Braemar – interims due soon, now looking for a 20% uplift to 365p before 442p next year
Did you know that in the short to medium-term fossil fuels will represent almost 40% of freight volumes.
By the end of last year the world trading fleet numbered some 63,000 vessels, with around 2.1bn of deadweight tonnage. That is double the figure of 2007.
The world fleet grew around 3% last year and is expected to see overall growth by 6.4% over the next four years.
The cargo that ships carry will change enormously in the longer-term, however, there will still be a huge need for transport of hydrogen, ammonia, or whatever other low carbon fuels that could replace fossil fuels to meet energy needs.
As far as Braemar is concerned they see that as a huge opportunity, and accordingly it is investing in its renewables offering and the group’s capacity to serve those trades in the physical and paper markets.
But who noticed this?
Scant attention was given to the announcement last Thursday afternoon that the company has just launched a ten-strong Natural Gas dealing desk to add to its important Securities division.
Braemar's Natural Gas desk will primarily deal in EU gas, UK NBP gas, and LNG.
It will also broke EUA (Carbon ETS) allowances.
The group states that the desk serves a sophisticated and demanding client base, including many of Europe's leading energy companies as well as banks and hedge funds.
It states that the group’s new brokers are well-known in the markets for their long track record of success.
Braemar Chief Operating Officer Tris Simmonds commented that,
“Providing access to more energy products was always part of our growth strategy, there are clear synergies with our shipping desks and our clients need greater market access. We’ve brought in a talented young team with a good track record. They will provide us with a strong platform to add more products.”
The group considers that it is responding to a clear need in the Energy market for assistance navigating volatile rate changes and price fluctuations.
Natural Balancing Point
I am grateful to S&P Global for the following description –
‘The UK NBP gas market is Europe's longest-established spot-traded natural gas market, in operation since the late 1990s. The price of UK NBP is widely used as an indicator for Europe's wholesale gas market alongside the more recent, but now more liquid, Dutch TTF.
NBP stands for National Balancing Point. In the NBP model gas anywhere in the country within the national transmission system counts as NBP gas. This brings buyers and sellers together to simplify trade.
The UK gas market has a wide range of gas supplies: the UK's own gas production, piped imports from Norway and Continental Europe, storage, and liquefied natural gas tanker supplies from global markets. Declining North Sea production over the past decade has seen a growing increase in the proportion of supply from imports.
The NBP gas market allows a wide range of participants to buy and sell: oil and gas producers, LNG suppliers, utility companies, power generators, industrial users and financial traders. Gas can be traded over-the-counter between participants and through brokers, or on exchanges.
A variety of delivery periods are traded in the market, including: within-day (for same day delivery), day-ahead (for next day delivery), months, quarters, summers (April to September) and winters (October to March) and annual contracts.’
A Natural Fit
This move looks to be an absolutely natural fit into the Braemar Securities business, where it has grown both its markets and its revenues in the last few years.
It will work alongside the Dry Cargo FFA, the Wet FFA and the Coal (physical and derivatives desks.
A forward freight agreement (FFA) is a financial forward contract that allows ship owners, charterers and speculators to hedge against the volatility of freight rates. It gives the contract owner the right to buy and sell the price of freight for future dates.
The Group’s Business
The company was formerly known as Braemar Shipping Services Plc and changed its name to Braemar Plc in September 2022.
It is a grouping of expert advisers in shipping investment, chartering and risk management.
Its integrated teams deliver creative solutions and tailored support for customers around the world, placing it at the forefront of its industry.
Braemar (LON:BMS) is one of only two publicly traded UK Shipbroking companies.
It is a leading global player with offices in London, Singapore, Geneva, Dubai, Athens, Aberdeen, Hamburg, Beijing, Shanghai, Melbourne, Mumbai, Perth and Houston.
That global presence means that it is well-positioned to serve key industry players across different time zones and cultures.
Its operations are diversified across Tankers, Dry Cargo, Sale and Purchase, Renewables, Financial and Offshore to generate a reliable, less cyclical income stream.
