Braemar PLC: Setting Sail to Sweeter Seas, 75% upside

[Harryd591]

Braemar PLC: Setting Sail to Sweeter Seas

CEO Gundy has positioned Braemar for sustainable growth. Shipping conditions are buoyant and 7x PE will prove too low. My 12 month fair value target is 475p, 75% total return (70% capital, 5% divY)

For the full review please see my substack with the url in the image below! This was the result of hours of painstaking research so I hope you find it interesting



Summary

I forecast rich returns for shipbrokers in 2024 and 2025 as the market starts to grapple with a structural weakness in the supply side of the Tanker market and newfound momentum in Dry Cargo as the interest rate environment abates. With this backdrop, UK shipbrokers Clarkson and Braemar will be poised to deliver additional good years of revenue and profit growth. Braemar combines this thematic trade with a real self improvement story. It has de minimis exposure to the third big shipping market of containers, which has supply side overcapacity and where rates will remain low in 2024. Further to this, it is trading at a large discount to my perceived 475p fair value, to its closest peer Clarkson (13x PE, Clarkson’s own norms 18x+ PE), and to Braemar’s own long-term norm valuation levels.

Under the new CEO James Gundy, Braemar is now streamlined and on a sustained growth path. There is a real sense the company now has its act together with a real growth mentality. Compared to years back when Braemar was heavily indebted, the now transformed balance sheet provides ammunition for Braemar to sustainably grow revenue and profits. With greater revenue diversification, the company target remains “not less than £18m from FY25 onwards.” For Braemar because they are a February financial year end business, FY25 starts next February. I am bullish on the shipping rate outlook and Braemar’s own growth opportunities and expect normalized profit after tax of £14mln next year.

5 years ago, Braemar was a stock I’d only dare to ‘rent’. Now, it is one that can be ‘owned’, with a combination of a thematic trade (shipping strength and tanker shortage) and an idiosyncratic stock trade (cheap valuation, self-help and a move to sustained growth). Chartering is at the business core, but investors are overlooking the growth story in Braemar Securities. This has evolved rapidly from £3mln to £17mln of revenue in only 3 years, and it looks capable of reaching £50mln of revenue in the next 5-7 years.

In the short run, broker forecasts look too low, with Dry Cargo conditions significantly picking up right since the turn of the second half of the year (see the Baltic Dry Index which has soared in recent weeks). Conditions in other Chartering areas should remain strong according to time charter rates, and Risk Advisory should continue growth apace. I forecast £158mln of revenue for this financial year compared to broker averages at £150mln.

I forecast Braemar to generate £13.5mln+ of FCF in FY25, and on my forecasts Braemar is only on a 6.8x Y+2 PE and 6.0x Y+3 PE. My fair value is 475p/sh which would put the company on a Y+2 PE of 10.2x and give a 75% total return (capital return and dividends). I think we will see Braemar as a 10-12x PE corridor stock again. Shareholders will have also received meaningful dividends, starting with 12p worth that go ex-dividend in January/February (4%+ return). The next update should come in February with the full year trading statement. My stretch fair value is 660p, my ‘it went wrong’ fair value is 200p.

Calendar dates to watch out for
4 January 2024, ex-dividend date on 8p final dividend in respect of FY23
23 February 2024, ex-dividend date on 4p interim dividend in respect of H1 FY24
Middle February 2024, pre-close trading update

[Harryd591]

To clarify, the long form review I've written on my substack might require about 20 minutes of your time due to its length, so the above is simply a brief summary

[ukstonks]

Great work, thx for the idea

[Dod101]

Yes............except for the fact that within 10 minutes of signing up to this site, the op writes this great review of Braemar Shipping, a company with a chequered history to say the least.

A certain amount of circumspection would do no harm.

Dod

[Harryd591]

Dod,

I make no bones that if I spend weeks doing in depth research on a company and I write on it that it would be nice if people read it if they are interested but do their own research!

I tried to find where investors who like stocks reside and came across the lemonfool... a forum for company ideas?

Anywho just sharing my research and we will see in a year if I was right or wrong with my views

[simoan]

Yes............except for the fact that within 10 minutes of signing up to this site, the op writes this great review of Braemar Shipping, a company with a chequered history to say the least.

