Braemar Shipping Services — Update 20 May 2016

Braemar (LSE: BMS)

Last close As at 21/05/2024

GBP3.10

12.00 (4.03%)

Market capitalisation

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Research: Industrials

Braemar Shipping Services — Update 20 May 2016

Braemar Shipping Services

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Industrials

Braemar Shipping Services

Strategy delivers

Preliminary results

Industrial support services

20 May 2016

Price

445.50p

Market cap

£134m

£/US$1.42

Net cash (£m) at 29 February 2016

9.2

Shares in issue

30.1m

Free float

70%

Code

BMS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(0.1)

3.6

(9.7)

Rel (local)

4.9

1.4

3.0

52-week high/low

513.50p

411.00p

Business description

Braemar is a leading global shipping services group, with interests ranging from shipbroking to the supply of specialist technical and logistics support to the various parties involved in the transport of goods by sea and in the energy sector.

Next events

AGM

July 2016

Analysts

Nigel Harrison

+44 (0)20 3077 5700

Roger Johnston

+44 (0)20 3077 5722

Braemar Shipping Services is a research client of Edison Investment Research Limited

Braemar has, once again, demonstrated the efficacy of its acquisition programme of the past few years. While earnings look set to plateau in the immediate future due to the ongoing challenging trading conditions, the group has the financial ability to sustain its investment strategy and continue group development. We have trimmed our estimates.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

02/15

145.6

11.22

32.28

26.0

13.8

5.8

02/16

159.1

13.37

34.70

26.0

12.8

5.8

02/17e

165.0

13.50

34.09

26.0

13.1

5.8

02/18e

170.0

14.00

35.40

26.0

12.6

5.8

Note: *PBT and EPS normalised, excluding intangible amortisation and exceptional items.

Profits in line

Braemar’s underlying FY16 pre-tax profits are in line with our estimates, rising from an adjusted £11.2m to £13.4m. The two principal positives were the strong tanker market, which boosted shipbroking income, while Braemar Engineering earned substantial fees on a major LNG consultancy contract. Other businesses responded positively to challenging trading conditions. EPS rose 9% to 34.7p, providing 1.3x cover for an unchanged dividend of 26.0p.

Acquisition strategy continues to deliver

The successful acquisition strategy has enabled Braemar to continue development of the business despite a challenging trading climate since 2008/09. Braemar has established a strong shipping services operation, where revenues are related more to levels of seaborne trade and oil & gas activity, while the 2014 merger of shipbroking operations with ACM established the group as a major player in deep sea tanker broking, just as the business was turning upwards. Current investment is aimed at extending existing operations into adjacent business areas, by recruiting suitable experienced personnel or by small bolt-on acquisitions.

Net cash up by £2m

Net cash increased by £2.0m to £9.2m over the year; our estimates indicate a minimum similar increase in each of the next two years. This provides security for the relatively high dividend yield, while additional facilities totalling £30m support management’s acquisitive ambitions.

Valuation: Attractive rating

Braemar shares are rated at a substantial discount to global market leader Clarkson – c 30% on the basis of prospective calendar 2016 earnings (P/E of c 13.2x vs 18.4x), falling to c 16% for 2017. This probably reflects a combination of the relative size of the two businesses and the latter’s bigger recovery potential from a turn in the shipping cycle. Nevertheless, the major presence in the Asia/Pacific region, the strong balance sheet and the high yield offer considerable attractions for Braemar shareholders.

Investment summary

Company description: Shipbroking and specialist services

Braemar is a broadly based international shipping services group. The largest source of income is shipbroking, where the group has a strong position in deep sea oil tankers and the offshore sectors, with principal offices 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 offices across the UK and several overseas locations, especially in the Asia Pacific region. Technical services include specialist marine surveys involving site supervision, marine engineering, incident response and adjustment work for the insurance industry. Logistics work ranges from ship agency to freight forwarding.

