Q3FY12 Result update Great Eastern Shipping Buy Target Price: Rs308 :: Centrum

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Q3FY12 Result update

Great Eastern Shipping

Buy

Target Price: Rs308

CMP: Rs265             

Upside: 16%

Lower freight rates to add pressure on margins  

Great Eastern Shipping’s (GE Shipping) Q3FY12 results were a mixed bag. While revenue and EBITDA were inline, higher depreciation and interest led to lower-than-expected profitability. Movement in foreign currency led to restatement of dollar denominated loans and in accordance with AS-16 Rs308mn was accounted for in interest cost during Q3 (Rs949mn for 9mFY12). We have revised our estimated to factor in the higher depreciation and interest cost as well as factoring in the provisions for impact of changes in the foreign exchange. The company is focused on growing its offshore business under Greatship (India), and has an order book of four vessels, including a 350 feet jack-up rig. We believe the offshore business would be the major growth and profitability driver for GE Shipping, going forward. 

m  Q3 results mixed: Consolidated revenue grew 35.1% YoY to Rs7,514mn, 6.6% above our estimate. EBITDA grew 28.0% YoY to Rs2,605mn, just 2.1% below our estimates, however PAT (adjusted) at Rs665mn, was down 43.4% YoY and 36.9% below expectations. Its shipping revenue increased 12.7% YoY to Rs4,895mn, while offshore revenues grew 60.8% YoY to Rs3,376mn on back of 2 vessel addition.

m  Shipping business witness margin pressure on declining freight rate: Consolidated EBIDTA margins declined 193bp YoY and 504bp QoQ to 34.7%. Offshore EBIT though jumped 56.0% YoY to Rs1,114mn, its margins declined 101bp YoY to 33.0. Shipping EBIT (adjusted for reversal of impairment) was down 28.9% YoY to Rs814mn, while its EBIT margins declined 971bp YoY to 16.6% on the back of lower freight rates and higher operating costs.

m  Global oversupply adds pressure to freight rates: Freight rates continued to remain under pressure in both the crude and dry bulk segments, impacted by the global slowdown in demand combined with record new-vessel deliveries especially in the dry-bulk segment. While the average time charter yield (TCY) remained stable in the crude tanker segment, up 3.7% YoY, it declined 3.7% YoY in product tanker segment. Average TCY declined 20.0% YoY to $16,114 per day in the dry-bulk carrier segment.

m  Maintain Buy, target price rolled over to FY14 (Rs308): We have rolled forward our sum-of-the-parts (SOTP) valuation of GE Shipping to FY14. While we have valued the shipping business at Rs255/share (0.7x FY14 standalone BV, we value offshore business at Rs54/share (6.5x FY14E EBITDA) to arrive at our revised target price of Rs308 (earlier Rs311).

Thanks & Regards, 

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