Unlike other sectors, shipping is a global industry i.e. freight rates, demand for tonnage and profitability are closely linked to the progress in global trade. In this article, we will discuss about the contemporary global shipping industry and see where two shipping majors, Great Eastern Shipping (or GE Shipping) and Teekay Shipping, stand among the whole scheme of things. As a matter of fact, while the former is the largest private sector shipping company in India, the latter shares its place among the largest in the world in the tanker segment.
GE Shipping is the largest private sector shipping company in the country and has a tonnage capacity of 2.47 mdwt (million dead weight tonne). As part of its fleet, the company has 68 vessels, including 37 ships (29 tankers and 8 dry bulk carriers) and 31 offshore vessels. GE Shipping is predominantly focused in the crude and product transportation segment with largely 'Aframax' type tanker mix (88% of the total capacity are tankers). Notably, as against the world average of 14.3 years, the company's tanker fleet is relatively young at 13.2 years, and this gives it an edge over many other domestic and global shipping companies. The company also has a diversified presence into oil drilling rigs, marine construction and air logistics. GE Shipping's revenues and profits have grown at CAGR of 7% and 12% respectively, during the period FY95-FY04.
Teekay Shipping (the Canadian shipping major), on the other hand, is primarily engaged in the shipment of oil and petroleum products through its large fleet of 152 vessels, which includes product carriers, Suezmaxes, Aframaxes and VLCCs (very large crude carrier). The company carries more than 10% of the world's seaborne oil. Its business is divided into two segments - spot tanker segment (fleet of approx. 85 tankers trade at market-related rates) and fixed-rate segment (large portfolio of long-term contracts that provide stable cash flows through the shipping cycle). During the period FY95-FY04, the company's revenues and profits have grown at CAGR of 24% and 45% respectively.
Both GE Shipping and Teekay Shipping have witnessed similar fortunes over the past years (see the graph above). And since the beginning of FY04, things have looked good for both these companies. The benefits, especially during FY04, arose due to the strengthening of the spot tanker market that rose to its highest level since 2000. This strength in the spot markets was attributable to strong tanker demand and restrained fleet growth. Also, the Prestige incident during the first half of 2003 and crude inventory building by the US ahead of the Iraq war boosted tanker freight rates. These rates did not soften during the second half as well as strong global economic growth (especially in the US, China and other Southeast nations) drove up world oil demand. This led to a significant increase in tanker demand that grew at an annual rate of 7% during the year. According to the International Energy Agency (IEA), global oil demand grew by 2.1% in 2003, the fastest growth in the past 6 years.
Both the companies, especially Teekay, which has a major presence in the global tanker market, benefited from the whole scheme of things. For GE Shipping, apart from benefits in the tanker segment, increased demand of commodities (iron ore, steel and aluminium) led to rising freight rates in the dry bulk segment as well. Growth in topline of Teekay is on the higher side also because of its inorganic growth strategies.
At their respective current prices, while GE Shipping trades at a P/E multiple of 4.7x FY04 earnings and 3.8x our expected FY06 earnings, Teekay is trading at a 9.2x FY04 earnings. On the basis of price-to-book value, while GE Shipping is trading at 1.4x FY04 book value and 0.9 x our expected FY06 book value, Teekay trades at 2x FY04 book value. The higher valuation of Teekay could be attributed to its magnitude of operations and its global presence (GE shipping is just 16% of Teekay's tonnage capacity and 1% of global tonnage).
Teekay, in its FY04 annual report, has stated that a strong global economic growth led by China and the US is expected to result in above average growth in global oil consumption during FY05 as well. It also states that the 2.1% increase in oil demand forecast by the IEA should typically lead to a 3.5% to 4.0% increase in tanker demand.
However, we believe that while growth in global trade has helped both Teekay Shipping and GE Shipping improve their financial performance in recent times, sustainability is still an issue. Especially with the Japanese and Southeast Asian economies still vulnerable to a downturn, and that the Chinese economy is on its way for a slowdown, freight rates could decline on the margin. However, though freight rates could soften, on a point-to-point basis, realisations will still be still on the higher side in FY05.