COMPANY UPDATE Amit Agarwal agarwal.amit@kotak.com +91 22 6621 6222 GE SHIPPING COMPANY (GESCO) PRICE: RS.312 RECOMMENDATION: BUY TARGET PRICE: RS.380 FY15E P/E: 6.5X Shipping markets have stabilized - crude continues above $100/ barrel After a healthy run in Q3FY14, most of the shipping indices have settled with Baltic Dry Index at ~1600 points and Baltic tanker index at ~700 points. With depleting global shipbuilding order book and improving trade, we expect shipping markets to improve in FY15E. With brent above $100/barrel, we expect offshore market to remain robust with GESCO continuing to focus more on the offshore subsidiary - Greatship India Limited. Summary table (Rs mn) FY13 FY14E FY15E Sales 30,066 31,108 33,443 Growth (%) 1.7 3.5 7.5 EBITDA 11,587 13,843 14,982 EBITDA margin (%) 38.5 44.5 44.8 PBT 5,842 6,943 7,882 Net profit 5,550 6,457 7,331 EPS (Rs) 36.4 42.8 48.6 Growth (%) 72.9 17.5 13.5 CEPS (Rs) 67.1 85.9 93.0 BV (Rs/share) 436 471 507 Dividend / share (Rs) 7.5 12.0 12.0 ROE (%) 8.4 9.1 9.6 ROCE (%) 5.4 7.3 7.6 Net cash (debt) (16,864) (20,854) (22,555) NW Capital (Days) (25.3) (24.7) (23.5) EV/EBITDA (x) 5.6 4.9 4.7 P/E (x) 8.6 7.4 6.5 P/Cash Earnings 4.7 3.7 3.4 P/BV (x) 0.7 0.7 0.6, Kotak Securities - Private Client Research Post improvement in asset prices in th last 6 months, the stock currently trades at a steep discount to its NAV of Rs 532/ share ( Rs 311 of shipping and Rs 228 of offshore). Historically, GESCO has traded in a range of 0.5 to 1 x of it NAV. We assign a value of 0.7 x of NAV to GESCO which is close to the mid point of its trading range on the back of 1) Stable shipping markets 2) Improvement in asset prices 3) Healthy crude prices and 4) Strong BS. Recommend BUY on GESCO with an increased price target of Rs.380 (earlier Rs.330). Supply side pressure has eased in across segments - markets should be stable in FY15 In the dry bulk market, the order book to fleet ratio has improved to 23.5% from 38% YoY, while in dirty tanker segment the ratio has improved to 17% from 24% YoY. With demand improving especially from China for bulk and for crude from Europe and US, the shipping markets have improved in the last two quarters. Currently we estimate scrapping to be equal to or more than new order placement which is positive for the sector. With continuous reduction in global shipping order book, we expect stable shipping market in FY15 with shipping companies including GESCO reporting improved financial performance. Reduction in global shipping order book Mn DWT Dec-12 Dec-13 Segment Tonnage Order book % Tonnage Order book % Bulk 651 247 37.9 682 160 23.5 Tanker 372 88 23.7 373 64 17.2 Product 56 24 42.9 56 19 33.9 Container 206 27 13.1 209 37 17.7 Baltic dry index Baltic tanker index Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 2
Quarterly Time Charter Yield for GESCO (TCY in $/day) TCY ($/day) Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Crude Carrier 15,888 17,534 16,132 14,142 13,957 Product Carrier 16,111 17,135 18,825 14,429 16,036 Bulk Carrier 8,996 7,827 10,289 9,745 13,407 Assets prices have also improved in the last 3 to 6 months Asset prices across segments have improved between 2 to 15 % which indicates recovery and renewed interest in the sector. New build asset prices across segments ($ mn) VLCC Capesize Suezmax Aframax Dec-13 93 56 63 51 Oct-13 90 49 56 47 Dec-12 74 46 57 38 Jun-11 81 52 58 40 Mar-11 83 58 59 43 Dec-10 90 59 62 47 Oct-10 98 59 69 55 Oct-09 120 66 85 69. Current shipping fleet of GESCO - 2.42 mn dwt Segment No's Avg Average (yrs) Crude Carriers 8 11.2 Product Carriers 13 8.5 Gas Carrier 1 24.0 Tankers total 22 10.5 Capesize 1 18.0 Kamsarmax 3 3.0 Supramax 4 7.3 Dry Bulk total 8 8.5 Total 30 10 GESCO current shipping fleet consists of 30 ships aggregating 2.42 mn dwt (increased from 28 ships and 2.32 mn dwt YoY). A year back the company was also not having any capex in the shipping segment which currently stands at $ 205 mn for 7 ships. Current order book of GESCO in shipping segment Segment Type of ship No's Delivery date Product tanker Medium range 1 Q4FY16 Dry Bulk Kamsarmax 2 H1FY16 Dry Bulk Kamsarmax 3 Q2/Q3 CY16 Gas carrier (second hand) Very large 1 H1FY15 Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 3
