokers, for example, operate bonus schemes, which generate a substantial part of an employee’s income. Obviously, the risks have increased as the group has become larger, but we understand that merging the broking teams, for example, has proved highly motivating, especially for younger members of the team.
■
The shipping cycle: the shipping cycle is seen by investors as a major factor affecting the performance of shipbroking shares. However, the group’s acquisition strategy over the past five years has introduced businesses with differing cycles. The past few years have seen unprecedented extremes, with spot rates and ship valuations moving more sharply than for many years. This stems from the unexpected global trading downturn, which led to high levels of overcapacity exacerbated by long shipbuilding order books. Numbers of shipping movements have already recovered, while many older ships have been retired earlier than was originally planned. Shipping rates continue to fluctuate but remain at depressed levels for the time being in most sectors, with the overall fleet expansion still outstripping trade growth.
■
Oil price: normal day-to-day fluctuations in the oil price do not have a material impact on group profitability. However, the extent of movements over the past few years has had contrasting effects across the group. The obvious adverse factor relates to the impact on exploration activity, which affected the offshore broking desk and Braemar Offshore and Braemar Adjusting in the Technical division. The benefit of increased global demand for oil has so far failed to sustain a reversal of the tanker overcapacity situation, transforming the profitability of the largest segment of the broking business.
Valuation
Peer group comparison
Exhibit 4: Peer group comparison
Share price (p) |
Market cap (£m) |
Revenue (£m) |
Yield |
P/E |
P/E |
|
Clarkson |
2920 |
883 |
328 |
2.2 |
26.2 |
21.6 |
James Fisher |
1664 |
835 |
525 |
1.6 |
20.0 |
18.6 |
TP ICAP |
462 |
2,558 |
1,753 |
3.7 |
13.6 |
11.6 |
Brewin Dolphin |
336 |
951 |
307 |
3.9 |
17.4 |
15.5 |
Braemar Shipping |
314 |
95 |
140 |
4.5 |
19.4 |
13.7 |
Source: Edison Investment Research, Bloomberg consensus estimates. Note: Based on annualised adjusted profits, before exceptional items and amortisation of intangibles. Prices as at 8 May 2017.
Braemar underperformed its peers significantly over the last year, as the impact of the oil and gas downturn on Technical took hold. Year to date the shares have performed well, despite confirmation of the rebasing of the dividend. Not surprisingly, Braemar continues to trade at a P/E discount to Clarkson, the market leader and the only other listed shipbroker. On a calendar year 2018 basis this currently stand at 37%, a reflection of the stronger anticipated growth for Clarkson, in addition to the greater recent resilience of its earnings. Braemar trades on a 19% P/E discount to the entire peer group in 2018, or 10% excluding Clarkson. The high dividend yield remains supportive.
If the company can resume growth and markets start to display evidence of sustained recovery we would expect the discounts to the peers to diminish. A rating in line with Clarkson requires a longer track record of growth and stability to be established. In this regard Braemar’s strong position in the tanker market, above average exposure to South-East Asia and ability to develop its non-broking interests are all supportive to the medium-term outlook. The cash-generative nature of the business and the above average dividend yield remain important positive factors in assessing the shares.
Capped DCF
We also now consider a capped DCF value for Braemar. For this we utilise a six-year forecast period and then cap the cash flow growth at zero in the terminal value, adjusting the working capital and capex cash movements to reflect the zero growth scenario. We use a calculated WACC of 9.0%. As we are not currently forecasting substantial recovery in the shipping cycle over the forecast period, this returns a value of 326p (in bold in table below), only 4% above the current share price. Sensitivity to higher terminal growth and WACC is reflected in the table below.
Exhibit 5: Braemar capped DCF sensitivity table to terminal growth and WACC
WACC |
6% |
7.0% |
8.0% |
9.0% |
10.0% |
11.0% |
|
Terminal |
0% |
500 |
425 |
369 |
326 |
291 |
263 |
1% |
504 |
428 |
372 |
328 |
293 |
265 |
|
2% |
507 |
431 |
374 |
330 |
295 |
267 |
|
3% |
511 |
434 |
377 |
332 |
297 |
268 |
Source: Edison Investment Research estimates
Financials
Profits to recover, but growth still subdued
The outlook statement indicates that a considerable amount of uncertainty persists in FY18, with depressed markets having the potential for recovery, but the timing and strength of any such movement being far from predictable. However, the self-help actions undertaken by management should see Technical swing back to moderately healthy profitability in the current year. In addition, Logistics should see continued development through its Port Agency business, aided by an improved performance from the refocused specialist Freight Forwarding activity. In the core Shipbroking business the length of the cycles to date in various segments leads to caution when it comes to predicting improving trading conditions. As a result, we have taken a cautious stance with respect to both volume growth and trading margins in the current year, despite signs of improvements such as Dry Bulk rates. Overall, we are forecasting a further moderate decline in underlying Shipbroking operating profit contribution.