A certain amount of circumspection would do no harm.

Dod

Did you not start a thread complaining about the lack of investment discussions only a couple of weeks ago? And the first time someone shares some quality research you complain about it! As it happens I hold BMS for broadly the same reasons expressed by the OP. Whilst I can live without price targets etc. it is undoubtedly too cheap on most fundamental metrics.

What the OP did not mention is the historical accounting problems that caused trading to be halted for several months until very recently, These problems pre-dated the current management team who seem competent and highly motivated to grow the company. The main downside for me is the enormous cost of staff bonuses which detract from the valuation IMO. In good years it is an unseemly amount which could otherwise have been re-invested in the business. In that respect, shipbrokers are little different to bankers.

[Dod101]

I have followed Braemar off and on for years and I think you would agree that it has had a chequered history. I am just saying that a new poster deciding to give us the benefit of his ideas might best be treated with circumspection. I am not saying reject the views expressed and this could be a great idea for today but I am afraid I am a bit of a cynic.

I was closely involved with ship owners in my paid employment days and it is a cyclical business but I nowadays do not follow it closely enough to know where we are in the cycle.

Dod

[simoan]

I have followed Braemar off and on for years and I think you would agree that it has had a chequered history. I am just saying that a new poster deciding to give us the benefit of his ideas might best be treated with circumspection. I am not saying reject the views expressed and this could be a great idea for today but I am afraid I am a bit of a cynic.

I was closely involved with ship owners in my paid employment days and it is a cyclical business but I nowadays do not follow it closely enough to know where we are in the cycle.

Dod

No doubt about the chequered history of the company and cyclical nature of shipbroking, but investing is about the future, not the past. I watched the most recent company results presentation last week and the management struck me as credible and motivated with a meaningful plan for growing revenues in the next few years. We’ll see if they can achieve it.

I share your cynicism, particularly where the share in question is an illiquid small cap which can move in price on relatively small amounts of buying. In that regard, the expectations of the OP are a little over the top IMHO, particularly given that broker forecasts (including the company’s own broker) are for flat to slightly down profits for FY24 and FY25. However, I expect they will possibly be upgraded at some point. We’ll see.

[kempiejon]

To clarify, the long form review I've written on my substack might require about 20 minutes of your time due to its length, so the above is simply a brief summary

Hi Harry, welcome to the boards, that's a bit big for an opening post, daunting I'm sure. I hope you'll share some more views.

[Dod101]

Well good luck to you, simoan. You clearly follow Braemar more closely than I do but I have no interest in investing in them( or taking a punt on them depending on your view)

Dod

[simoan]

Well good luck to you, simoan. You clearly follow Braemar more closely than I do but I have no interest in investing in them( or taking a punt on them depending on your view)

Dod

It’s not a punt. It is cheap on a number of metrics and can easily afford the 5% dividend which is covered 2.5x by free cash flow and earnings. I can also easily understand the financial statements unlike HSBC or Legal & General, for instance. I don’t expect it to shoot the lights out and will be long gone way before our new friends 475p target price.

[Harryd591]

To clarify, the long form review I've written on my substack might require about 20 minutes of your time due to its length, so the above is simply a brief summary

Hi Harry, welcome to the boards, that's a bit big for an opening post, daunting I'm sure. I hope you'll share some more views.

Thank you. I look forward to being a part on the community on anyone's other ideas moving forwards!

[Gerry557]

I looked at BMS a while back mainly for the high yield. I think it was 7%+

I thought I'd missed my chance and then was grateful not to be a holder during covid.

I might relook again. Can you expand on the management issues and reasons for the stoppage of trading. Never a good look but some better context might help.

Unfortunately my dabbing in the smaller shares hasn't gone that well.

[Harryd591]

Hi Gerry,

Yes, sure! Here is a summary. For me what is crucial is that there was never really any issue about Braemar's remotely recent financial statements or the veracity of any of its financial results from remotely recent history or from the current management team. It is easy for some investors to bash Braemar with this, but I think it will not be a big memory if the story plays out like I expect/hope in the next year!



