Management has done much to reduce the likely impact of the shipping cycle in recent years, as emphasised in the current trading update. The 22% discount rating to its peer group, the strong balance sheet and the 6% yield offer sound defensive qualities to the shares.
Braemar’s trading update highlights the group diversification strategy as a key factor behind trading in the year to February 2016 continuing on track to meet fullyear market expectations. Strong activity in tanker markets, supplemented by useful Sale & Purchase business, is more than compensating for challenging conditions in dry cargo and offshore in the Shipbroking operations. Similarly, in Technical, the expected strong trading at Braemar Engineering (LNG tanker work) is more than balancing the impact of a tougher offshore market. Logistics continue to plan, with the further improvements to the longer-term outlook. We do not propose to adjust our estimates.
The figures reinforce management observations about the group diversification strategy. Acquisitions have reduced the reliance on the shipping cycle, with the group having introduced cash-generative businesses where demand is related either to the volume of seaborne trade or the oil and gas sector. Moreover, the broking business has been invigorated by the 2014 merger with ACM. The tone of the trading statement points positively to the medium term, despite challenging trading conditions in several areas of the group business.
While working capital was slightly above expectations at August 2015, we continue to look for a small y-o-y increase in net funds to £8.0m at February 2016.
Braemar’s share price is close to the level pending at the time of its October interim results announcement. By contrast, market-leader Clarkson saw a sharp adverse reaction to its autumn trading statement, while the share prices of other members of the peer group are higher by up to10% over the same period. On the basis of consensus estimates for calendar 2016, Braemar’s shares are rated at a 22% discount to the average (12.1-15.5x) of the other four companies; this discount fails to reflect the diversification strategy, the strong balance sheet and the aboveaverage yield.