Great Eastern Shipping Company Ltd. - Value BUY - Antique

Great Eastern Shipping (GE Shipping) is the largest diversified private shipping company in India with consolidated fleet of 29 in shipping and 24 in offshore. The decline in freight rates due to overcapacity and concern on demand growth due to slowdown in global economy has impacted the company over past three year. Though sector outlook in shipping remains challenging, the stable performance in offshore and strong balance sheet with healthy cash flow provides valuation support for stock. We believe recent decline in stock price provides buying opportunity with long term view given strong history of asset play. We maintain BUY.
Strong balance sheet - an asset in down cycle
The company has a cash balance of INR32bn on standalone and INR40.8bn on consolidated basis with net debt to equity of 0.09x and 0.42x, respectively. The strong balance sheet coupled with modern fleet (average age of 9.6 years) is expected to help the company in current challenging times. The decline in asset prices will help it to use cash for asset acquisition at attractive prices.
Offshore to reduce volatility in earnings
The company has increased offshore fleet from 4 in FY08 to current 24 vessels, providing earnings growth in challenging times. Offshore has reported a CAGR of 72% to INR12.7bn in revenues and 56% to INR2.24bn in profits over FY08-13. The company has added third jack-up rig in 3QFY13 and is expected to add ~INR1.5bn in FY14e EBITDA. We expect offshore to report earnings CAGR of 26% to INR3.5bn in FY13-15e.
Consolidated NAV at INR433
GE Shipping has invested ~INR17.2bn in offshore subsidiary, Greatship (India), translating into INR112 per share. Net asset value (NAV) factoring offshore investment at cost is ~INR248 per share in 4QFY13. However, management has disclosed the NAV based on mark to market for offshore segment at INR433 per share, translating CMP of INR206 into 52% discount to NAV.
Valuation and outloo
At the CMP of INR206, the stock trades at a P/E and EV/EBIDTA of 6.1x and 3.6x, respectively, discounting its FY14 earnings. On P/BV basis, it trades at an attractive level of 0.5x FY13. GE reported cash EPS of INR67 translating into cash yield of 32% in FY13. The asset prices have started correcting once again due to low freight rates and concern of over capacity. We believe GE Shipping will be able to get good bargain in tonnage acquisition going ahead due to expected distress sale from leveraged players. We maintain our target price to INR282.
Source: Equity Bulls