value and opportunity

As mentioned in the first article about Dart Group, I am looking at the moment at UK companies.

Within my “Boss Screener”, the following company scored really good: Braemer Shipping Services.

According to their website, they are doing the following:

The Group is divided into four operating divisions: Shipbroking, Technical, Logistics and Environmental. These work together to offer a unique combination of skills for clients, at any time, anywhere in the world.

Basic valuation metrics look Ok but not spectacular:

Market Cap ~ 70 mn GBP
P/E 9.8
P/B 1.1
P/S 0.5
Div. Yield 8%
EV/EBITDA 5.7

The company has no debt, but net cash (positive).

historically, returns on equity following my “boss” definition were really good:

	EPS	BV p.Sh.	DVD	CI ROE
31.12.2002	0.10	1.04	0.13	14.4%
31.12.2003	0.08	1.14	0.13	21.9%
31.12.2004	0.24	1.29	0.16	23.0%
30.12.2005	0.37	1.69	0.18	37.6%
29.12.2006	0.32	1.78	0.20	15.6%
31.12.2007	0.49	2.00	0.23	22.5%
31.12.2008	0.57	2.51	0.26	32.7%
31.12.2009	0.48	2.80	0.27	20.7%
31.12.2010	0.48	3.07	0.28	18.3%
30.12.2011	0.34	3.08	0.29	9.7%

Although one has to mention, that 2001 for example was a loss year for them. They do make smaller acquisitions from time to time which explains that tangible book is only 50% of actual book value.

As one can also clearly see, 2011 was a more difficult year for them. As one could expect for a potential UK value stock, it is widely covered by the excellent UK value blogs, for instance

Kelpie Capital
Interactive Investor

Especially the Interactive Investor has a very good coverage about the company and another listed UK shipbroker Clarkson Plc.

Shipbroking Business

Again, thanks to Richard Beddard for this fantastic post about the business and the link to some very interesting material about long-term cycles in the shipping industry.

So to summarize it in my own words:

– ship broking (i.e. broking of shipping capacity, not ships themselves) is a cyclical business
– ship broking also seems to be a fragmented business where people seem to have more loyalty to persons than to corporations
– ship oversuply and depressed freight rates will most likely persist for many years to come
– Bramer itself is in a transformation process to diversify into more service oriented areas

If one looks into the annual report, one can clearly see that the ship broking business is in a drastic downturn with sales shrinking by -20%. on the other hand they managed to earn ~14% operating margin (down from 21%). So this means that fixed costs are relatively small. Any manufacturing business would not retain a profit when sales drop 20%.

The other divisions did compensate for revenue loss but not fully for profits. Although the environmental segment looks interesting with almost doubling sales and tripling the operating margin.

So lets stop here and reflect a minute:

The boss score tries to identify reliable boring companies which deliver solid ROEs over several cycles. With Bramer we have here clearly a different situation:

There seems to be a “long-term cycle issue” with the core business and they are in the middle of a strategic business shift. So the past profitability numbers are maybe a relatively weak indicator for future profitablity, as the underlying business changes significantly.

Braemer could be an interesting investment, but it does not really fit into the pattern I am looking for.

Although other factors look good (Management owns a significant share of the company, stock is relatively unknown and not well covered, string free cashflow generation in the past, attractive dividend yield etc.), for the time being I only put it on my watch list, as I don’t know enough about the shipping business to make an informed investment judgement. Also the stock is not cheap enough to qualify as a asset play or mean reversion investment.

Summary:

Based on historical profitability, Braemer would be a clear buy. But as the whole shipping sector seems to have a long-term problem and Braemer has put itself into a business transformation process, I think at the moment the risk does not justify an investment at current prices.