Valuation: Discount rating

Braemar’s prospective rating is almost 30% below that of Clarkson on the basis of prospective 2016 calendar earnings, falling to a 16% discount on the basis of 2017 estimates. It is also rated at a discount to other members of its peer group. We believe that this discount reflects market fears that the strength of the tanker market may not be sustainable, while the ultimate recovery of other segments of the broking industry will be less beneficial to Braemar than to Clarkson. Our estimates do suggest much slower immediate earnings growth at Braemar compared to the remainder of the peer group. Nevertheless, Braemar’s strong position in the tanker market, its above average exposure to South-East Asia and action taken to develop further its non-broking interests all point positively to the medium-term potential. The reduction in risk stemming from the diversification policy, the cash-generative nature of the business and the well above average (1.3x covered) dividend yield are all important positive factors in assessing the shares.

Financials

Results for FY16 are in line with expectations, showing underlying pre-tax profits up from an adjusted £11.2m to £13.4m. With trading conditions remaining challenging we are reducing our current year estimate from £13.9m to £13.5m.

Net cash was raised by £2.0m over the year to £9.2m; we look for net cash growing by a minimum further £2.0m in the current year.

Exhibit 1: Estimate changes

Year to Feb

EPS (p)

PBT (£m)

EBITDA (£m)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2016

34.0

34.7

+2

13.4

13.4

Unh

15.6

15.9

+2

2017e

35.4

34.1

-4

13.9

13.5

-3

16.2

15.9

-1

2018e

N/A

35.4

N/A

N/A

14.0

N/A

N/A

16.4

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.

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 service 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)

2012

2013

2014

2015

2016

Revenue

Shipbroking

49,813

46,362

40,866

53,589

70,699

Technical

44,014

55,827

45,748

49,646

54,283

Logistics

37,630

37,495

38,917

42,366

34,143

131,457

139,684

125,531

145,601

159,125

Operating profit

Shipbroking

7,121

5,348

2,635

5,588

9,653

Technical

4,104

6,425

6,905

6,289

5,201

Logistics

1,888

2,006

1,981

2,275

1,577

13,113

13,779

11,521

14,152

16,431

Unallocated costs

(2,367)

(2,951)

(2,238)

(2,621)

(2,673)

10,746

10,828

9,283

11,531

13,758

Interest

181

255

196

(293)

(387)

Joint ventures

252

62

(88)

(22)

0

Pre-tax profit

11,179

11,145

9,391

11,216

13,371

Source: Braemar Shipping RNS. Note: Before amortisation of intangible assets and exceptional items.

Shipbroking (44% of revenue; 59% of 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 £240m in 2015. The merger with ACM lifted Braemar towards the number two spot in the market. With revenues of £71m, the division is well under half the size of Clarkson, but is believed now to be close in size to Simpson, Spence & Young, 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.

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 (34% of revenue; 32% of operating profit)

The Technical division comprises five distinct businesses, offering a comprehensive range of services from 37 offices based in 20 different countries.

Braemar Offshore provides a broad range of specialist services to the offshore energy sectors. The principal business is marine warranty surveying services (70% 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.

Braemar SA 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.

Braemar 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.

Braemar 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.

Braemar Howells 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. The last such contract followed the grounding in 2011 of the MV Rena off the New Zealand coast; Braemar consolidated £28.3m of revenues and £3.6m of profit, over the subsequent two years.

Logistics (22% of revenue; 9% of operating profit)

Cory Brothers provides ship agency, freight forwarding and logistics services from 18 offices across the UK and in Singapore. The company also has joint agency arrangements in Brazil and Gibraltar.

The ship agency business generates just over half of divisional revenues, 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 arranging 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 with 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: Five year movement in shipping rates

Source: Braemar preliminary results presentation

Exhibit 3: Five year movement in shipping rates

Source: Braemar preliminary results presentation

The global shipping market has grown with the expansion in world trade, augmented by the increased flow of raw materials and finished goods stemming from the shift in manufacturing capacity to lower-cost territories. There was a minor dip in the volume of seaborne trade in 2009, but it was quickly reversed and continues to grow steadily.

There were capacity shortages for several years up to 2009, leading to 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, with an obvious 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 now slowed considerably and, with the earlier than planned retirement of a number of older vessels, the extent of the oversupply situation has started to ease. Nevertheless, shipping capacity in most sectors remains significantly above demand.

The ensuing uncertainty led to increasing consolidation in shipbroking, with the larger broking houses, which have major research teams, taking an increasing share of the market. The Braemar/ACM merger was just one of three major shipbroking deals announced in recent years; 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.

