Result Update: GE Shipping Company - SELL - TP Rs.350 - Kotak

GESCO has reported weak set of numbers for Q4FY18on the back of 1) Stagnant shipping market, 2) Weak offshore market, and 3) Decreasing asset prices.

Key Highlights

- GESCO has reported weak set of numbers for Q4FY18 as the shipping continues to remain weak across segments. Other reasons for the weak performance include poor strategy adopted by the company in placing its ships, addition of ships without business, poor bargaining with customers and higher bunker prices (fuel). Sales was reported at Rs 7.7 bn (-8% YoY and flat% QoQ).

- The operational performance was also weak in line with our expectation with a fall in EBIDTA margin. Weak sales due to poor shipping market, lower operating leverage and increasing bunker prices impacted the margins at 27.75% (-1610 bps YoY).

- Depreciation cost and interest cost has remain stable, while other income has fallen with falling yields across fixed income securities.

- It is important to note that company has provided for impairment of Rs 2.06 bn in the quarter, which impacted the net profit and which also suggest sustained weakness in the shipping market.

Valuation and Outlook

- We estimate business environment and sentiments to improve going forward leading to poor revenues, weak EBIDTA margin, falling return ratios and stretched BS for GESCO. We are valuing the company based on book value which equates to book value of all the assets minus the liabilities. The current cycle does not capture the true earnings of the company and hence we are not using any earnings metrics. We value the stock at 0.60 (60 percent) of its FY20 book value. The 40% discount to book value reflects the discount required for a cyclical stock in the current state of the shipping cycle. Recommend SELL (from BUY) with a decreased TP of Rs 350 (from Rs 420) at an implied PE of 14.5x FY20E.

Shares of GREAT EASTERN SHIPPING CO.LTD. was last trading in BSE at Rs.346 as compared to the previous close of Rs. 347.4. The total number of shares traded during the day was 4444 in over 202 trades.

The stock hit an intraday high of Rs. 346.9 and intraday low of 340.9. The net turnover during the day was Rs. 1525503.

Source : Equity Bulls

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