Braemar Shipping: Annual General Meeting Notes

Sunday, Jul 10 2011 by
9
Braemar Shipping Annual General Meeting Notes

Firstly, let me thank UK Value Investor for bringing Braemar Shipping Services (LON:BMS) to my attention, here and here. After my own research, I decided to add some to my high-yield sub-portfolio and attended their AGM on 22nd June to learn more.

See Braemar's annual report for details. Braemar's business comprises four areas of operation: i) Shipbroking, ii) Technical Services (Warranty services, Marine Consultancy, Vessel surveys etc), iii) Logistics & Environmental (Pollution control, salvage etc).

 

Investment metrics

What attracted me to the business, as an investor, is an attractive yield, backed by a strong earnings track record and sound balance sheet. Here is a summary snapshot of some key investment metrics (you should DYOR as the figures may not be up to date):

BMS

2010/11

2011/12f

Share price (p)

468.0

 

Shares in issue (m)

21.1

 

Mkt cap (£m)

98.7

 

Turnover (£m)

126.1

127.0

EPS (p)

47.4

48.2

P/E

9.9

9.7

NTAV (£m) 

32.0

 

NTAV/share (p)

151.8

 

Net cash (£m)

25.6

 

Cash/share (p)

121.3

 

Dividend (p)

26.0

26.3

Yield

5.6%

5.6%

ROCE

19.7%

 

Year End

28th February

2011/12 figures are based on current broker consensus forecasts. Braemar has no bank debt.

I hold BMS within my high-yield sub-portfolio, as I believe it will offer a solid yield and a measure of inflation protection. Note that Braemar has so far continued to produce strong profits throughout the GFC (Global Financial Crisis). Founding directors continue to have "skin in the game" with around 12% of the shares between them.

AGM - General

The AGM, on 22nd June, was well attended, with around 20 shareholders present. I was pleased to see that well known poster "AliceInWonder1" was also there - and in good form. Details and resolutions can be found in the Notice of Meeting. All directors were present, apart from Alastair Farley, for whose absence the chairman apologised profusely and advised that he had permission to be on leave, agreed before he joined the company this January. I wish all companies would take ensuring the presence of all their directors at General Meetings as seriously. Some (particularly on AIM) seem to regard a token presence as sufficient.

The Chairman read an AGM Statement - which I found encouraging - and then proceeded with the formal business. Questions were invited before each resolution, rather than there being a general Q&A session. I was able to discuss various points of detail with individual directors after the formal meeting was closed. These detailed questions are covered below. Most questions during the meeting came from "Alice" and I.

Questions on the Resolutions

Approval of the report and accounts offered an opportunity to ask general questions.

Q1. I observed that shipbroking generated of 80% of group profits but comprises only 50% of revenue and employs roughly 1/3 of Braemar's 802 staff. So, why not focus on this and what is the value of the other businesses?

A1. Sir Graham Hearne, Chairman, confirmed that the other businesses offered lower margins but their earnings were less volatile than those of the shipbroking business, so it offered a useful complementary and stabilising earnings stream. I observed that this did not appear to be the case last year, when results were rather poor. GH responded that improvement could be expected this year and he confirmed that full integration of relatively recent acquisitions should help.

Time for a post-meeting fact check... Here are the figures for the last 5 years:

Revenue (£m)

Ship-broking

Tech. Services

Logistics

Environ-mental

"Other" Total

 

 

 

 

 

 

2007

40.5

6.6

23.5

3.2

33.3

2008

52.8

9.5

27.9

10.8

48.2

2009

60.4

21.2

40.8

4.8

66.7

2010

57.4

22.7

31.9

7.1

61.7

2011

61.7

22.6

35.1

6.8

64.5

 

 

 

 

 

 

 

 

 

 

 

 

Operating Profit (£m)*

Ship-broking

Tech. Services

Logistics

Environ-mental

"Other" Total

 

 

 

