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GE SHIPPING
PRICE: RS.254 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.315 FY12E P/E: 10.4X
Healthy operational performance
Fleet addition, healthy operational performance and higher other income
resulted in GESCO reporting above than estimated net profit of Rs 1628
million for the quarter increasing more than 100% QoQ but falling ~5%
YoY. Healthy performance was reported by the tanker and the product
segment in the quarter. However the bulk segment continues to be weak.
Over supply of ships continues to put pressure on the freight rates affecting
the performance of most of the ship-owners including GESCO. However the
offshore segment of GESCO (GIL) has shown healthy performance. IPO of
Greatship India Ltd (100% offshore subsidiary) is expected by end of FY12E
Key Financials highlights:
n GE Shipping Co (GESCO) reported healthy numbers with consolidated revenues
increasing ~6% YoY at Rs 6,818 million amidst weak shipping market globally
and increasing shipping fleet for the company
n The offshore segment reported revenue of Rs 2467 mn growing ~6% YoY
n Conolidated EBITDA was at Rs 2,812million translating into EBIDTA margin of
41.24%
n The Shipping division reported an EBIT margin of ~31% and offshore division
reported an EBIT margin of ~38%.
n The company had booked Rs 461 mn as profit on sale of ships (PSS) in the current
quarter. PSS on an average for the last 7 years has formed 33% of the PBT
of the company. We estimate PSS to be less than average of 33% (from FY05 to
FY11) for the company in FY12E and FY13E.
n Interest component has gone up significantly from Rs 650 million in the previous
quarter to Rs 735 million in the current quarter. The debt for the company has
gone up from Rs 53 bn in the previous year to Rs 60 bn in the current quarter.
n As a result the adjusted net profit of the company has increased to Rs 1628 million
more than 100% QoQ.
Tough phase for shipping business continues - Supply side pressure
continues
In the dry market, the BDI still struggles to surpass the 1,500 points level mark with
weak expectations for the forthcoming days. Even the tanker market in the quarter
was very soft with oversupply of ships and minimum tonnage available. We are not
bullish on the shipping business going forward primarily due to over supply of ships in
the bulk segment (net supply of 7.0% per annum) and even in the tanker segment
(net supply of 3.2% per annum) over CY11E to CY14E.
NAV (Shipping NAV + investment in GIL) at Rs 340 per share
The management indicated that the NAV for the company has fallen to Rs 340 per
share in the quarter (it was Rs 345 per share as on March 2011). The same was Rs
362 per share in December 2010, Rs 339 per share in March 2010 and Rs 320 in
June 2009. Both dry and tanker market has fallen about 5% to 50% YoY in the
quarter, the NAV for GESCO (including investment in GIL of ~ Rs 16bn) has fallen
QoQ. Usually the shipping asset prices moves after a lag of 2 to 3 months to shipping
freight rates. We feel NAV of the company to remain under pressure in subsequent
quarters.
Company continues to have a healthy cash balance
Company continues to have a healthy cash balance of Rs 22 bn in the balance sheet
which is ~20% of the balance sheet. Healthy cash balance is of utmost importance
for the company to make timely asset purchase and face the cyclicality of shipping
business. Healthy cash balance could positively impact the other income component
of the company with interest rates expected to move up.
Offshore segment - Greatship India Ltd. (GIL) - the next growth
driver for the company
After the de-merger of its offshore division in 2006, GESCO has promoted a wholly
owned subsidiary - Greatship India (GIL) - to capitalize on the growing opportunity in
the offshore segment. Incorporated in 2002, the company operations began in the
financial year 2006 - 2007. With global crude prices soaring most of the Global and
Indian oil majors are investing heavily in Oil and Gas exploration in search of new
reserves. With exploration & production activity going strong and likely to remain
firm in the coming years, we expect GIL to be the next growth driver for GESCO.
While still in infancy, the subsidiary offers high earnings visibility and opportunities in
the offshore sector. Besides this, value is expected to be unlocked from the offshore
division in the near future through an IPO of the offshore division.
