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Great Eastern Shipping (CMP: `. 327/ TP: `396/ Upside:21%)
Tanker freight rates bottoming out: The International Energy Agency (IEA) estimates
global oil demand to register 1.5% CAGR over CY2009-11E increasing by 2.6mbd
to 87.5mbd as against the decline of 1.5% in CY2009. As per Clarksons, 13% and
14% of the existing capacity (fleet) of crude and product tankers will be added in
CY2010. However, accelerated phase out of single hull tankers, which account for
12% of the world's existing tanker fleet, will relieve supply-side pressures and keep
the freight rates at current sustainable levels over the near to 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.
GIL IPO to unlock value: 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 better stability and high visibility in
Earnings. We have valued Gesco's Offshore business at 5.0x FY2012E EV/EBIDTA
which is at a discount to Great Offshore (FY2012E EV/EBITDA of 5.6x) thereby
fetching `107/share or `1,678cr
Relatively younger fleet: The average age of Gesco’s fleet (34 vessels) is around
10.6 years, which is relatively young given that most vessels have a life of 25
years. The company has applied depreciation on an accelerated basis for the
vessels that will need to be phased out by FY2010 as per the MARPOL regulations.
Offshore assets such as platform supply vessels and anchor handling tugs are
relatively young and hence, the company could earn better rates on such assets.
Compellingly attractive valuations: We expect Gesco to register 41.6% CAGR in
Net Profit over CY2010-12E with the bottoming out of the freight rates and asset
prices. We value Gesco on SOTP basis, with its Shipping business contributing
`289/share (15% discount to NAV), while its Offshore business contributing
`107/share business (5.0x FY2012E EV/EBIDTA). Based on our Target Price of
`396 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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