Braemar Shipping Services Share Blog – Interim Results Year Ending 2018

Braemar Shipping has now released their interim results for the year ending 2018.

Revenues declined when compared to the first half of last year due to a £1.9M fall in technical revenue, a £1.2M decrease in logistics revenue and a £470K reduction in ship broking revenue. Cost of sales also declined but gross profit was £2M lower. Operating costs reduced by £1.5M and there were no restructuring costs, which were £1.5M last time. Partially offsetting this was a £709K increase in acquisition costs which meant that the operating profit was £186K higher. Finance costs increased by £61K and tax charges grew by £192K to give a profit for the period of £53K, a decline of £60K year on year.

When compared to the end point of last year, total assets declined by £5.6M to £149.1M, driven by a £4.6M decline in trade receivables, a £1.3M decrease in cash and a £1.1M fall in other receivables, partially offset by a £1.2M growth in prepayments. Liabilities also fell during the period due to a £776K decrease in derivative financial liabilities, a £622K fall in borrowings and a £508K decline in payables. The end result was a net tangible asset level of £17.2M, a decline of £3M over the past six months.

Before movements in working capital, cash profits declined by £327K to £3.5M. There was a broadly neutral working capital position compared to an outflow last time and after tax payments reduced by £780K, the net cash from operations was £2.5M, an improvement of £5.6M year on year. The group spent £380K on fixed tangible assets and £382K on acquisition fees to give a free cash flow of £1.8M. This did not cover the loan repayments of £622K, the purchase of own shares of £850K and dividends of £1.5M so there was a cash outflow of £1.1M and a cash level of £6.4M at the period-end.

The profit in the Ship broking division was £3.5M, a decline of £554K year on year, mainly due to falling tanker rates and low offshore rates. Transaction numbers were similar to the comparable period last year. The forward order book increased by 7% since the start of the year, however.

As expected the tanker markets continued to soften. The Baltic Dirty Tankers index dropped by 19% but while demand remained strong, the delivery of additional tonnage with not notable increase in scrapping reduced vessel earnings. In specialised tankers, there has been a continued expansion in the fleet of LPG and LNG vessels which put pressure on freight rates in the spot market and challenged demand for time charters. Fixture volumes remained steady and the teams maintained their level of earnings compared with the previous year.

As anticipated, the offshore market continued to experience tough conditions as global oil and gas exploration activity remained low although there are signs that the industry is resolving its vessel capacity issues. In dry cargo, the Baltic dry index improved year on year as commodity demand grew in the core markets and fleet growth moderated. Improved earnings for ship owners reduced the level of scrapping activity. The ongoing industrial reforms in China impacted industries like steel, aluminium, coal mining, chemicals and plastics so have been beneficial for dry bulk. Additionally, the growth in China’s demand for agribulks continued to support vessel demand.

The sale and purchase team concluded higher average value deals compared with the comparable prior year period, although the volume of second hand and demolition vessel transactions was lower. The period started well in the dry cargo market with strong activity, but as freight rates softened buyers started to hold back. There has been some improvement in the tanker market as buyers believe that ship values are unlikely to fall further but the lack of quality second hand vessels coming to the market continues to limit activity. Activity in newbuilding has significantly increased compared with the same period last year and the group expect this trend to continue throughout the rest of the year.

The loss in the Technical division was £360K, an improvement of £199K when compared to the first half of last year. The restructuring completed last year is delivering the expected cost savings and the division has won a number of new projects which started in September that are expected to contribute to an improved overall performance. The division continued to be impacted by low levels of oil and gas exploration activity, however. Although trading conditions in some areas continued to be quite difficult, there are encouraging signs in both the event and project led businesses.

The loss adjusting business reported increased profits in the period with an encouraging volume of new claims being awarded. The Far East, Middle East and Canadian operations continued to perform above expectations. In addition to the traditional Upstream Oil and Gas activity, our business saw an increase in the number of instructions associated with downstream, power and expert witness activities.

The surveying and marine consultancy saw high overall activity in the period. They also achieved a number of key wins and positive developments in recent months. The action taken by the business in the previous financial year to address its cost base is bearing fruit. The marine warranty surveying and engineering consultancy continued to be adversely affected by project delays and reduced activity. Their workforce was scaled back to match lower levels of demand and low tender pricing.

