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GREAT EASTERN SHIPPING COMPANY
PRICE: RS.250 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.315 FY12E P/E: 11.2X
We met the management of GE Shipping Co (GESCO). We update our model to
incorporate FY11 annual report and latest developments for GESCO.
Shipping fleet of the company has declined - company has been
net seller of ships in the market
The company currently has a fleet of 35 ships aggregating 2.54 mn dwt. In FY12 till
date, the company took delivery of 2 Kasramax (each of 81,000 dwt) and a
Supramax of 57,000 dwt. The company also sold a very old tanker Jag Lakshya
1989 built having a capacity of 152,000 dwt. Unfortunately the company had cancelled
a new build order of 3 VLCCs, deliveries for which were scheduled in FY12
and FY13. This was primarily due to poor market conditions and poor shipping
market outlook. If we observe the trend for the last 3 years - the company has been
net seller of ships in the market.Under current circumstance where the shipping
market is estimated to remain weak atleast for the next two years, we expect
GESCO to resist from adding ships to its fleet - which is a prudent measure as many
ships currently are burning cash. We expect GESCO to focus more on the offshore
subsidiary.
Company would buy assets from the second hand market if opportunities
prevail
Management indicated that the company would buy assets from the second hand
market whenever they are able to get a good deal or whenever they get long term
business associated with the shipping asset.
Impairment hit of Rs 857 mn taken in FY11
With sustained fall in asset prices across segments (almost 50% in the last 2 years)
and little hope of any significant recovery, GESCO was prudent to provide Rs 857 mn
towards impairment in FY11 and which had significantly impacted the profits of the
company. Going forward we don't anticipate any further impairment as asset prices
are expected to recover from here in the longer run.
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 is very soft
with oversupply of ships and minimum tonnage available. We believe the current
spot market rates across most of the shipping segments are below the operational
cost of the ship. We are not bullish on the shipping business going forward primarily
due to oversupply 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) estimated at Rs 340 per
share
The management indicated that the NAV for the company has fallen to Rs 340 per
share in the June 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.
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.
GIL currently has a fleet of 17 offshore assets including two 350 feet jack rig. Both
the rigs are deployed with ONGC till FY12 end for ~$150,000 per day, while other
assets are deployed on medium to long term contracts for day rates varying from
$15,000 to $ 50,000 per day. GIL has a capex plan of $450 mn in the offshore segment
for FY12E and FY13E which includes addition of 6 assets.
With oil at $ 110 per barrel, GESCO is bullish on GIL
The demand for offshore assets is a derivative of energy prices. In CY10, the average
was $96 for Brent crude. With crude sustaining above $100 per barrel - we
believe at the current level of crude oil price, E & P companies are making healthy
returns. If oil even sustains at these levels (most likely), it would encourage oil E & P
companies to further invest in exploration which would give a thrust to oil exploration,
thereby improving the fortunes of offshore asset owners with better rates and
better utilization. GESCO is optimistic with the fortunes of GIL.
However IPO of GIL has been put on the back burner
With poor market conditions, GESCO has deferred the plans of the IPO of GIL which
we had anticipated to come by 2HFY12E. We now expect the IPO to come in FY14E
when GIL achieves some scale in revenues and profits.
Revenues and earnings of GESCO would be primarily driven by
GIL
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. We expect
GIL to contribute ~ 47% of the revenues and more than 60% of the earnings for
GESCO by FY13E. The increased contribution of GIL in the earnings could also be
attributed to weak shipping business.
Cash reserve has depleted due to huge investment in the offshore
subsidiary from internal accruals and also lower cash flow
generation - however company continues to have a healthy cash
balance
The cash balance of the company has declined from ~ Rs 22 bn in FY09 to Rs 13 bn
in FY11. Investment of the parent in 100% subsidiary - Greatship India ltd (GIL) - has
gone up from ~ Rs 3 bn in FY09 to ~ Rs 16 bn in FY11. Company continues to have
a healthy cash balance of Rs 13 bn in the balance sheet which is ~12% 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.
Despite the cyclical nature of its business, GESCO has one of the best dividend-paying
track records in the industry. Prudent management has enabled GESCO to ride
cyclicality in the business, sustain strong margins and deliver consistent profits. This
has also enabled the company to maintain its dividend paying track record. From
FY07 to FY11 (except for weak FY09) GESCO has maintained a dividend payout in
excess of 15% and has an attractive dividend yield.
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 1.0 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 $450mn for GIL
over FY11-FY13E. Historically GESCO has traded at a discount of 30% to its Net
Asset Value or Asset Replacement Cost. Using NAV (40% discount - assigning
higher discount) we assign a value of Rs 205/ per share for the shipping business.
