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Great Eastern Shipping
Rising Exposure to Offshore and Strong Balance Sheet; Positive in Current Macro Environment
We forecast increasing revenue days and margin
expansion in offshore business to drive 18% CAGR in
consolidated earnings over F11-13e. In addition, the
company has a strong balance sheet (0.5x net gearing
for F13e), which positions it well to expand its fleet as
the shipping cycle recovers. Medium term positive.
Key Catalysts: 1) Management delivering on the growth
potential in offshore earnings given recent fleet addition and
relative strength in business environment. 2) Recovery in
global growth leading to higher demand and better shipping
rates, positive for earnings and asset prices and 3) Attractive
valuation at 0.5x PB and 5x F13e EV/EBITDA.
Key Investor Debates:
Debate #1: Has the shipping cycle bottomed out?
Market View: Shipping environment remains challenging
given muted demand, limiting potential earnings upside
Our view: We agree with consensus on the challenging
outlook for shipping. However, in our view, increasing
significance of offshore (offshore revenue days have
increased from will rise from 15% of total in F09 to around
40% in F12e) will support earnings momentum. Moreover,
ordering for new shipping assets have slowed down, medium
term positive for rates.
Debate #2: What will be GESCO’s margin trajectory over
the next 12-18 months?
Market View: While margins may have bottomed out, near
term improvement is less likely.
Our view: We estimate F12e margins to expand by around
700bps given increasing proportion of high margin offshore
business in total revenues and supported by gains from buy
out of a rig (this was in-chartered resulting in significant cost).
Risks to our Call: Weaker than expected earnings growth in
offshore business with slowdown in global E&P capex and
prolonged weakness in shipping business leading to higher
than expected decline in asset prices.
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