In recent concall they have mentioned their revenues will be muted for another 2 quarters given geo political issues. They informed upfront. Very good management. Given the cyclical nature of industry one should have exit framework while dealing with these sectors. Their LNG docks growing continuosly but overall business muted.
2 Likes
- 30% of Market Cap is net cash.
- Management has the track record of being a great operator in the industry, with a mindset of good capital allocation regarding the vessels that they buy/sell/charter. Their preference is to sit on the cash for asset buying opportunities, rather than do a buyback or pay dividend. This is also affected by the taxes on dividend/buyback. The act of keeping a cash balance, especially when it is so high is somewhat of a drawback in my opinion.
- NAV should touch ₹1500/share this quarter, and the CMP is ₹900. That is a 40% discount to NAV.
- Crude and product tanker rates are experiencing a downturn, due to low GRMs and muted demand from China, while dry bulk and LPG are doing really well
- Co will have 2 rigs dry docked and unoperational, due to one contract expiring, and the other rig being in between jobs. Thus, the utilisation for thr rigs should be very low in the coming quarter, and then onwards it is dependent on winning a tender for the unoperational rig, and getting a new contract when the short-term one expires.
- The company has a good track record of buying vessels cheap and selling high, but this is still cyclical.
- Around a third of the revenues and margins come from the offshore subsidiary, Greatship.
- Order book looks optically high for product and LPG tankers, but the Co justifies it saying that most of it is as replacement for the older vessels, especially in product tankers.
- LPG rates are fixed with a Time Charter, but after that, there will be exposure to the existing spot rates. This is true for all segments, regardless of the current spot to fixed mix in the segment. This brings in a lot of uncertainty.
Now after all this halla-ho, I am just considering what is a fair price to buy this company? Also, am trying to understand what the triggers for value unlocking would be. And trying to ascertain a worst-case earnings scenario.
7 Likes
Hi can you tell me how did you arrive at the NAV? Is it same as book value because book value seems in 900s?
NAV is mentioned in their concalls. Recording is there on BSE.
Also on their investor presentations. Also available on BSE.
2 Likes
Ge ship have been selling older ships
They shall enter the mkt to buy when younger ships are valued fairly
Priced
NAV should drop at that time so shall earnings
Purchases of ships made at lower levels shall bring great returns in next shipping cycle
But has the current cycle ended
American oil to India and other consumption centres shall add ton miles to trade boosting revenue
On the other hand restricted world trade because of Trump policies and it’s ripple effects might dampen shipping rates
All in all complex situation and uncertain outcomes
Views are personal no recommendation intended
4 Likes
Anyone has idea about the jack-up oil rigs business of the company?
1 Like
My views on GE Shipping:
Business - GE Shipping is part of violently cyclical shipping industry, that follows typical commodity cycle, with extraordinary profitability for few years (say 5 years) due to high demand & limited supply, followed by glut in supply with abysmally low demand for many years (say 15 years).
Industry consists of multiple small players and no single player can change the industry dynamics. Entry barriers are very limited and anyone who smells money can order new ship that may be delivered in 3 years (rough estimate), and enter the market.
Last shipping cycle peaked in 2008, and since then there had been pain for 14 long years till 2022, post that, the demand is a bit better. Most of the shipping companies went bankrupt after 2008 cycle, and probably investor who has lived through the cycle would never like to enter shipping again.
GE Shipping during this time produced zero returns for 14 long years, the past is off-course painful.
When Industry is so brutal, should any sensible investor, even think of entering the industry?
Which brings us to second point:
Owner operator Management - Lets look at how management has executed in its history of 6 decades.
Few facts:
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GE shipping is one of the few companies that survived ruthless down cycle after 2008 and in fact grew stronger after it. You can see same pattern after every cycle during its history of 6 decades. Is it complete luck or there some Skill involved there?
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Operational Prudence - Based on my limited reading of the company, it has never leveraged its balance sheet that can bankrupt it in downcycle. It buys assets in downturn and patiently waits till conditions improve, and it gluts itself with cash when most players want to invest in assets.
They behave like value investors when it comes to buying, running and selling the ships.
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Capital allocation and buy back - When share price is in distress, management initiated buyback couple of times in the past. In the past Management has indicated that they were not inclined of buybacks because of 20% tax to be paid by the company, but now that the rules are changed with exiting investors paying the tax, management may be aggressive on buybacks when share price diverges considerably from underlying value.
The company has history of paying reasonable dividends for more than three decades. These actions looks like management is minority shareholder friendly.
Valuation : Being a commodity industry, I prefer to value the company on asset replacement cost rather than Earnings that fluctuates a lot.
Current assets are worth 20,000 Cr (16,000 Cr ships + 4,000 Net Cash), valued by market at 12,000 Cr, a discount of 40%. Another way to look at it is current NAV that’s Rs 1500 per share, valued by market at Rs 900 per share.
In fact, earnings of last 3 years (8,000 Cr) is 70% of the market cap. However, being part of commodity cycle, current earnings comes at 55% PAT margin and looks unsustainable in the future.
However, overall share price indicates that market does not respect the company, despite the current tide in industry’s / company’s favor.
Will it continue forever? I dont know. However, I do know that market changes its mood wildly sometimes. It did rerated hotels wildly when cycle turned in favor of industry post covid. Prior to that, talking to someone about investing in hotels was like insulting them 
Summary - GE Shipping is a company, where investor can bet on jockey (Management) and not on the horse (Business) at a price where odds are in your favor. My view is that management can run the cycles well based on past execution track record.
Disclaimer - Views are personal and biased, I am invested in the company and this post is not a recommendation to buy the stock.
16 Likes
Hello Folks,
New to the party, just like to add some points which i considered significant for considering valuation of a company.
- It has got all values a sustainable business should have i.e increase in sales (not massive) but a growing one, for operational stability a increase in profits followed by increase in margins.
- I think this is the most important point that is management agility to survive when the market goes downturn. this shows the approach that management is not massively aggressive towards their approach.
- company is profitable followed by consistent cashflows.
What goes against the company?
->Though the company has cashflows, we cannot see a type of deployment that can lead to incremental growth, well its a dividend paying company the company is lacking on its part of deployment of capital and NEVER forget, the market cap covers 45% to 50% of cash so its a cash rich company.
→ one more point regarding holdings, i think its the mutual funds who are selling making it cheap to buy at such levels.
Moreover,This is a text book stock of benjamin graham’s approach where it is suggesting that it is available at Margin of safety levels.
Disclaimer- Invested and biased at these levels.
3 Likes
A simple back on the envelope valuation approach for such typical cyclical stock is to consider long term RoE vs current P/B.
10 yr RoE = 11%
current P/B = 0.91
So expected investor return = 11/0.91 = 12%
It would be safer if P/B becomes 0.75 such that investor return = 11/0.75 = 15%.
Can initaite buy now just to be in watchlist and can be added aggressively if stock gets cheaper by another 15%.
10 Likes