The downward shift in this cycle was deeper and more prolonged than in previous recessions. This reflects the heavy shipbuilding order books ahead of the downturn and the sudden and unexpected nature of the setback in demand. The original backlog of orders has now been either delivered or cancelled, while the pace of new orders has slowed. Some shipyards were closed or mothballed. There has been increased recent investment activity, notably for tankers.

The price of new ships has fallen considerably over the past five years, with shipyards fighting to stay in business. Moreover, the lower running costs associated with modern, more efficient engines suggests that new ships can compete effectively with the overpriced vessels delivered during the immediate post-recession period. This will, however, almost certainly lead to an acceleration in the retirement of older, less efficient ships, especially as new environmental laws come into effect. In addition, following the recent environmental problems linked to a number of the oil majors, there is a growing desire to use modern ships.

Strategy

Braemar’s ongoing business strategy includes the following aspects:

Overseas investment - Much of the Braemar’s growth in recent years has come from overseas investment, especially in the Asia-Pacific region. While shipbroking operations are largely London based, UK operations generate well over 60% of group revenue; however, 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.

Diversification – Investment into other less cyclical shipping services reflected a desire to reduce the impact of the shipping cycle. The number of shipping movements has already passed pre-recession levels, indicating that demand for shipping services has been sustained. Management sees further opportunities in this direction, with the availability of potential acquisitions for the Technical division having increased since the onset of recession.

Organic growth - The integration of ACM was completed by spring 2015. Expansion remains firmly on the agenda, absorbing either 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 killed operators whose ambitions are not being fulfilled within smaller struggling businesses. Meanwhile, offices in the Asia-Pacific region offer considerable potential in terms of attracting successful independent teams which can benefit substantially from exposure to the more comprehensive research and contact base of a larger group.

The Technical and Logistics divisions both have cross-selling opportunities. There are some 25 overseas offices from which the Technical teams operate; there is considerable scope to offer a broader range of services, where appropriate, with divisional companies working together more closely.

Sound results

Braemar has delivered sound results for the year to February 2016, with revenue up by 9% to £159.1m and underlying pre-tax profits by 19% to £13.4m, The major factor was the previous year’s merger with ACM, which was consolidated for the full period in FY16, compared with seven months in FY15. The oil price had a major operational impact, with a strong advance in tanker broking earnings outweighing the adverse effects on the group’s offshore broking and service operations. Dilution from the equity issued as part of the consideration for ACM restricted the increase in underlying EPS to 7% from 31.3p to 34.7p. The dividend was unchanged at 26.0p, with cover increasing from 1.2x to 1.3x.

Exceptional items totalled £3.4m; these were in line with management indications and related directly to the ACM merger. There was a £2.0m increase in net cash from £7.2m to £9.2m.

Exhibit 4: FY16 results breakdown

Year to February (£000s)

2015

2016

Change (%)

Revenue

Shipbroking

53,589

70,699

+31.9

Technical

49,646

54,283

+9.3

Logistics

42,366

34,143

-19.4

145,601

159,125

+9.3

Operating profit

Shipbroking

5,588

9,653

+72.7

Technical

6,289

5,201

-17.3

Logistics

2,275

1,577

-30.7

14,152

16,431

+16.1

Unallocated costs

(2,621)

(2,673)

11,531

13,758

+19.3

Interest

(293)

(387)

Joint ventures

(22)

0

Pre-tax profit

11,216

13,371

+19.2

Source: Braemar Shipping RNS. Note: Before amortisation of intangible assets and exceptional items.

Shipbroking

Braemar’s shipbroking operation was transformed by the ACM deal; the size of the business increased by some 70%, with the team invigorated. The subsequent restructuring led to a £4m (10%) reduction in the cost base. Last year saw a major advance in divisional operating profits from £5.6m to £9.7m, with a strong performance in tanker broking, responding to a favourable trading climate. Increases in the number of movements plus longer journeys related to the development of the Atlantic Basin led to a reversal of the previous over-capacity in deep sea tankers. The tanker market contributed 62% of divisional revenues, up from 53% the previous year.