GESCO is focusing on 100% offshore subsidiary - Greatship India Limited (GIL). Current fleet of GIL Segment No's 350 feet Jack up 3 PSV 4 AHTS 9 MPSSV 2 ROV 6 Source; Company Company currently has a fleet of 24 offshore assets including three 350 feet jack rig. Rigs are deployed with ONGC/Private oil explorer on long term contracts, while other assets are deployed on medium to long term contracts for day rates varying from $15,000 to $ 50,000 per day. Management indicated that GIL has completed most of its capex and future capex would be limited for the subsidiary. Till date GESCO has made equity investment of ~Rs 18 bn in the subsidiary. Company currently has one jack-up rig on order which would be delivered by CY15. Revenues and earnings of GESCO would be primarily driven by GIL With oil prices staying above $100/barrel, we expect the exploration & production activity to remain strong in near future, which would drive the revenues and profitability of GIL. We expect GIL to contribute ~ 51%/53% of the revenues and more than 60% of the earnings for GESCO in FY14E/FY15E. We expect the performance of the subsidiary to compensate the weak performance of the shipping segment. Brent crude is sustaining above $100/barrel 115 110 105 100 95 90 We expect profitability and return ratios to improve With improving profitability and asset turnover we also estimate the return ratios of the company to improve from here. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 4
Trends in ROE and ROCE for GESCO Healthy Balance Sheet and Dividend yield - act as valuation support GESCO continues to have a strong balance sheet with cash balance of Rs 25.7 bn and investments of Rs 14 bn. Put together both form more than 25% of the BS. Also dividend yield of the company is on the healthy side. In FY14 till date company has announced an interim dividend of Rs 8.5/share. Dividend yield Year PAT Dividend Payout Mkt price Dividend (Rs Mn) (Rs mn) (%) (in Rs at Yield Year end) (%) FY07 9,074 1,751 19.3 203 5.7 FY08 14,535 2,284 15.7 377 4.0 FY09 14,178 1,218 8.6 187 4.3 FY10 5,176 1,218 23.5 295 2.7 FY11 4,733 1,223 25.8 270 3.0 FY12 3,210 610 19.0 250 1.6 FY13 5,550 1,142 20.6 240 3.1 Source; Company Company recently completed a share buyback Details of the buyback Amount earmarked for Buyback Rs.2790 million Closure of buyback 28th Feb,2014 No of shares bought back (FV = Rs 10) 1,545,019 Amount spend on buyback Rs.413 mn % of buyback 14.8 Reduced equity of GESCO Rs.1508 mn Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 5
We recommend BUY on GE Shipping with a price target of Rs.380 Valuation and recommendation: Performance of GESCO would be driven by stable shipping markets and healthy offshore market. We estimate the company to report earnings CAGR of 15% over FY13 to FY15E at Rs 6.48 bn in FY14E (EPS = Rs 42.8) and Rs 7.33 bn in FY15E (EPS = Rs 48.6 bn). Post improvement in asset prices in the last 6 months, the stock currently trades at a steep discount to its NAV of Rs 532/ share ( Rs 311 of shipping and Rs 228 of offshore). Historically, GESCO has traded in a range of 0.5 to 1 x of it NAV. We assign a value of 0.7 x of NAV to GESCO which is almost the mid point of the trading range on the back of 1) Stable shipping markets 2) Improvement in asset prices 3) Healthy crude prices and 4) Strong BS. Recommend BUY GESCO with a price target of Rs 380. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 6