Market concerns in the shipping industry around an eventual downcycle in shipping rates may be exaggerated and one company is well placed to leverage from this opportunity. Global brokerage house, Nomura has initiated coverage on the Great Eastern Shipping Co. with a ‘Buy’ rating and a target price of Rs 1,965. This implies an upside of nearly 28% from the stock’s current price.
The Great Eastern Shipping share price surged 3% intraday on September 28 following a positive outlook from Nomura. The stock has gained nearly 15% in the last month and around 9% in the last six months.
The brokerage said Great Eastern Shipping’s distinguishing feature is not its assets but its capital allocation. The company’s management has shown the discipline to buy tonnage when asset values are depressed and sell into strength, returning surplus cash.
“It sat on a cash pile of Rs 8,000 crore as of Q1 (30% of its NAV, 38% of marketcap), which we think can be used to double its existing fleet once the cycle turns negative,” Nomura said.
The company’s net asset value clocked an around 27% compounded annual growth rate in FY21-FY26, mainly led by strong operating cash flow generation and an increase in the value of assets as the global shipping market continues to be in an upcycle due to the disruptions in global trade flows.
Nomura expects operating cash flow generation to remain strong at Rs 38 billion to Rs 49 billion over FY27-FY29. “We think that market concerns around the eventual downcycle in shipping rates may be exaggerated, as GE Shipping ( appears well-placed to leverage from this opportunity as it targets to double its existing fleet (we assume a 50% increase in fleet over FY26-FY29) at low prices, without needing to raise any external capital, given its very strong cash balance,” Nomura added.
The brokerage’s FY28 and FY29 earnings projections are “conservative” as it assumes 50% lower spot rates for crude tankers. However, it expects the company to add 10 vessels each in FY28 and FY29.
Nomura said the resolution of ongoing conflicts may put downward pressure on ton miles demand and is among the key downside risks to its forecast. Other risks include sustained high oil price which may lead to demand destruction, strong tanker order book that can cause oversupply, and execution risks in fleet expansions. A repricing of offshore rigs and the rupee’s appreciation against the dollar also pose risks.
Nomura believes that Great Eastern Shipping is well placed to benefit from concerns about an eventual downcycle in shipping rates. The brokerage house believes that the company’s focus on doubling its existing fleet at low prices without needing to raise any external capital should aid its performance.