1. Braemar Shipping (LSE: BMS), rated a BUY by Charles Stanley
Braemar offers specialist broking (82% of profits), technical (8%), logistics (7%) and environmental (2%) services to the dry bulk, oil/gas, chemical and container-shipping industries. This involves negotiating daily rates or advising on vessel transactions for customers, as well as sorting out customs clearance, inspections, insurance and demolition. The only problem is that freight rates for cargos such as iron ore and coal have dropped due to slowing demand from emerging markets. Worse, this has coincided with a glut in supply, due to the long lead times on the deliveries of tankers ordered back in 2008.
However, it’s not all bad news. More ships at sea translate into more contracts for Braemar to fix them, even if commissions are lower. The second-hand and demolition sectors are improving as older vessels are replaced and require either selling or scrapping. Finance director James Kidwell thinks transaction volumes could be boosted further if banks decide to take a harder line with the mushrooming number of owners currently facing financial distress. Banks typically sell ships seized due to bankruptcy. And Braemar’s liquid natural gas unit is performing strongly owing to a surge in demand for ships to transport natural gas after Japan’s earthquake in March. Twelve months ago almost a third of the world’s 300-strong fleet was laid up. Now nearly all these ships are back in service.
In terms of the numbers, the order book stood at £23m as at February. Although this was lower than the £28m figure reported a year ago, it was consistent with a shift to clients trading on the spot market, as opposed to pre-booking charters several months in advance.
The City is anticipating 2011 turnover and underlying earnings per share (EPS) of £127m and 48p respectively, nudging up to £132m and 51p in 2012. That puts the stock on meagre p/e ratios of 9.4 and 8.8 while also paying a 5.5% dividend yield. On this basis I value Braemar on an eight times through-cycle earnings before interest, tax and amortisation (EBITA) multiple. After adjusting for net cash of £25.6m (or £1.20 a share), that delivers an intrinsic worth of more than 600p a share.
The biggest threat facing the industry is a hard landing in China. I suspect this will be avoided, given Beijing’s track record of successfully managing its economy, even during periods of global turmoil. Adverse weather and civil unrest can affect activity levels too. As most broker fees are settled in dollars, any weakening of the US currency would not be helpful either. That said, the company is already comfortably navigating today’s rough seas. So investors able to accept the occasional storm should climb on board. Charles Stanley has a price target of 535p and interims are due out on 31 October.
Rating: BUY at 450p
2. Thomas Cook (LSE: TCG), rated a BUY by AlphaValue
Many thrifty consumers have opted to stay in Britain for their holidays this year, rather than jet-setting off to the Mediterranean or north Africa. This has hurt profits at Thomas Cook, Europe’s second-largest travel firm behind Tui Travel. Moreover, the impact of Middle Eastern unrest has been worse than first thought, with demand from French customers in particular dwindling in the key destinations of Egypt, Tunisia and Morocco. Some holidaymakers have rebooked to visit Turkey, although local hoteliers have put up their prices to cash in on the popularity and Thomas Cook has been unable to pass on all of the costs.
All told, the group now expects underlying EBITA to be £320m for the year to September, down from £362m in 2010 and well short of analyst’s estimates of £380m. As a result, the chief executive has been ousted, and the firm has launched a root-and-branch review of its British business, which includes Going Places and MyTravel.
This is disappointing. Yet some of the scaremongering seems overdone. For instance, it’s unlikely that during any subsequent restructuring the British arm of the business will be closed altogether. Between £40m and £50m of annual cost savings have already been identified, with another £45m coming after its merger with Co-op Travel in the autumn. That deal has just been sanctioned by the Competition Commission.
The tour operator model has plenty of mileage left in it. Package holidays offer travellers a number of valuable benefits that they can’t get for themselves. These include cost/time advantages, in-resort assistance and crisis management (in the event of disruption or local political unrest).
It’s also unlikely that Thomas Cook will breach its banking covenants. True, the dividend is liable to be cut to preserve cash (already priced in), yet the firm is embarking on a £200m asset disposal programme to generate funds. Moreover, the finance team has just renegotiated a one-year extension on its loans until May 2014. Furthermore, trading has remained strong in central and northern Europe and the board is keeping a tight rein on cash. The performance of its German airline is encouraging too.
Ironically, a double dip may actually help longer term, as smaller rivals would go to the wall. Already there is about 20% less volume being sold than there was before 2008. Not only do these bankruptcies reduce competition, but they also mean less inventory has to be fire-sold in the dreaded ‘lates’ market. As one of the cheapest players around for all-inclusive deals, Thomas Cook should continue to attract bargain hunters alongside those for whom an annual break is a ‘must-have’.
I value the company on a six-times EBITDA (EBITA with depreciation added back) multiple. After adjusting for net debt of £902m, £300m of possible right-sizing expenses and a £274m pension hole, that produces an intrinsic worth of more than 140p a share. AlphaValue has a price target of 219p and there could even be takeover interest given the CEO’s exit.
Rating: HIGH RISK BUY at 60p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See
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