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Great Eastern Shipping: F2Q11: Steady in Turbulent Waters; Remain OW
What's Changed
Price Target Rs345.00 to Rs370.00
Investment conclusion: Our OW rating is due to:
a) high revenue visibility in a period of volatile freight rates
with 57%, 71% and 54% revenue days in tankers, product
tankers and bulkers, respectively, amounting to Rs3.4bn
being covered under charter contracts for 2H11e;
b) earnings progression is likely to pick up in ensuing
quarters as its offshore fleet expands;
c) GESCO has net debt of Rs14bn and net debt:equity of
0.2x at September 2010, which bodes well for expansion;
Moreover, news flow around equity issuance of its
offshore subsidiary (filed with regulator) will also support
stock performance, we believe. GESCO trades at a
steep discount to global peers that we believe should
contract given its earnings profile and balance sheet
strength. We raise our probability weighted NAV based
target price to Rs370, implying an upside of 17%.
What's new: GESCO reported QE September 2010
earnings of Rs2bn, ahead of our estimate. This was driven
by lower expenses (including interest) and profit on sale of
ships. EBITDA margins expanded by 50bps QoQ to 41%,
ahead of our estimate. The company benefited from
charter exposure at attractive rates, in our view. This will
continue to support earnings in F2H11e.
Revenue momentum in offshore segment continues
to gain strength on the back of new assets acquired – it
took delivery of three vessels (in offshore) and delivered
one. It placed orders for two vessels for delivery in
F12/13e.
Key Risk: While freight rates are likely to be volatile in
2H11, higher than expected decline in freight and asset
prices is the key risk.
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