By contrast, the dry bulk cargo (down from 18% to 14% of revenues) and offshore (halved from 13% to 6% of revenues) markets remain subdued. In both segments, there is still considerable overcapacity, with little sign of change in the immediate future. There has been increased retirement of older bulk carriers, as owners try to reduce the imbalance, but the process remains incredibly slow. We frequently hear of plans for the larger operators to take concerted action, but there seems to be a reluctance to take the necessary pain. Offshore desks cannot avoid the impact of sharply reduced exploration activity. A timely and close attention to the cost bases of both operations meant that both desks remained profitable.

On the other hand, the sale and purchase operation (still 18% of revenues) did well. The desk increased its involvement in the scrapping of ageing bulk carriers, with several owners forced by their financiers into distressed sales. Tankers activity in the S&P area remained subdued.

Technical

There were contrasting performances across the Technical division. Despite a 9% increase in revenues to £54.3m, underlying operating profits slipped back by 17% to £5.2m, somewhat below our (£5.9m) estimate. The principal adverse factor remained the drop in the oil price, which undermined trading at both Braemar Offshore and Braemar Adjusting. Each business invested in broadening its base of operations, but the benefits will accrue in the future.

By contrast, there was the expected strong performance from Braemar Engineering, which lifted revenues by almost 50%, as deliveries on the three-year LNG tanker design, site supervision and crew training project in Nigeria reached its peak levels. The momentum of new business is building under a number of management initiatives, notably in its Houston office, but there are still some gaps in the forward order book.

Braemar SA experienced a slowdown in activity in South-East Asia, but more than balanced this with growing levels of consultancy work in the Middle East and the Americas.

The environmental problem-solving business, Braemar Howells, sustained its position last financial year. No new major incidents arose, but the previous year’s restructuring reduced the cost base and pointed towards a number of initiatives to broaden the base of the business.

Logistics

Logistics results were disappointing, showing revenue down by 19% to £34.1m and operating profits sharply down, by 31% to £1.6m. The change of management in early 2015, involved the head of the port agency business taking control of the whole division, has created a much more focused strategy, but the benefits are coming through far more slowly than we had been expecting; several new contracts are in position, but uncertainties about global trading climate have delayed their implementation.

Returns from the Port Agency business held up well, with an increased share of a difficult UK market. Singapore has proved more challenging, while the new office in Houston has performed well and will hopefully start contributing to the group bottom line during the current year. As expected, the Freight Forwarding business was caught between rationalising low margin business and the slower than planned build up of the better quality contracts. Investment in overseas growth looks solidly based and should start to deliver recovery in the current financial year.

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 2016, the group held forward currency contracts to sell $31m at an average rate of $1.477/£1. Our profit estimates are based on there is no material change 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; tanker rates have already recovered strongly, but other sectors remain under extreme pressure.

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. Balancing this were the benefits of increased global demand for oil, which led to a reversal of the previous tanker overcapacity situation, transforming the profitability of the largest segment of the broking business.

Valuation

Exhibit 5: Peer group comparison

Share price

(p)

Market cap

(£m)

Revenue

(£m)

Yield
2015 (%)

P/E
CY16e (x)

P/E
CY17e (x)

Clarkson

2287

691

302

2.7

18.4

15.3

James Fisher

1508

758

438

1.5

20.5

18.3

ICAP

435

2,832

460

5.1

16.0

14.8

Brewin Dolphin

276

782

284

4.3

15.7

14.1

Braemar Shipping

450

135

159

5.8

13.2

12.8

Source: Edison Investment Research, Thomson Datastream consensus estimates. Note: Based on annualised adjusted profits, before exceptional items and amortisation of intangibles. Prices as at 18 May 2016.

While the share prices of ICAP, Brewin Dolphin and Braemar have traded in a fairly narrow band since our Update report last October, Clarkson (global market leader in shipbroking) has seen a 9% reverse, and James Fisher (shipping services) has been in receipt of a sharp upward rerating. The Clarkson move reflects a cutting of market estimates – it continues to grow the underlying business impressively, but has a comprehensive business spread of shipping markets, including the broking areas where shipping rates remain under extreme pressure. At Fisher, we believe that there had been fears about the shift in world trade, which have subsequently proved to be unfounded.

For Braemar, the high exposure to deep sea oil tankers has led to a well above average performance by its shipbroking operation, tempered by the adverse impact of the oil price on certain of its other activities.