Braemar Engineering continued to be project focused and was held back in the period by ongoing project uncertainty. They undertook a programme of substantial reorganisation last year with cost savings being delivered in the current period. Deferred start of a significant project impacted the performance of the business but this project commenced in mid-September. Encouragingly the sales pipeline has significantly improved compared with the prior year; specifically related to smaller vessel conversions, bunkering projects and system upgrades and modifications. Also they have further opportunities secured or under development.

The profit in the Logistics division was £574K, a decline of £290K when compared to the first half of 2017. The port agency business remained strong while the business improvement programme in freight forwarding is ongoing. In the ship agency business, during the first half of the year the group built on the previous years’ business development activity in port agency hub services but this was offset to some extent by a lower market activity. They are continuing to develop their business internationally.

The freight forwarding business performance was lower than the prior year following market changes impacting the import business. Their business improvement programme across all service areas is being implemented and they are winning new business, however, which they expect to accelerate in the second half of the year.

After the period-end, in September, the group acquired NAVES, a German business which advises clients on corporate finance related to the maritime industry including restructuring advisory, corporate finance advisory, M&A, asset brokerage and financial asset management. The acquisition agreement provides for a consideration of between €24M and €35M. The initial consideration, payable on completion, is €14.8M, half of which was paid in cash and half in convertible loan notes; and €1.5M from the issue of 458,166 shares to the sellers. Three annual instalments of €1.4M will be payable to the sellers, half in cash and half in loan notes. Five annual instalments of €700K will be payable to management sellers through more loan notes. Finally an additional payment of up to €11M may be payable over the three years following completion dependent on performance. The business generated underlying operating profit of €3M last year.

Going forward, the group is well placed to deliver a stronger second half performance as the improving momentum continues. The principal drivers of this are the continuing recovery in the Technical division following the cost saving measures taken, new project work for the engineering business and a solid pipeline of marine and adjusting business. In addition, the second half will benefit from the initial five month contribution from Braemar NAVES. They are in line to meet their objectives this year.

Given the negligible profit, there is not much point looking at PE ratios for the current period. On the full year consensus forecast, however, the ratio is 13.9. After the interim dividend was reduced, the shares are yielding 3.3% but this increases to 4.9% on the full year forecast. At the period-end the group had a net cash position of £6.4M compared to £700K at the same point of last year.

Overall then, the group struggled in the period but there are signs that some of the markets are improving. Profits fell, net assets declined and although the operating cash flow improved, this was due to working capital movements and the cash profits decreased. The group still managed to produce some free cash flow, however.

The ship broking market has been affected by growing supply pushing rates down in the tanker market along with the subdued oil and gas market affecting the offshore business. The technical division is also being affected by the weakness in the oil and gas markets but new projects here are starting to improve the performance of the division. The logistics division is also struggling due to a poor freight forwarding market, but again some improvements are being seen. It does look as though the second half of the year will be better and with a forward PE of 13.9 and yield of 4.9% the shares look OK value. The acquisition looks a bit expensive though to me so I will keep a close eye here.

On the 7th September the group announced the acquisition of NAVES Corporate Finance, a corporate finance advisory business focused on the maritime industry to create a new division within the group known as the Finance Division. The consideration payable is €24M, rising to a maximum of €35M should earn-out payment terms and conditions be satisfied. The business is based in Germany and advised predominantly German clients on financing, restructuring and sale and purchase transactions.

A consideration of €19M, to be satisfied 50% in cash and 50% in convertible loan notes is payable, along with €1.5M to be satisfied by the issue of 458,166 shares to sellers on completion, €3.5M to be satisfied by the issue of convertible loan notes to management sellers in five equal annual instalments, and up to a further €11M payable to management sellers over a three year period which will be satisfied wholly in convertible loan notes.

Last year the business generated revenue and profit of €7.5M and €2.1M respectively. The board believe that the acquisition will be earnings enhancing during the current year.

On the 2nd February the group announced the acquisition of Atlantic Brokers, an established broker of physical and financial coal products for a total consideration of £4.8M. The business is an introducing broker for ICE coal and CME Clearport coal futures and options and the acquisition provides the group with the opportunity to expand into new markets using the physical shipping capability and market research of Braemar. As Atlantic is regulated by the FCA it will enable the group to move into the growth area of commodity derivatives broking.

The consideration of £4.8M is made up of £2.7M in cash and £2.1M to be satisfied by the issue of 804,426 shares. This looks interesting but I am staying clear until the debt cab be brought back down.


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