Braemar PLC: Setting Sail to Sweeter Seas, 75% upside
Posted: December 7th, 2023, 8:36 pm
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
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