Braemar’s prospective rating is almost 30% below that of Clarkson on the basis of prospective 2016 calendar earnings, falling to a 16% discount on the basis of 2017 estimates. It is also rated at a discount to other members of its peer group. We believe that this discount reflects market fears that the strength of the tanker market may not be sustainable, while the ultimate recovery of other segments of the broking industry will be less beneficial to Braemar than to Clarkson. Our estimates do suggest much slower earnings growth at Braemar compared to the remainder of the peer group.

Nevertheless, Braemar’s strong position in the tanker market, its above average exposure to South-East Asia and action taken to develop further its non-broking interests all point positively to the medium term outlook. The reduction in risk stemming from the diversification strategy, the cash-generative nature of the business and the well above average (1.3x covered) dividend yield are all important positive factors in assessing the shares.

Financials

Profits to edge higher

The statement accompanying the FY16 results suggests broadly similar trading in the current year, but with confidence about the medium and longer term. Shipbroking markets remain difficult to assess; while there will be numerous new ships delivered in the current year, we sense that global oil demand will continue to edge higher, with the producers still keen to supply that need. Iranian oil will feature more prominently, while increasing Chinese demand, despite its economic slowdown, from the Atlantic Basin, may lift the number of long-haul charters. Elsewhere, there seems little sign of any improvement in dry markets, while we need to see more stability in oil markets before there will be any recovery in exploration activity. There are encouraging noises about accelerating demolition activity to potentially benefit the S&P business. We have decided to remain cautious in our shipbroking estimates, indicating a 9% profits fall in the current year.

Exhibit 6: Edison profit estimates

Year to February

2015

£000s

2016

£000s

2017e

£000s

2018e

£000s

Operating profit

Shipbroking

5,588

9,653

8,800

8,800

Technical

6,289

5,201

5,600

5,800

Logistics

2,275

1,577

2,300

2,550

14,152

16,431

16,700

17,150

Unallocated costs

(2,621)

(2,673)

(2,900)

(2,900)

11,531

13,758

13,800

14,250

Interest

(293)

(387)

(300)

(250)

Joint ventures

(22)

0

0

0

Pre-tax profit

11,216

13,371

13,500

14,000

Source: Braemar Shipping RNS, Edison Investment Research estimates. Note: Before amortisation of intangible assets and exceptional items.

The key to profits in Technology and Logistics is the speed with which last year’s new business initiatives start to deliver. Braemar Engineering has gaps in its order book, but other Technology division companies are all looking more optimistic; similarly, we are hopeful that Logistics will recover the ground lost in FY16 this year and move further ahead next year. Nevertheless, our earlier underlying pre-tax estimate of £13.9m for the current year is looking too high; we are cutting this to £13.5m and introducing an estimate of £14.0m for the year to February 2018.

Balance sheet remains strong

Net cash increased by £2.0m to £9.2m over the year to February 2016. Cash generated from operations rose to £13.5m, of which tax and interest payments absorbed £3.1m and dividend payments totalled £7.6m. Capex of £2.2m was largely balanced by the exercise of share options (£0.4m) and exchange movements (£1.1m). With capex likely to be lower, there should be at least a similar increase in net funds over the current year.

Since the year end, the group has negotiated a new £30m facility with HSBC, comprising a £15m RCF and a £15m accordion facility. The strong balance sheet enables management to seek further bolt-on acquisitions, while maintaining the generous dividend.

Exhibit 7: Financial summary

£'000s

2013

2014

2015

2016

2017e

2018e

February

UK GAAP

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

139,664

125,531

145,601

159,125

165,000

170,000

Cost of Sales

(43,599)

(31,758)

(37,700)

(33,365)

(40,000)

(40,800)

Gross Profit

96,065

93,773

107,901

125,760

125,000

129,200

EBITDA

 

 

12,066

10,552

13,553

15,871

15,900

16,350

Operating Profit (before amort. and except.)