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2007

8.8

0.6

0.9

0.2

1.7

2008

13.1

0.8

1.2

1.9

3.9

2009

15.0

4.2

1.1

-0.2

5.1

2010

13.3

2.3

1.4

0.6

4.4

2011

14.3

1.3

1.2

0.3

2.8

 

 

 

 

 

 

 

 

 

 

 

 

Operating Margin

Ship-broking

Tech. Services

Logistics

Environ-mental

"Other" Total

 

 

 

 

 

 

2007

21.6%

8.3%

3.9%

7.1%

5.1%

2008

24.8%

8.9%

4.1%

17.3%

8.0%

2009

24.8%

19.6%

2.8%

-3.6%

7.7%

2010

23.2%

10.3%

4.5%

8.6%

7.1%

2011

23.2%

5.8%

3.5%

4.0%

4.4%

 

*Pre-amortisation, impairment and exceptionals

"Other" Total = Technical services + Logistics + Environmental

So, it would appear that the facts don't bear GH's statement out. Shipbroking appears to produce excellent and pretty steady returns, whereas "Other" is more volatile and offers much poorer margins. I may have to write a follow up letter.

Q2. "Alice" enquired about succession planning. [Alan Marsh, CEO and co-founder is now 61].

A2. GH responded that this was an issue that featured high on the Board's agenda and action could be expected. In response to further probing, GH also felt that any transitions would be "seamless".

Q3. I complemented the Audit committee on retendering their audit work, resulting in a change from PWC to KPMG and a significant saving. (see Corporate Governance Report and Note 5 to the accounts).

Moving on to the remuneration report...

Q4. On p33 it states:

In discharging these responsibilities the Remuneration Committee may call for information and advice from advisers inside and outside the Group. During 2010/11, the Remuneration Committee took advice from the Chief Executive, Alan Marsh.

On what matters was the CEO consulted?

A4. Concerning remuneration of senior executives.

Q5. What is meant by “rewarded competitively” & “competitive base salary”?

A5. Shipbroking talent is highly sought after and we need to ensure we can recruit quality staff.

I warned of the danger of a ratcheting up of salaries.

Q6. What difference does the Committee feel the LTIP makes to the performance of the directors. Will they work harder as a result?

A6. IMO the response to this was rather weak. There were smiles at the notion that the LTIP would make any difference to how hard exectuives worked but the Board expressed a desire to have an element of remuneration that was linked to longer term performance of the business.

As I wasn't happy with the remuneration report, I told the Board I would vote against - and was the only shareholder present to do so.

I had a longer discussion with the Chairman of the Remuneration Committee, John Denholm, after the formal meeting. More on this below.

Other resolutions were voted on without questions, apart from the final one, permitting the company to communicate with shareholders electronically, if they accepted this option. Shareholders were assured that it would be straightforward to change their election for communications if they wished to change their minds (I have sometimes found that this is not the case with other companies, where it is not made clear how paper communications can be requested or the process is made difficult).

Post-meeting Discussion

I had quite a lengthy discussion with John Denholm and Richard Agutter concerning the remuneration report after the meeting. I was interested to learn that the CEO (whose remuneration last year totalled £846K) was not the highest paid employee! Details of shipbrokers' pay is highly confidential because the market for these individuals is very competitive. I note that the average revenue per shipbroking staff member is £214K - which is high, considering this includes junior and support staff, and is largely professional services/commission income with little "cost of sales". AIUI shipbrokers perform a similar function for vessels that estate agents perform for property, and suspect they will be strongly remunerated on a personal commission basis.

Though the Board pay (£2.5m in total) may be considered high, for a business with pretax profits of £13.2m, I do accept that the nature of the business does lead to well above average salaries.

Considering all this, I suggested that the wording of the remuneration report was improved: "competitive" suggests that the company is striving to offer the highest salaries! In times when general pay levels are subdued this is not a desirable trait. We also discussed the fact that the LTIP (long term incentive plan, awarded as shares) is based on EPS growth. I expressed the view that linking it to cashflow would be preferable, to avoid an incentive to distort EPS. JD stated that the committte would consider these points.