While we value the subsidiary at 6 x 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 an unchanged price target of Rs 315. We expect the poor
performance of the shipping business would be more than compensated by the robust
performance of the offshore segment (GIL) and hence we are not changing the
target price.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GREAT EASTERN SHIPPING COMPANY
PRICE: RS.250 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.315 FY12E P/E: 11.2X
We met the management of GE Shipping Co (GESCO). We update our model to
incorporate FY11 annual report and latest developments for GESCO.
Shipping fleet of the company has declined - company has been
net seller of ships in the market
The company currently has a fleet of 35 ships aggregating 2.54 mn dwt. In FY12 till
date, the company took delivery of 2 Kasramax (each of 81,000 dwt) and a
Supramax of 57,000 dwt. The company also sold a very old tanker Jag Lakshya
1989 built having a capacity of 152,000 dwt. Unfortunately the company had cancelled
a new build order of 3 VLCCs, deliveries for which were scheduled in FY12
and FY13. This was primarily due to poor market conditions and poor shipping
market outlook. If we observe the trend for the last 3 years - the company has been
net seller of ships in the market.Under current circumstance where the shipping
market is estimated to remain weak atleast for the next two years, we expect
GESCO to resist from adding ships to its fleet - which is a prudent measure as many
ships currently are burning cash. We expect GESCO to focus more on the offshore
subsidiary.
Company would buy assets from the second hand market if opportunities
prevail
Management indicated that the company would buy assets from the second hand
market whenever they are able to get a good deal or whenever they get long term
business associated with the shipping asset.
Impairment hit of Rs 857 mn taken in FY11
With sustained fall in asset prices across segments (almost 50% in the last 2 years)
and little hope of any significant recovery, GESCO was prudent to provide Rs 857 mn
towards impairment in FY11 and which had significantly impacted the profits of the
company. Going forward we don't anticipate any further impairment as asset prices
are expected to recover from here in the longer run.
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 is very soft
with oversupply of ships and minimum tonnage available. We believe the current
spot market rates across most of the shipping segments are below the operational
cost of the ship. We are not bullish on the shipping business going forward primarily
due to oversupply 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) estimated at Rs 340 per
share
The management indicated that the NAV for the company has fallen to Rs 340 per
share in the June 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.
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.
GIL currently has a fleet of 17 offshore assets including two 350 feet jack rig. Both
the rigs are deployed with ONGC till FY12 end for ~$150,000 per day, while other
assets are deployed on medium to long term contracts for day rates varying from
$15,000 to $ 50,000 per day. GIL has a capex plan of $450 mn in the offshore segment
for FY12E and FY13E which includes addition of 6 assets.
With oil at $ 110 per barrel, GESCO is bullish on GIL
The demand for offshore assets is a derivative of energy prices. In CY10, the average
was $96 for Brent crude. With crude sustaining above $100 per barrel - we
believe at the current level of crude oil price, E & P companies are making healthy
returns. If oil even sustains at these levels (most likely), it would encourage oil E & P
companies to further invest in exploration which would give a thrust to oil exploration,
thereby improving the fortunes of offshore asset owners with better rates and
better utilization. GESCO is optimistic with the fortunes of GIL.
However IPO of GIL has been put on the back burner
With poor market conditions, GESCO has deferred the plans of the IPO of GIL which
we had anticipated to come by 2HFY12E. We now expect the IPO to come in FY14E
when GIL achieves some scale in revenues and profits.
Revenues and earnings of GESCO would be primarily driven by
GIL
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. We expect
GIL to contribute ~ 47% of the revenues and more than 60% of the earnings for
GESCO by FY13E. The increased contribution of GIL in the earnings could also be
attributed to weak shipping business.
Cash reserve has depleted due to huge investment in the offshore
subsidiary from internal accruals and also lower cash flow
generation - however company continues to have a healthy cash
balance
The cash balance of the company has declined from ~ Rs 22 bn in FY09 to Rs 13 bn
in FY11. Investment of the parent in 100% subsidiary - Greatship India ltd (GIL) - has
gone up from ~ Rs 3 bn in FY09 to ~ Rs 16 bn in FY11. Company continues to have
a healthy cash balance of Rs 13 bn in the balance sheet which is ~12% 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.
Despite the cyclical nature of its business, GESCO has one of the best dividend-paying
track records in the industry. Prudent management has enabled GESCO to ride
cyclicality in the business, sustain strong margins and deliver consistent profits. This
has also enabled the company to maintain its dividend paying track record. From
FY07 to FY11 (except for weak FY09) GESCO has maintained a dividend payout in
excess of 15% and has an attractive dividend yield.
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 1.0 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 $450mn for GIL
over FY11-FY13E. Historically GESCO has traded at a discount of 30% to its Net
Asset Value or Asset Replacement Cost. Using NAV (40% discount - assigning
higher discount) we assign a value of Rs 205/ per share for the shipping business.
While we value the subsidiary at 6 x 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 an unchanged price target of Rs 315. We expect the poor
performance of the shipping business would be more than compensated by the robust
performance of the offshore segment (GIL) and hence we are not changing the
target price.
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