Exhibit 6: Edison profit estimates
Year to February (£000s) |
2016 |
2017 |
2018e |
2019e |
Operating profit |
||||
Shipbroking |
9,653 |
7,882 |
6,486 |
6,811 |
Technical |
5,201 |
(2,920) |
2,057 |
2,463 |
Logistics |
1,577 |
1,254 |
2,026 |
2,066 |
Unallocated costs |
(2,673) |
(2,721) |
(2,775) |
(2,831) |
Underlying operating profit |
13,758 |
3,495 |
7,794 |
8,509 |
Interest |
(387) |
(303) |
8 |
37 |
Joint ventures |
0 |
0 |
0 |
0 |
Pre-tax profit |
13,371 |
3,192 |
7,802 |
8,546 |
Source: Company reports, Edison Investment Research estimates. Note: Before amortisation of intangible assets and exceptional items.
The medium- to long-term outlook will be determined by global trade development as well as a recovery in the oil and gas markets. Both areas appear relatively stable at low levels at present, and Braemar’s operations appear positioned to respond to any improvements. However, given some of the recent uncertainties in the macro outlook that have been introduced by Brexit, the European elections, the new Trump administration, and North Korea, we feel it is appropriate to stay relatively cautious at present. An acceleration in demolition work would be encouraging for prospects on rates, as well as for the Sale and Purchase business.
Balance sheet strength facilitates strategy
Net cash of £7.1m at the year-end was some £2.1m better than we had been forecasting, with an outflow of only £2.1m during the year despite the challenging environment and associated restructuring charges. The position was strengthened by the disposal of Braemar’s shares in the Baltic Exchange, and also benefited from some year-end working capital positions. The former will not recur this year and the latter is likely to unwind in FY18. Nevertheless, we expect broadly neutral cash flow for the current year as profitability recovers, and the dividend payments reflect the sharply reduced FY17 final dividend payment and rebalancing of the interim for FY18.
The group’s £30m facility with HSBC, comprising a £15m RCF and a £15m accordion facility, combined with the strong cash position enables management to seek further bolt-on acquisitions, having rebased the income to investors to sustainable levels.
Exhibit 7: Financial summary
£m |
2014 |
2015 |
2016 |
2017 |
2018e |
2019e |
||
Year end 28 February |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||||
Revenue |
|
125.5 |
145.6 |
159.1 |
139.8 |
137.9 |
142.5 |
|
Cost of Sales |
(31.8) |
(37.7) |
(33.4) |
(28.3) |
(28.3) |
(29.2) |
||
Gross Profit |
93.8 |
107.9 |
125.8 |
111.5 |
109.6 |
113.3 |
||
EBITDA |
|
10.5 |
13.4 |
15.9 |
5.1 |
9.4 |
9.9 |
|
Operating Profit (before amort. and except.) |
|
9.2 |
11.5 |
13.8 |
3.5 |
7.8 |
8.5 |
|
Intangible Amortisation |
(0.3) |
(0.4) |
(0.6) |
(0.5) |
(0.5) |
(0.3) |
||
Exceptionals |
(0.4) |
(6.1) |
(3.4) |
(3.8) |
(2.0) |
(0.3) |
||
Other |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Operating Profit |
8.5 |
5.0 |
9.7 |
(0.9) |
5.2 |
7.9 |
||
Net Interest |
0.2 |
(0.3) |
(0.4) |
(0.3) |
0.0 |
0.0 |
||
Profit Before Tax (norm) |
|
9.4 |
11.2 |
13.4 |
3.2 |
7.8 |
8.5 |
|
Profit Before Tax (FRS 3) |
|
8.7 |
4.7 |
9.4 |
(1.2) |
5.2 |
7.9 |
|
Tax |
(2.3) |
(2.2) |
(2.8) |
