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GREAT EASTERN SHIPPING COMPANY (GESCO)
PRICE: RS.220 RECOMMENDATION: BUY
TARGET PRICE: RS.270 FY13E P/E: 8.8X
Shipping markets globally continue to go through a bad phase and GESCO is
not immune to it. Shipping asset prices have declined by ~15% QoQ which
has resulted in the Net Asset Value per share falling from Rs329 per share to
Rs 280 per share QoQ. Good news is that, oil price continue to stay above
$100 per barrel which would help the offshore subsidiary - Greatship India
Limited (GIL) to do well and add significant value to the consolidated entity.
We value the shipping business at 40% discount to NAV which = Rs 170/ per
share, while we value the subsidiary at 6x FY13 EV/EBIDTA which comes to
~Rs100 per share. We re-iterate BUY rating on GESCO with a reduced price
target of Rs 270. The reduced target price factors in fall in asset prices in the
last one quarter and weakness in the shipping market. However we expect
the poor performance of the shipping business would be partly
compensated by the robust performance of GIL.
Highlights of the meet
Shipping fleet of the company has declined - company has been
net seller of ships in the market
The company currently has a fleet of 34 ships aggregating 2.62 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 three old tankers aggregating 2.3
lakh dwt. 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 asset.
Asset prices have fallen by ~15% in the last one quarter
Asset prices (especially second hand) across categories have fallen by more than
15% as ship owners are resorting to distress sales of shipping assets as they are not
able to cover even the operating cost associated with the asset. It is important to
note that some of the top shipping companies have filed for bankruptcy in the current
quarter.
Shipping NAV estimated at Rs 280 per share
With the fall in the second hand asset prices, the management indicated that the
shipping NAV for the company has fallen by ~15% from Rs 329 per share in the
September 2011 quarter (it was Rs 340 per share as on June 2011). Both dry and
tanker asset prices have fallen by about 15% in the quarter and we estimate the
shipping NAV for GESCO has fallen QoQ to Rs 280 per share. We feel NAV of the
company to remain under pressure in subsequent quarters.
Tough phase for shipping business continues - Supply side pressure
continues
In the dry market, the BDI still struggles to surpass the 2,000 points level mark with
weak expectations for the next 12 months. 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 CY12E to CY14E.
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
Company currently has a fleet of 19 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 $350 mn in the offshore
segment for FY12E and FY13E which would include 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 and CY11,
the average was $100 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 capital 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.
Segmental break up of revenues
(Rs mn) FY12E FY13E
Bulk 3,817 3,714
Tankers 5,067 5,684
Product carriers 5,693 5,750
LPG 246 252
Incharter shipping revenue 1,196 1,176
Offshore subsidiary (GIL) 11,711 14,700
Total 27,730 31,276
% from parent 57.8 53.0
% from GIL 42.2 47.0
Source: Kotak Securities - Private Client Research
Cash reserve has depleted due to huge capex 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 $350mn for GIL
over FY12E to 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 170/ per share for the shipping business, while we value the subsidiary
at 6 x FY13 EV/EBIDTA in line with valuation of global offshore majors. It comes to
around Rs 100 per share. We re-iterate BUY on GESCO with a reduced price target
of Rs 270 (earlier Rs.300). The reduced target price factors in fall in asset prices in
the last one quarter and weakness in the shipping market. However we expect the
poor performance of the shipping business would be partly compensated by the robust
performance of the offshore segment (GIL).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GREAT EASTERN SHIPPING COMPANY (GESCO)
PRICE: RS.220 RECOMMENDATION: BUY
TARGET PRICE: RS.270 FY13E P/E: 8.8X
Shipping markets globally continue to go through a bad phase and GESCO is
not immune to it. Shipping asset prices have declined by ~15% QoQ which
has resulted in the Net Asset Value per share falling from Rs329 per share to
Rs 280 per share QoQ. Good news is that, oil price continue to stay above
$100 per barrel which would help the offshore subsidiary - Greatship India
Limited (GIL) to do well and add significant value to the consolidated entity.
We value the shipping business at 40% discount to NAV which = Rs 170/ per
share, while we value the subsidiary at 6x FY13 EV/EBIDTA which comes to
~Rs100 per share. We re-iterate BUY rating on GESCO with a reduced price
target of Rs 270. The reduced target price factors in fall in asset prices in the
last one quarter and weakness in the shipping market. However we expect
the poor performance of the shipping business would be partly
compensated by the robust performance of GIL.
Highlights of the meet
Shipping fleet of the company has declined - company has been
net seller of ships in the market
The company currently has a fleet of 34 ships aggregating 2.62 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 three old tankers aggregating 2.3
lakh dwt. 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 asset.
Asset prices have fallen by ~15% in the last one quarter
Asset prices (especially second hand) across categories have fallen by more than
15% as ship owners are resorting to distress sales of shipping assets as they are not
able to cover even the operating cost associated with the asset. It is important to
note that some of the top shipping companies have filed for bankruptcy in the current
quarter.
Shipping NAV estimated at Rs 280 per share
With the fall in the second hand asset prices, the management indicated that the
shipping NAV for the company has fallen by ~15% from Rs 329 per share in the
September 2011 quarter (it was Rs 340 per share as on June 2011). Both dry and
tanker asset prices have fallen by about 15% in the quarter and we estimate the
shipping NAV for GESCO has fallen QoQ to Rs 280 per share. We feel NAV of the
company to remain under pressure in subsequent quarters.
Tough phase for shipping business continues - Supply side pressure
continues
In the dry market, the BDI still struggles to surpass the 2,000 points level mark with
weak expectations for the next 12 months. 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 CY12E to CY14E.
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
Company currently has a fleet of 19 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 $350 mn in the offshore
segment for FY12E and FY13E which would include 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 and CY11,
the average was $100 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 capital 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.
Segmental break up of revenues
(Rs mn) FY12E FY13E
Bulk 3,817 3,714
Tankers 5,067 5,684
Product carriers 5,693 5,750
LPG 246 252
Incharter shipping revenue 1,196 1,176
Offshore subsidiary (GIL) 11,711 14,700
Total 27,730 31,276
% from parent 57.8 53.0
% from GIL 42.2 47.0
Source: Kotak Securities - Private Client Research
Cash reserve has depleted due to huge capex 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 $350mn for GIL
over FY12E to 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 170/ per share for the shipping business, while we value the subsidiary
at 6 x FY13 EV/EBIDTA in line with valuation of global offshore majors. It comes to
around Rs 100 per share. We re-iterate BUY on GESCO with a reduced price target
of Rs 270 (earlier Rs.300). The reduced target price factors in fall in asset prices in
the last one quarter and weakness in the shipping market. However we expect the
poor performance of the shipping business would be partly compensated by the robust
performance of the offshore segment (GIL).
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