In March Braemar management reported their preliminary results on 2023 (very strong) and said that they expected to publish their FY23 financial results "by the end of May 2023"

However on May 23rd 2023, management then said that it will be released in late June. Then in late June they said it would take longer and for the first time said why.

The board and auditors were working together to put in certain procedures in the group after they had cleaned up the books from the last couple of years. This prompted the auditors and board to want to assess a specific transaction of $3mln from 2013, which involved payments made to 2017. This still had a liability on the balance sheet, which is why it was noticed. This was the period before the current management team. The board was not comfortable with how that transaction was represented and the remaining liability on the balance sheet.

The board then appointed specialist forensic accountant firm FRP Advisory Group (which is listed business on the LSE), to do an investigation and report into an investigation committee chaired by the non-executive Chairman.

This whole process around this was necessary before the group could publish its FY23 results, but because Braemar is required (under FCA rules) to publish its results by the end of June 2023, the stock was suspended until the investigation was complete, the audits were passed, and the FY23 results were published. This investigation ended up checking 'several' transactions between 2006 and 2013.

That investigation finally came to fruition when the results were published in November 2023. This involved creating £2.0mln of provisions (£1.7mln of historical unsettled commissions payable, and £0.3m of reclassification from trade payables into provisions). This could change but in my view not by an order of magnitude. The whole investigation also cost £2.5m in non-recurring costs.

The current management team and board are now comfortable that these legacy factors are behind them. For me it is very important that this process happened because it also means the current auditors will have taken scrutiny of the current accounts even more (not just those a decade+ ago) and there is nothing to flag up from that

[simoan]

Hi Gerry,

Yes, sure! Here is a summary. For me what is crucial is that there was never really any issue about Braemar's remotely recent financial statements or the veracity of any of its financial results from remotely recent history or from the current management team. It is easy for some investors to bash Braemar with this, but I think it will not be a big memory if the story plays out like I expect/hope in the next year!



In March Braemar management reported their preliminary results on 2023 (very strong) and said that they expected to publish their FY23 financial results "by the end of May 2023"

However on May 23rd 2023, management then said that it will be released in late June. Then in late June they said it would take longer and for the first time said why.

The board and auditors were working together to put in certain procedures in the group after they had cleaned up the books from the last couple of years. This prompted the auditors and board to want to assess a specific transaction of $3mln from 2013, which involved payments made to 2017. This still had a liability on the balance sheet, which is why it was noticed. This was the period before the current management team. The board was not comfortable with how that transaction was represented and the remaining liability on the balance sheet.

The board then appointed specialist forensic accountant firm FRP Advisory Group (which is listed business on the LSE), to do an investigation and report into an investigation committee chaired by the non-executive Chairman.

This whole process around this was necessary before the group could publish its FY23 results, but because Braemar is required (under FCA rules) to publish its results by the end of June 2023, the stock was suspended until the investigation was complete, the audits were passed, and the FY23 results were published. This investigation ended up checking 'several' transactions between 2006 and 2013.

That investigation finally came to fruition when the results were published in November 2023. This involved creating £2.0mln of provisions (£1.7mln of historical unsettled commissions payable, and £0.3m of reclassification from trade payables into provisions). This could change but in my view not by an order of magnitude. The whole investigation also cost £2.5m in non-recurring costs.

The current management team and board are now comfortable that these legacy factors are behind them. For me it is very important that this process happened because it also means the current auditors will have taken scrutiny of the current accounts even more (not just those a decade+ ago) and there is nothing to flag up from that

That’s a good synopsis of events relating to the historic accounting issues. Part of my own thesis for investing is that the current accounts will also have been scrutinised by the auditors and that the new management team should be able to increase revenue and profitability from here. I note with interest that in the interims they had also examined the carrying value of goodwill and decided no action was necessary.

On a PER of 7.5 and with an ungeared balance sheet (small net cash position) there is the possibility for decent growth and multiple expansion. All they need to do now is exceed expectations for FY24 & strong outlook for FY25 to get a re-rating in progress. Too many external factors to make any predictions IMHO though.