Sale and Purchase contracts in the quarter
n Company has contracted to sell 3VLLCs which are currently under construction,
delivery of which is scheduled at end of FY12 and early part of FY13E. We believe
the company would have taken such a step citing poor tanker market going
forward. The impairment hit taken by company in Q4FY12 relates to these
three VLCCs.
n Sold and delivered a non-double hull Suezmax crude carrier of ~152,000 Dwt
n Took delivery of newly built dry bulk carrier of ~81,000 dwt
Current Shipping fleet of GESCO (2.61 mn dwt)
Category Nos Avg Average (yrs)
Crude Carriers 9 10.2
Product Carriers 16 9
Gas Carrier 1 20
Tankers total 26 9.8
Capesize 1 15
Kamsarmax 2 0
Panamax 1 16
Supramax 4 5.8
Handymax 1 14
DryBulk total 9 8.6
Total fleet 35 9.5
Source: Company
Capex programme of $ 55 mn in shipping and $450mn in offshore
segment over FY11 to FY13E.
As on June, 2011, the company has a total capex commitment of around $ 55 mn
for the shipping segment. Out of this, ~ $ 33 mn has already been advanced to the
yards as stage payments. This will result in addition to the tonnage of about 0.08 mn
dwt (1 Kamsarmax dry bulk carrier). The company also has a capex commitment of
$450 mn in the offshore segment.
Valuation and recommendation
We like GESCO's strategy of discarding old and single hull vessels judiciously which
enabled it to realize substantially greater asset price, which multiplied its profit generating
potential over years. The balance sheet position of the company is also very
healthy with current net debt to equity at a comfortable 0.45 x. With oil price above
$100 per barrel the offshore segment (GIL) is expected to add significant value to
the consolidated entity. Company is making significant capex of $55 mn in shipping
and capex of $450 mn in offshore over FY11-FY13E. Historically GESCO has traded
at a discount of 30% to its Net Asset Value or Asset Replacement Cost (December
07, was the only time it traded above its NAV). While major global players like
Teekay Corp and Frontline trade at a NAV of 80 % to 120 %. Using NAV (30%
discount - assigning average discount) we assign a value of Rs 205/ per share for the
shipping business. While we value the subsidiary at 6x FY12 EV/EBIDTA in line with
valuation of global offshore majors. It comes to around Rs 110 per share. We re iterate
ACCUMULATE rating on GESCO with a price target of Rs 315
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GE SHIPPING
PRICE: RS.254 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.315 FY12E P/E: 10.4X
Healthy operational performance
Fleet addition, healthy operational performance and higher other income
resulted in GESCO reporting above than estimated net profit of Rs 1628
million for the quarter increasing more than 100% QoQ but falling ~5%
YoY. Healthy performance was reported by the tanker and the product
segment in the quarter. However the bulk segment continues to be weak.
Over supply of ships continues to put pressure on the freight rates affecting
the performance of most of the ship-owners including GESCO. However the
offshore segment of GESCO (GIL) has shown healthy performance. IPO of
Greatship India Ltd (100% offshore subsidiary) is expected by end of FY12E
Key Financials highlights:
n GE Shipping Co (GESCO) reported healthy numbers with consolidated revenues
increasing ~6% YoY at Rs 6,818 million amidst weak shipping market globally
and increasing shipping fleet for the company
n The offshore segment reported revenue of Rs 2467 mn growing ~6% YoY
n Conolidated EBITDA was at Rs 2,812million translating into EBIDTA margin of
41.24%
n The Shipping division reported an EBIT margin of ~31% and offshore division
reported an EBIT margin of ~38%.
n The company had booked Rs 461 mn as profit on sale of ships (PSS) in the current
quarter. PSS on an average for the last 7 years has formed 33% of the PBT
of the company. We estimate PSS to be less than average of 33% (from FY05 to
FY11) for the company in FY12E and FY13E.
n Interest component has gone up significantly from Rs 650 million in the previous
quarter to Rs 735 million in the current quarter. The debt for the company has
gone up from Rs 53 bn in the previous year to Rs 60 bn in the current quarter.
n As a result the adjusted net profit of the company has increased to Rs 1628 million
more than 100% QoQ.
Tough phase for shipping business continues - Supply side pressure
continues
In the dry market, the BDI still struggles to surpass the 1,500 points level mark with
weak expectations for the forthcoming days. Even the tanker market in the quarter
was very soft with oversupply of ships and minimum tonnage available. We are not
bullish on the shipping business going forward primarily due to over supply of ships in
the bulk segment (net supply of 7.0% per annum) and even in the tanker segment
(net supply of 3.2% per annum) over CY11E to CY14E.
