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GE Shipping: Curvy prospects - Views on News from Equitymaster
 
 
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  • Nov 28, 2000

    GE Shipping: Curvy prospects

    The Great Eastern Shipping Company (Gesco) has been one of the most prominent gainers on the bourses in the last six months. Having posted good quarterly results, where is the company heading from here?

    For the first half of the current year, the company posted creditable results. While sales grew a marginal 12%, net profits jumped 32% to Rs 813 m. The growth in profits would have been far higher would it not have been for a decline in income from sale of ships to Rs 160 m in 1HFY01 (Rs 429 m in 1HFY00). As the impact of lower earnings was in the second quarter, the company posted a 25% drop in net profits. Excluding this item (in the current year as well as in the previous year), net profits have jumped by 274% in the first half of the current year. The company’s performance at the operating profit level is even impressive.

    Operating margins have gone up from 31% in 1HFY00 to 41% in 1HFY01. This could be attributed to the fact that average earnings per day, be it in Aframax, VLCCs (Very Large Crude Carriers) or Panamax, have moved up sharply in the last six months. This is due to the buoyant world trade, stiffening environmental norms and recovery in select South East Asian economies.

    Meanwhile, the company has proposed to buy-back its own equity shares. It plans to invest Rs 1.5 bn in the exercise. The upper limit for the buy back has been set at Rs 42 per share. At this price, the number of shares the company is targeting to buy-back is approximately 35 m. Reportedly, promoters currently hold around 14% stake (36.2 m shares). Assuming that, buy-back passes through, post-buyback promoters holding would rise to 16.2%.

    Buy-back schedule
    No. of shares* 258.8
    % holding 14.0%
    Current holding* 36.2
       
    Buy back budget (Rs bn) 1.5
    Price (Rs) 42.0
    No. of shares* 35.7
       
    Post-buyback equity* 223.1
    % holding 16.2%
       
    Earnings (Rs m) (FY01E) 1,840.3
    EPS (on diluted equity) 8.2
    P/E 4.2
    * No. of shares  

    As per our estimates (pre-buyback), Gesco is expected to generate net cash of around Rs 1,330 m in FY01E. This would mean that the company could fund close to 85% of its share buy-back programme via internal accruals itself (assuming that the company exercises its buy-back at Rs 42. It may be even lesser than that). Besides, the company had also passed a resolution for a Rs 1,000 m preference share issue for augmenting the proposed fleet expansion programme i.e. Liquefied Natural Gas (LNG) carriers and Aframax carriers.

    Gesco has one more option i.e. sell some of its older fleet. Gesco currently has two bulk carriers (FY76 made). Since second hand ship market is buoyant, as of now, the company could fetch attractive prices. However, we believe that the company’s fleet expansion plan would be delayed to a certain extent due to the buy-back programme (as we expect major portion of cash generated would be directed towards buy-back of shares).

    We expect the company to post around 50% jump in net profits for the full year. This includes income from sale of ships at Rs 300 m. We have downgraded sales estimate by 3% to Rs 11,618 m. The reason for this is softening freight rates, as concerns about oversupply of tonnage have started to loom the markets. Besides, the slowing US economy will have concurrent effects on sea-borne trade.

    Though, there may not be a sharp reduction in freight rates as a result of slowing down US economy, we believe that earnings growth for the second half would be in line with the first half trends.

    Having said that, average earnings per day for crude carriers continue to be on the uptrend. Since Gesco has two Aframax carriers in the spot market, the company would benefit from higher realisations.

    The stock is currently trading at Rs 35 at a P/E multiple of 2.9x the annualised 1HFY01 earnings of Rs 12.

     

     

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