The times they are a-changing
The disposals of Cory Brothers, and of Wavespecs, the sale of the AqualisBraemar non-core investment and the restructured consideration for Braemar Nave – all are marked important moves in the group’s new strategy.
They also meant that there had been an elimination of the group’s loss-generating activities.
Those moves were topped up by the ‘rebranding’ through the dropping of the ‘Shipping Services’ tag from the group’s corporate title.
The ambition is to double the size of the group’s business by 2025 – in fact it could be achieved a lot earlier.
The last trading year
At the end of August, the group declared its results for the year to end February 2022.
Trading in the Shipbroking business was very strong with revenue and profits significantly ahead of expectations and the previous year.
The strong performance reflected good market conditions and a return from the steps made to increase the breadth and focus of its Shipbroking activities.
The Dry Cargo, Gas and Container sectors performed particularly strongly.
However, Specialised Tankers made a slower recovery, while Deep Sea Tankers has only recently returned to better rates.
The resurgent interest in the shipping industry from both a lending and equity investment point of view meant that the Corporate Finance desk also performed well.
Summary Income Statement 2022
The strong trading and higher revenues have meant that all group profit measures increased significantly.
Statutory operating profit over the last full trading year increased by 44% to £9.5m (2021 restated*: £6.6m).
Underlying operating profit increased by 31% to £10.1m (2021 restated*: £7.7m).
Statutory reported profits for the year were up 209% to £13.9m (2021 restated*: £4.5m).
Proven history, promising future
By streamlining its key services towards Shipbroking and maintaining a strong, clear Balance Sheet, the group is focused on creating sustainable growth that delivers long-term returns for its shareholders.
Its new, future-facing strategy is clearly designed toward sustainable profit and growth.
It has refreshed the management team and successfully divested any non-core businesses to lessen its liquidity risk while at the same time strengthening its Balance Sheet.
Broker’s Views – higher valuations based on promising dividends
Analyst Ian McInally at Cenkos Securities rates the group’s shares as a Buy.
Describing the company as ‘a mainstay in worldwide shipping’ he suggests that it provides good exposure to global shipping markets and ongoing growth in the maritime markets.
For the current year to end February 2023 his estimates are for sales to rise from £101.3m to £127.8m, driving underlying pre-tax profits to a more than doubled £19.5m (£8.9m), while shooting earnings up to 51.0p (27.9p) per share.
I note that he only predicts a small rise in dividends to 11.3p (9.0p) per share, perhaps reflecting the group’s need to retain its strong pool of available capital as its expansion programme progresses.
For the coming year he cautiously pencils in £120.1m revenues, £16.0m profits, and 39.3p earnings but with an advancing 12.9p dividend per share.
On a dividend discount model alone McInally values the shares of Braemar at 470p.
At Edison Investment Research analyst Andy Murphy has lifted his valuation to 520p a share, again based on dividend expectations.
Emphasising the clearing of non-core activities, his estimates for this year are £130.6m revenues, £19.1m pre-tax profits, 46.3p earnings and a 12.0p dividend per share.
Looking forward, he too sees a slight fallback in business, with £112.5m sales, £15.9m profits, 36.9p earnings and an increased dividend of 13.5p per share.
The soon-to-be-reported interim results may well be witness to various estimates being upgraded.
My View – the potential to rise to 442p and still look cheap
The internal audit of its group activities and the re-shaping of its Growth Strategy is beginning to really show fruit.
The news that it has now opened a specific Natural Gas dealing desk in its Securities side, shows to me its ability to ‘play to the market’ in its client offering.
I cannot see any reason why this group’s shares are now not trading at least 20% higher than Friday night’s closing price of 303p.
Proceeding further to the February year end I would then be anticipating a movement well above the 365p level.
Remember the strategic aim is ‘to double the business by 2025’ – I am convinced that at the current rate of progression that could occur early in 2024.
The shares at this level really are an excellent growth purchase.
(Profile 05.12.19 @ 185p set a Target Price of 250p*)
(Profile 20.05.20 @ 99p set a Target Price of 150p*)
(Asterisks * denote that Target Prices have been achieved since Profile publication)