I went on to raise some detailed questions with the finance director, James Kidwell.

Q7. Why does Note 26 to the accounts show a movement in trade receivables of £4.4m but the difference between the current and last years' balance sheets is £3.8m?

A7. Probably due to currency translation.

Q8. Per note 16, I observe a significant increase in > 3 month old receivables. What is the reason for this?

A8. 2011 saw a greater proportion of commission income from new-buld shipping, which tends to have longer payment timescales. This is particularly the case for increasing business done with China. Another "problem area" is collection of loss adjuster payments, where Braemar has to collect its fees from numerous parties involved in a claim

That pretty much covers all my notes.

Regards,

Mark

 


About the Author's Website

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Disclaimer:  

The author may hold shares in this company, all opinions are his own and you should check any statements that appear factual and not rely on them before making an investment decision. The author is NOT a qualified analyst nor authorised to give investment advice. Whilst the author is a director of ShareSoc, all views expressed are entirely his own and not necessarily those of ShareSoc.


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Braemar Shipping Services plc operates in four segments: Shipbroking, Technical, Logistics and Environmental. The Company’s Shipbroking services include tanker chartering -crude oil, clean products, Liquefied Petroleum Gas (LPG), Liquefied Natural Gas (LNG), chemicals, Dry bulk chartering, Ship valuations, LNG consultancy, newbuilding and demolition. Its technical services provide energy loss adjusting, surveying, engineering and consultancy services. Its logistics services includes Port and liner agency, Ship-to-ship transfers, Hub agency, Customs clearance, Supply chain management, Freight forwarding, Worldwide consolidation, Project cargoes, Cruise ship support, and Recycling. Its environmental services include Pollution control, Incident response, Salvage services and Marine and port services. more »

Share Price (Full)
495p
Change
1.8  0.4%
P/E (fwd)
14.5
Yield (fwd)
5.3
Mkt Cap (£m)
146.9



  Is Braemar Shipping Services fundamentally strong or weak? Find out More »


7 Comments on this Article show/hide all

Fangorn 10th Jul '11 1 of 7
2

hi Marben,

Thanks for the concise write up on BMS - this is one I've been following for a while, for the very reasons you highlight -

" An attractive yield, backed by a strong earnings track record and sound balance sheet."

Nibbled a while back, also for my high yield portfolio. Looking to add more on any general market weakness.

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UK Value Investor 11th Jul '11 2 of 7
3

Thanks for letting me know Marben, it's nice to know somebody got some value from my investigations. Now we just need them to keep performing.

Newsletter: UK Value Investor
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Isaac 26th Sep '11 3 of 7
4

Well I broke my rule of waiting for lower markets before putting some money to work - I was waiting for 4500 FTSE and lower. I have been watching BMS for a LONG time to get in at a good price.

Well I decided to put some money to work, albeit a small amount.

But when I look at the fundamentals it is hard not to put some money to work.

The company is valued at £59.5m, at the final results the company had £25.6m on the balance sheet, pre tax profits were £14.8m last year, it is on a current PE ratio of less then 6 and yields 9%.

Management own about 15% of the company.

They have a big office in Singapore, Asia is where the growth is so this is a plus point. Even if China slows down and the Economy grinds to a halt I don't expect it to last forever.

Infact anyone looking back at the 2008 recession when the BDI slumped will note BMS still did very well financially - refer to Mark's figures in the header.

When you strip out the intangibles the business is worth about £1.43/share.

The directors were buying shares around £4.50ish in recent months.

Downside from here is probably 25% back to £2 & upside is probably 100% over 3-4 years IMO. The 50% drop from the peak has probably priced in most of the downside which is why I was prepared to buy.

I really hope to hold onto these a very long time (and I mean years) and keep taking the 9% dividends, I will sell when the yield goes below 3% & am looking to pick up more if it continues to drop;

I think these are very very good times to build an income portfolio even if it is a case of drip feeding small amounts of money each month.