0.1 |
(1.2) |
(1.6) |
||
Profit After Tax (norm) |
7.0 |
8.3 |
10.2 |
2.6 |
6.2 |
6.8 |
||
Profit After Tax (FRS 3) |
6.4 |
2.5 |
6.5 |
(1.0) |
4.1 |
6.3 |
||
Average Number of Shares Outstanding (m) |
20.9 |
25.7 |
29.3 |
29.5 |
29.4 |
29.4 |
||
EPS - normalised (p) |
|
33.6 |
32.3 |
34.7 |
8.7 |
21.2 |
23.2 |
|
EPS - normalised and fully diluted (p) |
|
32.2 |
29.5 |
31.5 |
7.9 |
19.2 |
21.0 |
|
EPS - (IFRS) (p) |
|
30.8 |
9.8 |
22.3 |
(3.5) |
13.8 |
21.4 |
|
Dividend per share (p) |
26.0 |
26.0 |
26.0 |
14.0 |
15.0 |
15.8 |
||
Gross Margin (%) |
74.7 |
74.1 |
79.0 |
79.7 |
79.5 |
79.5 |
||
EBITDA Margin (%) |
8.3 |
9.2 |
10.0 |
3.7 |
6.8 |
6.9 |
||
Operating Margin (before GW and except.) (%) |
7.3 |
7.9 |
8.6 |
2.5 |
5.7 |
6.0 |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
39.1 |
85.8 |
86.2 |
85.9 |
85.0 |
84.4 |
|
Intangible Assets |
31.5 |
79.4 |
79.6 |
80.0 |
79.1 |
78.6 |
||
Tangible Assets |
5.9 |
4.9 |
5.1 |
4.6 |
4.5 |
4.4 |
||
Investments |
1.7 |
1.5 |
1.5 |
1.4 |
1.4 |
1.4 |
||
Current Assets |
|
63.6 |
75.5 |
72.2 |
68.8 |
66.3 |
69.8 |
|
Stocks |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Debtors |
47.4 |
57.4 |
58.1 |
57.2 |
56.4 |
58.3 |
||
Cash |
13.7 |
16.3 |
11.5 |
7.7 |
5.9 |
7.6 |
||
Other |
2.5 |
1.8 |
2.5 |
4.0 |
4.0 |
4.0 |
||
Current Liabilities |
|
(36.5) |
(51.2) |
(48.4) |
(49.2) |
(45.4) |
(46.5) |
|
Creditors |
(36.5) |
(44.4) |
(46.6) |
(48.6) |
(45.4) |
(46.5) |
||
Short term borrowings |
0.0 |
(6.8) |
(1.8) |
(0.6) |
0.0 |
0.0 |
||
Long Term Liabilities |
|
(0.9) |
(5.8) |
(2.7) |
(5.4) |
(5.4) |
(5.4) |
|
Long term borrowings |
0.0 |
(2.3) |
(0.5) |
0.0 |
(0.0) |
0.0 |
||
Other long term liabilities |
(0.9) |
(3.5) |
(2.2) |
(5.4) |
(5.4) |
(5.4) |
||
Net Assets |
|
65.3 |
104.3 |
107.3 |
100.2 |
100.5 |
102.4 |
|
CASH FLOW |
||||||||
Operating Cash Flow |
|
2.2 |
7.3 |
13.5 |
6.6 |
5.5 |
8.9 |
|
Net Interest |
0.2 |
(0.3) |
(0.4) |
(0.3) |
0.0 |
0.0 |
||
Tax |
(1.4) |
(3.5) |
(2.7) |
(1.7) |
(1.2) |
(1.6) |
||
Capex |
(1.3) |
(4.9) |
(2.1) |
(1.0) |
(1.0) |
(1.0) |
||
Acquisitions/disposals |
(0.5) |
(10.9) |
0.0 |
0.0 |
0.0 |
0.0 |
||
Financing |
(0.2) |
0.4 |
(0.1) |
(0.4) |
(1.5) |
0.0 |
||
Dividends |
(5.4) |
(6.2) |
(7.6) |
(7.9) |
(3.0) |
(4.6) |
||
Other |
(3.2) |
11.6 |
1.4 |
2.5 |
0.0 |
0.0 |
||
Net Cash Flow |
(9.6) |
(6.5) |
2.0 |
(2.1) |
(1.1) |
1.7 |
||
Opening net debt/(cash) |
|
(23.3) |
(13.7) |
(7.2) |
(9.2) |
(7.1) |
(5.9) |
|
HP finance leases initiated |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other |
0.0 |
0.0 |
(0.0) |
0.0 |
0.0 |
0.0 |
||
Closing net debt/(cash) |
|
(13.7) |
(7.2) |
(9.2) |
(7.1) |
(5.9) |
(7.6) |
Source: Company reports, Edison Investment Research estimates
|
|
|
Gear4music (G4M) has excited the market with stellar growth since IPO, and has beaten our forecast once again with 272% EPS growth for FY17. Management is focusing on a strategy that could make G4M a significantly larger company, building on the international development of music as a leisure activity. The company is now investing in the infrastructure to make this possible, with two new centres in Europe and a new base in the UK.
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