GE Shipping (CMP: Rs.324/ TP: Rs.396/ Upside: 22%)
As per Clarksons, 13% and 14% of the existing fleet of crude and product tankers
will be added in CY2010E respectively. However, accelerated phase out of single
hull tankers, which account for 12% of the existing global tanker fleet, will relieve
supply-side pressures and keep the freight rates at current sustainable levels over
the medium term. GE Shipping (Gesco) will be a key beneficiary of higher tanker
freight rates as it derives around 46% of its consolidated revenues from the Tanker
Segment.
The company intends to list its 97.62% subsidiary, Greatship Ltd (GIL) by
2HFY2011E through fresh equity issuance. We believe this will unlock potential
value of the Offshore business, which globally trades at higher multiples than the
Shipping business due to high earnings visibility. We have valued Gesco's Offshore
business at 5.0x FY2012E EV/EBIDTA which is at a discount to Great Offshore
(5.6x FY2012E EV/EBITDA) and fetches Rs107/share.
We value Gesco on SOTP basis, with its Shipping business contributing
Rs289/share (15% discount to NAV) and its Offshore business contributing
Rs107/share (5.0x FY2012E EV/EBIDTA). Based on our Target Price of Rs396, the
implied EV/EBITDA, P/BV, P/E multiple works out to 6.2x, 0.9x, and 5.9x
respectively, on FY2012E basis. Thus, on account of trading at a significant
discount to its global peers, we recommend a Buy on stock.
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