Ernst Russ — Robust results growth

ERAG benefitted from the benign environment, marked by a recovery in global trade and a shortage of available container capacity in 2021. It was able to increase its average charter rate by 73.6% y-o-y to US$15k/day in FY21 (and to US$18.3k/day in December 2021), which, together with the expanding fleet, allowed it to increase shipping revenues by 117% y-o-y to €81m (88% of ERAG’s total revenue). ERAG’s other operations are gradually becoming less important, with revenues outside of the shipping segment down 39% y-o-y, bringing total revenues to €92m (up 66% y-o-y).

ERAG’s operating margin increased to 42% from 18% in FY20, as the increase in costs related to fleet expansion was significantly lower than the rise in revenues from increasing freight rates and high fleet utilisation (97.9% in FY21 vs 95.9% in FY20). This translated into an EBITDA (adjusted for non-operating result) of €38.6m versus FY20 at €10.1m. The cost of materials and services increased 31% y-o-y, but their share in revenues was lower at 53% versus 68% in FY20. Personnel expenses decreased 27% y-o-y to €5.1m as FY21 was the first full year after the disposal of the real estate segment. This has led to a significant headcount reduction, with average full-time equivalents (FTE) at 42 in FY21 compared to 63 FTE in FY20. Additionally, other operating expenses were reduced by €0.6m y-o-y (mostly due to lower legal and advisory costs) and other operating income was €0.9m higher y-o-y (mostly due to a €1.4m gain on disposal of limited partnership interests).

The non-operating result was a loss of €2.4m compared to a profit of €2.3m in FY20. The non-operating result includes various EBITDA adjustments, such as provisions creation and reversal, goodwill adjustments or write-downs on receivables not associated with ERAG’s operating business. The difference compared to FY20 was predominantly a result of the impact of exchange rates (€1.1m negative in FY21; €0.9m positive in FY20), as well as €1.3m income recognised in FY20 from reversal of provisions. ERAG also reported a €1.7m in income from other equity interests. This figure is 37% lower y-o-y due to a high base effect, because in FY20 ERAG recognised high equity distributions from the real estate segment, which has since been deconsolidated.

Consequently, ERAG’s net income was €26.3m, more than five times higher than FY20 profit of €4.8m (FY19: €1.7m). The profit attributable to ERAG’s shareholders was €15.7m (FY20: €4.2m), whereas investors holding minority stakes in various companies of the group amounted to €10.5m (FY20: €0.6m).

ERAG partially uses debt to finance its fleet and, on the back of an increase in scale, the gross debt increased by 30% y-o-y to €79.1m, with the fleet size also expanding. That said, the leverage ratio decreased significantly on the back of good financial results and cash conversion. The net debt increased only slightly (2%) to €52.7m as ERAG has €26.4m of cash at its disposal (FY20: €9.2m), and its relation to adjusted EBITDA (on last 12 months basis) decreased to 1.4x from 5.1x a year earlier.

ERAG expects FY22 revenues in the range of €160–170m (73–84% y-o-y growth) and EBIT of €72–77m (134–150% y-o-y growth). The EBIT guidance was increased in late March 2022 (from €62–67m) due to the announced disposal of a container vessel, which will result in c €12.3m gain on disposal (and was budgeted to deliver €2.5m EBIT in FY22). While ERAG provides its guidance based predominantly on the backlog, and to a large extent this estimate is already secured by contracts, we note it does not assume any major disruptions in global trade and route navigability. While the main risk factors around global seaborne trade volume and value include reintroduction of lockdowns in China as part of its ‘zero-COVID’ policy (which caused some delays in container handling in China), the container shipping market is expected to post growth of 3.8% in 2022 and 2.9% in 2023 in TEU terms after a robust recovery in 2021, with 6.1% growth according to Clarksons (forecast published in January 2022). Another risk factor are tensions arising from Russia’s invasion of Ukraine, although at present, the effect on the shipping market is limited as Russia’s share in the global trade is only 2% and consists predominantly of bulk goods such as oil, gas, grain, fertilisers and metals, according to analysis by ING. Nevertheless, any potential additional escalation may disrupt global supply chains, affecting GDP growth and shipping volumes.

ERAG’s portfolio consists of 28 ships (26 container ships, one bulker and one multi-purpose vessel), compared to just 14 at end-2020. During the year, ERAG acquired a majority interest in two multi-purpose vessels (in February 2021, with deadweight tonnage of 12,500 tonnes each) of which one was sold after the reporting date (February 2022). Moreover, it increased its stake in Fernando Feeder Parent, which holds a fleet of 12 ships, by 10% to 55% in December 2021, thus making it a fully consolidated entity. This portfolio consisted of 11 feeder ships with a capacity of around 800 TEU each and a container ship with a slot capacity of around 1,800 TEU. In January 2022, ERAG sold an 806 TEU container ship. We also note that ERAG recently signed an agreement to sell one of its container ships, with the transfer of ownership expected in April 2022.

The services of asset and ship management for funds and assets of external investors are gradually being phased out and ERAG concentrates on services provided to its own portfolio. In April 2021, ERAG sold the Bremen Fund Management sub-segment. Including other, smaller transactions made during the year, the total AUM decreased to c €500m (vs c €800m at end-2020); the number of funds stood at 18 at end-2020 (from 67 at end-2020) and ERAG’s headcount within these operations was reduced by six in FY21.

ERAG trades at a meaningful discount to its peers based on forward EV/EBITDA multiples – 63% and 54% for FY22e and FY23e, respectively. The discount is much higher than if based on FY21 reported results, as consensus implies an 172% increase in ERAG’s EBITDA in FY22, while the weighted average growth in the peer group is expected to be 12%. Although ERAG’s consensus consists of the estimates of one analyst (from Warburg Research), the expected revenue growth to €163m in FY22 is broadly in line with management guidance of €160–170m. That said, the discount may be partially justified by the high share of minority earnings in ERAG’s results (as EBITDA is not adjusted for minority interests). Nevertheless, even if we include the minorities in our EV calculations for ERAG (applying a P/BV ratio in line with ERAG’s current multiple), we arrive at 33% discount on FY22e results and 17% discount on FY23e. Here, the ROE for ERAG’s minority holders stood at c 15% in FY21, compared to 22% for the parent’s shareholders.

Based on P/E ratios, ERAG trades at a significant premium to peers on FY21 and at a discount to peers on FY22e and FY23e estimates. ERAG reports significantly lower net income margin (17% in FY21) than peers (average at 24%), and while consensus expects a 25% margin in FY22e, the FY23e estimate implies a reduction back to 16%. The lower net income conversion may be justified by its rapid growth. The FY23e peer group figures are affected by Hapag-Lloyd consensus estimates, which assume a 25pp decrease in net income margin (to 16%) compared to FY21. Excluding Hapag-Lloyd from the FY23e calculation, ERAG trades at a 3% premium to peers.