10,828

9,283

11,671

13,758

13,800

14,250

Intangible Amortisation

(1,498)

(432)

(1,772)

(1,080)

(200)

(200)

Exceptionals

0

0

(4,316)

(2,365)

(1,600)

(400)

Operating Profit

9,330

8,851

5,583

10,313

12,000

13,650

Net Interest

255

196

(293)

(387)

(300)

(250)

Share in profits from joint ventures

62

(88)

(162)

0

0

0

Discontinued

(351)

(2,209)

0

0

0

0

Profit Before Tax (norm)

 

 

11,145

9,391

11,216

13,371

13,500

14,000

Profit Before Tax (FRS 3)

 

 

9,296

6,750

5,128

9,926

11,700

13,400

Tax

(2,447)

(2,268)

(2,187)

(2,826)

(3,100)

(3,350)

Profit After Tax (norm)

8,698

7,023

8,310

10,173

10,260

10,650

Profit After Tax (FRS 3)

6,849

4,482

2,941

7,100

8,600

10,050

Average Number of Shares Outstanding (m)

20.8

20.9

25.7

29.3

30.1

30.1

EPS - normalised (p)

 

 

41.7

33.5

32.3

34.7

34.1

35.4

EPS - normalised and fully diluted (p)

 

40.3

32.1

29.5

31.5

31.1

32.3

EPS - (IFRS) (p)

 

 

32.8

21.4

11.4

24.2

28.6

33.4

Dividend per share (p)

26.0

26.0

26.0

26.0

26.0

26.0

Gross Margin (%)

68.8

74.7

74.1

79.0

75.8

76.0

EBITDA Margin (%)

8.6

8.4

9.3

10.0

9.6

9.6

Operating Margin (before GW and except.) (%)

7.8

7.4

8.0

8.6

8.4

8.4

BALANCE SHEET

Fixed Assets

 

 

41,314

40,959

87,553

88,769

87,669

86,569

Intangible Assets

32,071

31,460

79,371

79,596

79,396

79,196

Tangible Assets

6,426

6,140

5,106

5,459

4,559

3,659

Investments

2,817

3,359

3,076

3,714

3,714

3,714

Current Assets

 

 

68,237

61,681

73,731

69,632

77,033

82,230

Stocks

0

0

0

0

0

0

Debtors

44,621

47,351

57,442

58,135

60,781

63,123

Cash

23,277

13,694

16,289

11,497

16,251

19,107

Other

339

636

0

0

0

0

Current Liabilities

 

 

(38,733)

(36,488)

(51,162)

(48,422)

(52,851)

(54,327)

Creditors

(38,733)

(36,488)

(44,362)

(46,622)

(48,351)

(49,827)

Short term borrowings

0

0

(6,800)

(1,800)

(4,500)

(4,500)

Long Term Liabilities

 

 

(975)

(866)

(5,849)

(2,674)

(3,847)

(3,847)

Long term borrowings

0

0

(2,300)

(500)

0

0

Other long term liabilities

(975)

(866)

(3,549)

(2,174)

(3,847)

(3,847)

Net Assets

 

 

69,843

65,286

104,273

107,305

108,003

110,625

CASH FLOW

Operating Cash Flow

 

 

14,996

2,158

7,259

13,459

14,914

15,422

Net Interest

251

196

(293)

(387)

(300)

(250)

Tax

(3,625)

(1,358)

(3,534)

(2,688)

(3,032)

(3,288)

Capex

(1,198)

(1,247)

5,512

(2,209)

(1,200)

(1,200)

Acquisitions/disposals

(279)

(524)

(10,851)

0

0

0

Financing

1,077

(197)

601

357

0

0

Dividends

(5,412)

(5,441)

(6,201)

(7,648)

(7,829)

(7,829)

Other including FX exchange differences

0

(3,170)

1,002

1,124

0

0

Net Cash Flow

5,810

(9,583)

(6,505)

2,008

2,554

2,855

Opening net debt/(cash)

 

 

(17,467)

(23,277)

(13,694)

(7,189)

(9,197)

(11,751)

HP finance leases initiated

0

0

0

0

0

0

Other

0

0

0

0

0

0

Closing net debt/(cash)

 

 

(23,277)

(13,694)

(7,189)

(9,197)

(11,751)

(14,607)

Source: Company accounts, Edison Investment Research. Note: Share-based payments not added back for adjusted earnings.

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

Chief executive: 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.

Finance director: 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

Chief executive: 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.

Finance director: 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

(%)

Majedie Asset Management

4.98%

Liontrust Asset Management

4.80%

Barclays Stockbrokers

4.62%

Quentin Soanes

4.07%

Chelverton Asset management

3.69%

Charles Stanley & Co

3.59%

Alan Marsh

3.50%

Companies named in this report

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

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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 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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