Braemar Shipping has now released their interim results for the year ending 2014.
There was quite a difference in fortunes for the separate sectors as the Technical and Logistics business both increased revenues but Shipbroking revenues fell by more than £5M and Environmental revenues fell by nearly £14M, due to the end of the contract for the Rena clean up. The technical division is now the most important by revenue taking over from the traditional revenue source of shipbroking. Overall revenues fell by £13.2M (although revenues actually increased by 3% if the Rena project was taken out of the equation) but cost of sales also fell to give a gross profit £4.2M lower than in the first six months of last year. An improvement in operating costs and lower amortisation (due to some assets from previous acquisitions being fully amortised) meant that operating profit was down £846K but a lower interest on the dwindling cash and a share of joint venture profit that more than halved were counteracted by a fall in tax paid to give a profit for the half year of £3.2M, down by £528K on the same period of last year. Disappointing, but not unexpected given the end of the Rena contract.
Overall assets collapsed by £11.2M from the end of last year which was almost entirely driven by a £16.2M fall in cash levels, somewhat mitigated by a £5.8M increase in trade receivables. Thankfully liabilities also fell as trade and payables were down £9.7M which meant that net tangible assets fell by £1.3M to £36.5M.
Cash profits were down by £1.7M on last year and were only £5.5M. On top of this there were adverse movements in both receivables and payable, which is being blamed on an increase in business for technical consulting and the timings of collections in other areas – and after tax was paid the net cash outflow from operations was a rather disturbing £10.1M. This was £14.5M down on the modest inflow in the first half of last year. The group also spent a small amount on acquisitions and intangible assets and did not benefit from a dividend from joint ventures (presumably due to the purchase of the remaining shares of Fred Olsen to take it in house). Dividend payments were as good as flat so the total cash outflow in the half year was £14.5M compared to an inflow of £229K last year. This is very disappointing and if it happens again, the group will have to think about approaching the bank for some loans (that has not happened for some time). Although apparently the first half is usually harder on cash flow due to staff bonuses and the final dividend being paid in this period.
The oversupply of shipping tonnage continued to weigh heavily on shipbroking income and this business suffered due to the low freight rates and vessel values even though the group maintained transaction volumes. There was some optimism towards the end of the half, however, as dry bulk rates seemed to pick up and significant newbuilding business was added. The technical division reported a good performance and the business provided expertise to several large, long term oil and gas projects as well as fulfilling the role of technical consultant to a number of LNG interests. The Logistics division saw a strong contribution from the ship agency and an improving logistics business and the environmental business returned to a more routine level.
Operating profit for Shipbroking in the first half was just £1.1M, down from £2.9M in the same period of last year due to the issues explained above. The encouraging signs also mentioned above resulted in a boost to the forward order book with more than 30 newbuilding and resale contracts secured. The tanker teams experienced low freight rates throughout the period and the Baltic dry index was on average 12% below that of the same period last year but although rates fell, volumes remained steady. The clean product tanker market was relatively firm and the group benefited from some good volumes in the Far East and the group opened a new tanker office in Oslo. The LNG and LPG departments won contracts which added to the forward book of business and should generate revenue for several years.
Dry bulk rates saw a marked improvement during the end of the period driven by Chinese iron ore imports, which are both increasing and also being imported from places further afield, tying up some of the bulker fleet. The centre for the dry bulk business was moved to the Far East during the period. The last few months have been very busy for the offshore desk which achieved a 20% increase in volumes. The spot market remained active, supported by a decent oil price which encouraged exploration activity. The offshore desk was also busy in the sale and purchase market, securing contracts for several newbuilding re-sales during the period.
The Technical division did well during the period and the operating profit of £3M was £1.3M higher than the first half of last year. It is expected that this momentum will continue into the second half of the year due to the involvement in long term projects but the market is likely to soften somewhat due to seasonal variation in offshore activities in the Far East. The improvement over last year was driven by the marine warranty surveying and engineering consultancy business in the Far East who have benefited from some large energy projects in the region and the business recently won significant new business here. Hull and machinery damage surveying saw an increase in the number of assignments carried out with a corresponding increase in revenue and the offices in Dubai and the Far East performed particularly well. Energy loss adjusting performed steadily with improved trading on last year and the group recently opened up a new office in Dubai. In consultant engineering the group commenced work on a three year contract for the design and site supervision of six LNG carrier new buildings and since the end of the period the group also won additional business on the world’s largest floating LNG production project.
Logistics performed fairly well with an operating profit of £1.3M £200K higher than in the first half of last year. The UK agency business benefited from increased port calls and a multi-year hub agency contract with an oil major which commenced in the second half of last year, although the market does remain volatile. In Singapore the agency business was very busy. The freight forwarding performance improved on last year with a general rise in economic activity and the board expect a similar performance in the second half of the year. The tours business had a better cruise ship season than last year.
The profit brought in by the Environmental business fell by £1.8M to be just £200K which represents a more routine level of activity without any major ongoing project work following the conclusion of the Rena clean up project. So far this year activities have been steady and barring any major event, profit will be broadly similar in the second half of the year.
During the six months the group acquired the remaining 20% of Fred Olsen Freight Ltd that it did not already own for a consideration of £235K. There was also £113K of payments being made due to deferred consideration for acquisitions made in previous years.
Going forward there does seem to be a degree of optimism in some shipping markets that a cyclical recovery is underway, in particular in an increase in dry bulk chartering rates. Therefore the board expect the shipbroking business to produce an improved performance in the second half and the other three divisions to post similar results to the first half of the year. The expected up-turn in shipbroking will be welcome indeed as this business has really been battered over the past few years to the extent that both the consulting arm and the forwarding sector are now more important profit wise. On the face of it, this is a disappointing set of results. Revenues and profits were both heavily down and it is becoming apparent how important the Rena contract was. Net assets fell and there was a cash outflow of £14.5M. Having said that, there is a real air of optimism around ship broking at the moment and the increased investment into the Technical sector will give Braemar a sound footing when the recovery does happen. The dividend remained unchanged and at current share prices gives a 4.7% yield for the year, which is excellent if it is maintained. I will be holding on here to see how the group fares at the end of the year.
On 17th January, the group issued a management statement covering the period from the half year point to date. It was announced that as expected, ship broking performance was higher than in the first half and the logistics and environmental divisions both performed to expectations. Braemar Technical performed strongly, driven by growth of the offshore energy market in Asia. Unfortunately this was offset by slower than expected contract awards at Braemar Casbarian in the US which is expected to result in group profits for the year being modestly below expectations. So, a gentle profit warning then is a disappointment, I hope it doesn’t get any worse.
On 20th March, the group announced that it had disposed of Casbarian, the US based technical services subsidiary. The business made a loss of £400K last year and the group made a loss on disposal of £900K. It seems that they did not want to provide the resources to turn the business around, which is a bit of a shame.