If BMS did'nt pay a dividend I would'nt be buying here as I have no idea how long the downturn will last, I am happy to buy as I am paid to wait for true value to be realised.

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Fangorn 16th Dec '11 4 of 7
1

I'm still watching. Not been looking at this recently so had a quick look through the interim account that finally arrived.

Waiting to see how their finals come in as there was a worrying cash outflow at the operating level in the August interims. Cash balance down to £9.3m.

And with freight rates suffering from over capacity (despite growth in demand for chartering apparently the size of the new tonnage supplied dwarfed this leading to a fall in freight rates), as well as the current global economic fears and the likely contraction of trade, I feel it's better to wait and see.

Might even offer the chance of getting a bargain as I see they're currently at circa 315p

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D1G3Y 2nd Feb '12 5 of 7
1

I dipped my toe in water and bought a few of these a couple of months ago for about 3.20. During that time the BDI has dropped significantly but the BMS SP has continued to creep up.

http://online.wsj.com/article/SB10001424052970204740904577196740634627990.html?mod=googlenews_wsj

"The Baltic Dry Index, a composite of commodity shipping costs around the world, fell for a 32nd consecutive session to 662."

"The index has plunged 59% this year alone and is down 94% from the peak hit just before the crisis hit."

My understanding is that BMS apply a margin to the total charter cost and as the daily rates represented by the BDI have reduced this will have the knock on effect on BMS revenues.

With 39% revenues and 70% margin coming from the ship broking division (2011 interim report) I am thinking of bagging my small profit.

I had hoped to keep these as a long term investment due to the approx 9% divi but with more ships due to be delivered this year the BDI could remain low for some time and that dividend does not look as secure.


I do note however that when the BDI fell sharply at the end of 2008 and remained low for 2009(compared to the previous year) this did not then correlate into reduced earnings for BMS

Am I missing something?

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Fangorn 3rd Feb '12 6 of 7
1

I share the same concern D1g3y. BDI has collapsed in stunning fashion and, despite what several say to the contrary, I use it as a proxy for world trade(as I gather many do). BMS is seemingly not correlated at all, which I wasn't expecting.

But I do worry that the dividend looks unsustainable especially as the majority of profits come from its shipbroking business. Surely if world trade falls significantly, and with bulk carriers in abundant supply, BMS wont be earning the profits it has recently.

Marben100 however will be better placed to offer a concise update as, unlike me, he is invested and I've only paid them a cursory glance. They've had a nice run recently I've noticed though.

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D1G3Y 6th Feb '12 7 of 7

Spotted a bit more on this over on the FOOL

http://boards.fool.co.uk/yeah-its-basically-broken-down-in-its-usefulness-12469018.aspx

By BertEEE re the BDI "Yeah it's basically broken down in it's usefulness as an indicator because we saw a binge in ship building pre the crisis so now we have way too many ships all fighting for cargo. A lot of people have switched now to look at shipping volumes (which are rising reasonably strongly) but it's much more lagged unfortunately so you don't have such a good leading indicator as the Baltic once was."

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About marben100

Marben100

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I am a full-time private investor... with a little trading on the side (generally small-scale arbitrage in specialist niches). Previously, I spent 24 years in the IT industry, 13 of those running my own IT services firm. I invested as a "hobby" for 20 years before turning it into a full-time occupation in 2004. I really enjoy the "research" side of investing, finding out about varied businesses and industries and learning what makes them tick. Since going "full-time" I have learnt an awful lot from some very erudite investors & professionals who are kind enough to share their expertise in electronc forums such as this. I can now count a number of them as my friends, having had the opportunity to meet them in the real world, as well as this virtual one! I try to pay back the debt I owe by sharing what I've learnt and I always value constructive criticism to correct my errors and misapprehensions! I am a Director of ShareSoc, the UK organisation for individual shareholders. See below for details.     more »



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