Braemar Shipping has now released its interim results for the year ending 2017.
Revenues declined when compared to the first half of last year due to a £6.9M reduction in technical revenue and a £2.5M fall in shipbroking revenue. Cost of sales also declined but nowhere near as much to give a gross profit £7.4M lower. Operating costs fell by £1.6M, reflecting a reduction in the size of the board, amortisation of acquired intangibles reduced by £380K and there were no restructuring costs which accounted for £491K last time to give an operating profit that decreased by £5M. The tax charge declined by £1.3M to give a profit for the period of £113K, a fall of £3.8M year on year.
When compared to the end point of last year, total assets increased by £1.2M driven by a £2.4M growth in receivables, a £1.8M increase in deferred tax assets and a £572K growth in goodwill, partially offset by a £3.4M decline in cash. Total liabilities also increased during the period as a £5M growth in borrowings and a £4.3M increase in pension liabilities following a reduction in bond yields due to the interest rate cut, was partially offset by a £1.3M decline in payables and an £897K decrease in current tax payables. The end result was a net tangible asset level of £21.7M, a decline of £6M year on year.
Before movements in working capital, cash profits declined by £5.7M to £2.4M. There was also a cash outflow from working capital but this was lower than last year and after tax payments increased by £303K there was a net cash outflow of £3M from operations, an improvement of £1M year on year. The group spent £349K on tangible assets and £166K relating to long-term receivables to give a cash outflow of £3.6M before financing. They took out a net £5.1M in new borrowings to pay for the £M of dividends that they couldn’t really afford so there was a cash outflow of £3.8M and a cash level of £8.1M at the period-end.
The operating profit in the Shipbroking division was £4M, a decline of £600K year on year. Rates in most shipping markets fell during the period. The teams continue to generate healthy transaction volumes but softer freight rates resulted in the decline in profit. A sustained weaker sterling exchange rate against the US dollar will benefit earnings, although the full beneficial impact will not be evident until next year due to the rolling hedging policy.
After a strong year last year, tanker freight rates softened quite significantly towards the end of the first half as new tonnage came into the market and port congestion eased. Nevertheless, oil and refined product trade flows remained strong and the teams performed well retaining a high market share and increasing deep sea transaction volumes.
The freight rates in the dry bulk market were depressed due to the continued over-capacity and weaker commodity demand in the core markets. The team concluded a higher volume of transactions although low freight rates led to weaker profits. A cost control programme has already been actioned but more recently the Baltic Dry Index has risen and now stands at 842 compared with 332 in March 216 and an average of 600 during the first half of the year. The increase is mostly felt in the Cape sector which should achieve an improved performance.
As expected the offshore department continued to experience low levels of activity as a result of reduced global oil and gas exploration and production development activity. The sale and purchase department concluded a significantly higher number of transactions for both second hand and demolition vessels but average vessel values on concluded business were lower commensurate with the market.
The operating loss in the Technical division was £2.1M, a detrimental movement of £5.2M when compared to the first half of last year as it suffered from the slowdown in oil and gas exploration activity. The team is implementing a restructuring programme to cut costs which incurred one-off costs of £1.5M following project completions and restructuring. This achieved office consolidation, reduced divisional headcount and annualised cost savings of around £3.2M.
Braemer Offshore was adversely affected by project delays and reduced activity in common with all regional service providers in the energy sector. Braemar Engineering concluded its three-year project for the design, site supervision and crew training for six LNG carriers. Following completion of this project and the current downturn in the oil and gas sector, the group restructured the team in the UK and relocated staff to the London office. They are focused on growing their engineering activity from both their offices in Houston and London.
Braemar Adjusting faced challenging conditions in the UK, US and Canadian offices although they have received recent instructions which should see an improvement in H2. The offices in the Middle East and Singapore have performed well with high staff utilisation. Braemar incorporating the Salvage Association continued to diversify its service offering but overall experienced a lower level of activity in the period. The number of instructions was similar to the same period last year but they experienced lower average incident value.
Braemar Howells carried out a routine level of work with no significant project work undertaken. They focused on the development of their UK operations, particularly retained services and framework agreements with major customers.
The operating profit in the Logistics division was £848K, a decline of £116K when compared to the first half of 2016. During the period the ship agency business generated growth through winning several global clients which has led to increased ship numbers. Despite a difficult market they are continuing to build their activities by expanding their presence in North America and the Far East as well as continuing to grow in Europe.
The freight forwarding business held its own in challenging markets. Freight rates were volatile, including an adverse impact from fluctuating exchange rates. They maintained their existing contract business and saw an improvement in contract cargoes, though pressure in the oil and gas sector continues to limit financial growth. They have invested in new logistics teams in Houston, Atlanta and Singapore and are starting to see growth in the client base in these areas.
The sale of the Baltic Exchange to the Singapore Exchange is expected to complete during the second half of the year. The group holds a 2% stake in the Baltic Exchange and if the transaction completed they would realise a one-off gain of £1.5M.
Going forward, the restructuring programme along with the shipbroking forward order book gives the board confidence for an improved performance in the second half so their expectations remain unchanged for the year as a whole.
At the current share price the shares are trading on a PE ratio of 14.5 which falls to 13.7 on the full year consensus forecast. After the interim dividend was maintained at the same level, the shares are yielding 8.5% which is expected to remain the same for the full year. At the period-end the group had a net cash position of £700K compared with net debt of £3.1M at this point of last year.
On the 23rd January the group issued a profits warning. The underlying pre-tax profit is now expected to be within the range of £3M to £3.5M. This excludes a one-off gain from disposal of its interest in the Baltic Exchange of £1.7M and one-off costs associated with restructuring of about £2.7M. This lower forecast is largely attributable to the Technical division and to a lesser extent, the freight forwarding element of the logistics business. The shipbroking division has traded well, met its objectives and is on track to meet expectations for the year.
The technical division has continued to underperform. The previously outlined weakness in the oil and gas sectors has worsened further than originally anticipated, impacting the division in several ways with a marked deterioration in replacement work. Accordingly they have significantly expanded the management actions originally announced to realign the business. This restructuring programme is now substantially complete and has resulted in significant reductions in its ongoing cost base. It is expected that the annualised cost savings will be over £6M for the next financial year.
Within the logistics division, the port agency business continued to perform strongly, although the freight forwarding business was affected by a reduction in market activity. Overall the logistics division performance has fallen but this will only have a small impact on the overall group results.
Sensibly the group has cut the final dividend payout (long overdue in my opinion) but after the share price fall, the shares are still yielding 5.7%. The group are not in any danger of going bust quite yet though – there is a net cash position of £1.6M at the end of December and they have an unused debt facility of £30M.
Following this profit warning, the shares are trading on a forward PE ratio of 17.6 which seems a bit expensive given the uncertainty surrounding the technical division. It seems that the crux of the problem is that the large LNG carrier project is coming to an end and there is just not enough work out there to replace it. The group have reacted quickly which should help costs going forward but also signals that the board see the issue as long-term. Overall, this is not something I am investing in quite yet.
Over the past few days some directors have been making share purchases as follows:
CEO James Kidwell 15,853 shares at a value of £40K
Non-Exec Jurgen Breuer 40,000 shares at a value of £100K
Chairman David Moorhouse 49,351 shares at a value of £125K
It also emerged that Kevin Gorman sold 15,356 shares for £47K which is a bit of a shame. Obviously they are reacting to the reduced share price following the profit warning. I still think the shares look overvalued given the market.