Selective play to maximize returns in shipping sector: ICICI Sec

News was prepared under the information support of Online Daily Newspaper on Hellenic and international Shipping "Hellenic Shipping News".

30 Sep 2010

Broking firm ICICI Securities said the outlook and performance of the domestic shipping industry is closely tied to the global shipping industry. It recommends investments in select stocks to maximize returns. In the shipping segment of industry, it recommends GE Shipping and Mercator Lines. In the offshore segment it recommends Aban Offshore and Great Offshore.
“The outlook and performance of the domestic shipping industry is closely tied to the global shipping industry. Hence, under performance of the global shipping industry is bound to have an adverse impact on domestic companies as well. However, despite this, select domestic shipping companies are better placed on account of their inherent strengths such as presence in different segments, long-term contracts and attractive valuations,`` broking firm said.
Shipping segment   
GE Shipping: ``GE Shipping is the second largest shipping company in India and operates a fleet of 62 vessels, which is being expanded to 74 vessels by FY12. The company has a comfortable debt equity ratio and ~ Rs 17 billion of cash on its balance sheet, which would be useful for acquiring assets in the second hand market at distressed valuations. The initial public offer of its subsidiary Greatship is expected in Q3FY11. This will be an added trigger. We recommend BUY with a price target of Rs 356.``
Mercator Lines: ``Mercator Lines has a diversified fleet and operates tankers, bulk carriers,  jack-up rigs and dredgers. The company owns and operates coal mines in Indonesia in addition to coal trading. Diverse revenue streams provide a significant hedge to the company from a downturn in any particular segment. Almost 70% of its dry bulk fleet is deployed on long-term contracts, which reduce volatility in earnings. From Q3FY10, Mercator Lines would be operating a floating production cum storage unit (FPSO), which is another new segment for the company. We expect the company to scale up its FPSO fleet after gaining initial operating experience. Mercator Lines is likely to increase its dredging fleet once dredging activity picks up pace in India. Despite the above advantages, Mercator Lines is trading at a significant discount and is likely to get re-rated. We recommend BUY with a price target of Rs 63.``
Offshore segment
Aban Offshore: ``Aban Offshore is the sixteenth largest offshore drilling company in the world with operating margins in excess of 60%. The company operates a fleet of 19 vessels consisting of 15 jack-up rigs, three drill ships and one floating production unit. Currently, 14 of its assets are deployed on long-term contracts. The company has secured contracts for three other assets, which will be deployed from Q3FY11. This has improved the earnings visibility and the EPS is expected to report a significant improvement in FY12. Further, crude oil prices have sustained above USD 60/barrel in the last 15 months. This is likely to lead to increased spend towards exploration/drilling, which would be positive for Aban Offshore. The single biggest concern was its high debt (in excess of Rs 140 billion) and its repayment. However, with improved earnings visibility the concern has eased significantly. We recommend BUY with a price target of Rs 947.``
Great Offshore: ``Great Offshore is one of the largest offshore companies in India and operates a fleet of 46 vessels consisting of 16 AHTS vessels, 12 offshore support vessels, 12 harbor tugs, three jack-up rigs and three construction barges. A varied mix of a fleet coupled with long-term contracts ensure steady revenue visibility for the company. The company has also ramped up its presence in the marine engineering and construction segment and has successfully executed contracts for ONGC. Post open offer, Bharati Shipyard has secured a 51% stake and management control in Great Offshore. With the management team in place the company is likely to increase its capex spend for fleet expansion. The company is trading at a significant discount to its historical valuation level, which makes the stock an attractive investment bet. Further, Bharati Shipyard, the current promoter, has acquired a 51% stake in the company at an average price of  Rs 476 per share, which provides an added comfort. We recommend  BUY on the stock with a price target of Rs 444.``

Source: Iris