Shipping is a dangerous, highly cyclical business. Vessels brave storms, delivering cargoes around the globe; but investors risk a watery grave, too. Ship broker Braemar Shipping is the latest to run aground; a profits warning is testament to weak freight rates and growing doubts about economic growth.
- Profits warning
- Slow global growth
- Second-hand ship sales weak
- Weak freight rates hit commission
- Hopes for a second-half pick-up
- Fat dividend yield
The first hint of trouble surfaced in June when Braemar said that rates to charter dry bulk freighters would remain subdued - and lower rates mean lower commissions. It blamed new tonnage being delivered, swelling a world fleet already blighted by overcapacity. New vessels ordered before the credit crunch were still feeding through, and rates wouldn't improve until there were fewer ships or volumes increased.
Three months on, low rates continue to offset strong transaction volumes and Braemar's sale and purchase (S&P) of used ships is suffering, too. Admittedly, S&P is not the company's bread and butter, but Braemar warns that lower prices, fewer second-hand deals and a slippage in new ship deliveries will clip 18 per cent off shipbroking income for the 12 months to February. That puts the £61.6m of revenue generated from broking in 2010-11 - 49 per cent of the total - nearer £50.5m this financial year.
Admittedly, Braemar's spread of activities - offshore, tanker and dry bulk - is a strength and has most likely driven gains in market share. Besides, a 7 per cent increase in income from other marine services and acquisitions should mitigate some of the decline. But losses at marine engineering consultancy Wavespec and in-cargo loss-adjusting meant the so-called technical division made just £1.3m in 2010-11. So shipbroking will still generate around three-quarters of group operating profit in 2011-12 even if, as broker Charles Stanley expects, underlying profit slumps 34 per cent to £9.1m
BRAEMAR SHIPPING SERVICES (BMS) | ||||
|---|---|---|---|---|
| ORD PRICE: | 310p | MARKET VALUE: | £65.4m | |
| TOUCH: | 310-320p | 12-MONTH HIGH/LOW: | 568p | 308p |
| DIVIDEND YIELD: | 8.4% | PE RATIO: | 9 | |
| NET ASSET VALUE: | 306p | NET CASH: | £25.6m | |
| Year to 28 Feb | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 101 | 14.7 | 49.0 | 23 |
| 2009 | 127 | 16.2 | 56.7 | 24 |
| 2010 | 119 | 13.5 | 47.9 | 25 |
| 2011 | 126 | 13.2 | 48.4 | 26 |
| 2012* | 120 | 10.1 | 35.0 | 26 |
| % change | -5 | -23 | -28 | - |
Normal market size: 500 Matched bargain trading Beta: 0.4 *Charles Stanley forecasts | ||||
Further waves are likely, given the volatile nature of shipping. A quick glance at the 10-year chart for the Baltic Dry Index (BDI) tells it all. After slumping to just 1,000 in February, the index now sits near a calendar-year high above 1,800, driven by recovering 'capesize' charter rates (mostly oil tankers and bulk carriers) - not bad. However, track back three years and the index was in free-fall. Having hit a record 11,793 in May 2008, it bottomed out in December at 663, a 22-year low.
With about 85 per cent of world trade still seaborne, the BDI is a fairly accurate barometer of global economic health. The outlook was bright when we recommended buying Braemar's shares 16 months ago. Since then, prospects have turned pretty poor. The fact that China's Cosco briefly withheld payments on charter contracts agreed at boom-time prices hardly helps.
True, Charles Stanley expects Braemar to maintain its 26p dividend in the current year, underpinned by a sizeable cash pile. Still, that will bring the company's eight-year run of rising payouts to an end and the payout is covered just 1.3 times by forecast earnings - well below the comfort zone. The broker has also cut its 2011-12 pre-tax profit forecast by 22 per cent to £10.1m, and EPS to 35p, putting the shares on a PE ratio of nine, still only slightly less than larger rival Clarkson.
