Safe Sailing...!!!
We Initiate coverage on the Shipping sector which is riding the commodity upcycle and where companies
possess highly liquid assets portfolio. The buoyancy in tanker freight rates due to supply constraints and low
level of oil inventory in the US adds to the lucrative investment opportunity. Our preferred bet is GE Shipping
because it has the largest exposure in the tanker segment coupled with favorable valuations. We also maintain
a buy on Mercator Lines Ltd. (MLL) due to its exposure in the dredging segment.
The Shipping sector is at the epicenter of global trade flows and offers a direct proxy to ride the rising commodity upcycle.
The sector is also blessed with liquid tradeable assets, and revived pricing outlook under changing regulatory scenario.
We expect the tanker freight rates to strengthen driven by higher crude movement and limited tanker availability (due to
single hull vessel phase out by 2010) and low level of oil inventory in US as compared to CY07. After the incidence of oil
spill in South Korean coast in early December 2007, we believe without imposed regulation, it is almost certain that the
trend will be more and more away from the use of single hull tankers during 2008 and beyond. (Refer Annexure I)
Dry bulk segment will remain stable in the short term where demand will be absorbed by the supply due to conversion
from single hull tankers to dry bulk .As per estimates Dry bulk carrier segment is likely to witness a growth of 10.8 % p.a.
Hence we believe in the medium term dry bulk rates are likely to soften from 2009E onwards due to additional supply of
vessels. (Refer Annexure II)
The key driver for the offshore segment is the increase in exploration and development expenditure globally (a spiral
driven by rising crude price). From prospecting, estimating to actual exploration, offshore vessels are integral to these
investments. Limited availability of such vessels is expected to cause a further rise in the charter rates for such vessels
over the next 2-3 years. In such case, players with younger vessels would be in an advantageous position.GE shipping
is increasing its exposure in offshore segment from 4 vessels in FY08 to 20 vessels in FY2010. (Refer Annexure III)
According to NMDP (National Marine Development Programme) for major ports, 25 different dredging projects are
envisaged to be taken up at a cost of Rs.63.04 bn. DCI is a preferred vendor for these activities, Large capital expenditure
makes chartering of dredgers to DCI an exciting business opportunity. Players like Mercator Lines Ltd have already
seized this opportunity. (Refer Annexure IV)
On current valuations, most of the shipping stocks are trading at a significant discount (approx ~26 to 30 %) to their NAV.
There exists a further hidden value of assets for vessels under order execution and pending fleet addition (where asset
prices have spiraled in trading markets).Globally, shipping players generally quote between 20% discount to 15% premium
to their NAV.
We initiate coverage on GE Shipping which has the largest exposure in the tanker segment with 77% double hull
vessels with an average age of 11.2 years and increased exposure in offshore segment. We recommend a Buy
with a target price of Rs.740 (7x FY10E). We also maintain a buy on Mercator with revised estimates. We strongly
feel that any decline in Dry bulk rates will be offset by attractive opportunity in the dredging and offshore sector.