NAV (Shipping NAV + investment in GIL) at Rs 340 per share
The management indicated that the NAV for the company has fallen to Rs 340 per
share in the quarter (it was Rs 345 per share as on March 2011). The same was Rs
362 per share in December 2010, Rs 339 per share in March 2010 and Rs 320 in
June 2009. Both dry and tanker market has fallen about 5% to 50% YoY in the
quarter, the NAV for GESCO (including investment in GIL of ~ Rs 16bn) has fallen
QoQ. Usually the shipping asset prices moves after a lag of 2 to 3 months to shipping
freight rates. We feel NAV of the company to remain under pressure in subsequent
quarters.
Company continues to have a healthy cash balance
Company continues to have a healthy cash balance of Rs 22 bn in the balance sheet
which is ~20% of the balance sheet. Healthy cash balance is of utmost importance
for the company to make timely asset purchase and face the cyclicality of shipping
business. Healthy cash balance could positively impact the other income component
of the company with interest rates expected to move up.
Offshore segment - Greatship India Ltd. (GIL) - the next growth
driver for the company
After the de-merger of its offshore division in 2006, GESCO has promoted a wholly
owned subsidiary - Greatship India (GIL) - to capitalize on the growing opportunity in
the offshore segment. Incorporated in 2002, the company operations began in the
financial year 2006 - 2007. With global crude prices soaring most of the Global and
Indian oil majors are investing heavily in Oil and Gas exploration in search of new
reserves. With exploration & production activity going strong and likely to remain
firm in the coming years, we expect GIL to be the next growth driver for GESCO.
While still in infancy, the subsidiary offers high earnings visibility and opportunities in
the offshore sector. Besides this, value is expected to be unlocked from the offshore
division in the near future through an IPO of the offshore division.
Sale and Purchase contracts in the quarter
n Company has contracted to sell 3VLLCs which are currently under construction,
delivery of which is scheduled at end of FY12 and early part of FY13E. We believe
the company would have taken such a step citing poor tanker market going
forward. The impairment hit taken by company in Q4FY12 relates to these
three VLCCs.
n Sold and delivered a non-double hull Suezmax crude carrier of ~152,000 Dwt
n Took delivery of newly built dry bulk carrier of ~81,000 dwt
Current Shipping fleet of GESCO (2.61 mn dwt)
Category Nos Avg Average (yrs)
Crude Carriers 9 10.2
Product Carriers 16 9
Gas Carrier 1 20
Tankers total 26 9.8
Capesize 1 15
Kamsarmax 2 0
Panamax 1 16
Supramax 4 5.8
Handymax 1 14
DryBulk total 9 8.6
Total fleet 35 9.5
Source: Company
Capex programme of $ 55 mn in shipping and $450mn in offshore
segment over FY11 to FY13E.
As on June, 2011, the company has a total capex commitment of around $ 55 mn
for the shipping segment. Out of this, ~ $ 33 mn has already been advanced to the
yards as stage payments. This will result in addition to the tonnage of about 0.08 mn
dwt (1 Kamsarmax dry bulk carrier). The company also has a capex commitment of
$450 mn in the offshore segment.
Valuation and recommendation
We like GESCO's strategy of discarding old and single hull vessels judiciously which
enabled it to realize substantially greater asset price, which multiplied its profit generating
potential over years. The balance sheet position of the company is also very
healthy with current net debt to equity at a comfortable 0.45 x. With oil price above
$100 per barrel the offshore segment (GIL) is expected to add significant value to
the consolidated entity. Company is making significant capex of $55 mn in shipping
and capex of $450 mn in offshore over FY11-FY13E. Historically GESCO has traded
at a discount of 30% to its Net Asset Value or Asset Replacement Cost (December
07, was the only time it traded above its NAV). While major global players like
Teekay Corp and Frontline trade at a NAV of 80 % to 120 %. Using NAV (30%
discount - assigning average discount) we assign a value of Rs 205/ per share for the
shipping business. While we value the subsidiary at 6x FY12 EV/EBIDTA in line with
valuation of global offshore majors. It comes to around Rs 110 per share. We re iterate
ACCUMULATE rating on GESCO with a price target of Rs 315
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