Braemar Shipping Services — Awaiting favourable trade winds

Braemar (LSE: BMS)

Currency in GBP

Last close As at 26/01/2023

GBP3.15

−2.50 (−0.79%)

Market capitalisation

GBP104m

Research: Industrials

Braemar Shipping Services — Awaiting favourable trade winds

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.

Andy Chambers

Written by

Andy Chambers

Director, Industrials

Industrials

Braemar Shipping Services

Awaiting favourable trade winds

FY17 results

Industrial support services

10 May 2017

Price

320p

Market cap

£97m

Net cash (£m) at 28 February 2017

7.1

Shares in issue

30.2m

Free float

70%

Code

BMS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

20.7

20.1

(28.9)

Rel (local)

20.1

17.2

(40.7)

52-week high/low

460.0p

234.8p

Business description

Braemar Shipping Services is a leading global shipping services group, with interests ranging from shipbroking (45% of FY17 revenues) to the supply of specialist technical (31%) and logistics (24%) support to various parties involved in the transport of goods by sea and in the energy sector.

Next events

AGM & Q1 trading

30 June 2017

H1 results

October 2017

Analysts

Andy Chambers

+44 (0)20 3681 2525

Alexandra West

+44 (0)20 3077 5700

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*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

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
2016 (%)

P/E
CY17e (x)

P/E
CY18e (x)

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
growth rate

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

Contact details

Revenue by geography

One Strand
Trafalgar Square
London
WC2N 5HR
+44 (0)20 3142 4000
www.braemar.com

Contact details

One Strand
Trafalgar Square
London
WC2N 5HR
+44 (0)20 3142 4000
www.braemar.com

Revenue by geography

Management team

CEO: James Kidwell

Chairman: David Moorhouse

James Kidwell was appointed to the board of Braemar in 2002 as group finance director, earning promotion to the role of chief executive in June 2012; he played a leading role in the group diversification strategy. He is a qualified chartered accountant; prior to joining the group James occupied senior financial roles at Boosey & Hawkes and Carlton Communications.

David Moorhouse has been a non-executive director of Braemar since 2005, assuming the role of chairman in 2015. He is a past chairman of Lloyds Register and was previously chairman and chief executive of the Process division of Kvaerner Group. He holds a number of other non-executive posts, especially in the maritime industry.

CFO: Louise Evans

Louise Evans joined the group as finance director in 2015. She is a qualified chartered accountant. Before joining Braemar she was finance director of Williams Grand Prix Holdings, having previously been a divisional finance director at RPS Group.

Management team

CEO: James Kidwell

James Kidwell was appointed to the board of Braemar in 2002 as group finance director, earning promotion to the role of chief executive in June 2012; he played a leading role in the group diversification strategy. He is a qualified chartered accountant; prior to joining the group James occupied senior financial roles at Boosey & Hawkes and Carlton Communications.

Chairman: David Moorhouse

David Moorhouse has been a non-executive director of Braemar since 2005, assuming the role of chairman in 2015. He is a past chairman of Lloyds Register and was previously chairman and chief executive of the Process division of Kvaerner Group. He holds a number of other non-executive posts, especially in the maritime industry.

CFO: Louise Evans

Louise Evans joined the group as finance director in 2015. She is a qualified chartered accountant. Before joining Braemar she was finance director of Williams Grand Prix Holdings, having previously been a divisional finance director at RPS Group.

Principal shareholders

(%)

Charles Stanley Group PLC

6.57

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Chelverton Asset management Liontrust Asset Management

6.13

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Barclays Stockbrokers

5.83

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Hargreaves Lansdowne AM

5.53

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Phoenix Fund Services UK

5.43

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Majedie Asset Management

4.89

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Liontrust AM

4.74

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Companies named in this report

Brewin Dolphin (BRW), Clarkson (CKN), James Fisher (FSJ), TP ICAP (TCAP)

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Braemar Shipping Services and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Braemar Shipping Services and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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