Clarkson PLC CKN
June 16, 2010 - 6:17pm EST by
dylex849
2010 2011
Price: 9.00 EPS $0.95 $1.10
Shares Out. (in M): 19 P/E 9.2x 8.1x
Market Cap (in $M): 250 P/FCF 9.5x 8.2x
Net Debt (in $M): 73 EBIT 36 41
TEV ($): 177 TEV/EBIT 4.9x 4.3x

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Description

Bottom line- single digit p/e on depressed earnings, net of cash even cheaper, 5% div yield 2x covered, toll on global GDP growth, optionality that investment services delivers.  In short, a coward's way to play an economic recovery, and already cheap if the recovery never comes.

Introduction

  • World's largest integrated shipping services business with 150 year history (you know the name if you have ever done research on a shipping investment)
  • This is a global franchise with a reputation and competitive position that is unrivaled in the industry
  • Classic brokerage business in that the larger you are the stronger your competitive position
  • Clear #1 market position in activities representing 80% of the company's revenue (gained share in 2009)
  • Valuator of choice for fundraisings performed by 21 of the world's top 25 I-banks
  • Global business with exposure to every aspect of shipping from charters to scrapping of vessels (see website at www.clarksons.com for details)
  • Leading research organization (70 people) that is world authority on all things shipping and 10x size of next largest competitor
  • Average operating margin of 18% over the past 6 years (23.6% peak, 12.8% trough)
  • Bonuses are 50% of PBT and act as natural release valve in good times and bad
  • Low capital intensity of roughly £2m per year against avg EBIT of about £25m
  • Global network of 21 offices with brokers across multiple disciplines removes risk of heavy exposure to any one individual or team
  • Almost 800 employees globally, of which about half are brokers
  • Strictly an agent and take no principal risk
  • Management owns 25% of the company.   CMB, leading shipping company, owns another 17% (not awful to have a large customer as a large shareholder)
  • EV value deducts accrued bonuses from cash in attempt to be conservative, while also dinging company for 7m pension liability
  • EV gives credit for 18mn of various hidden assets, including investment in hedge fund, stake in Baltic Exchange, conservative value on legacy shipping asset (Hermian) that is for sale

The Pitch

  • Clarksons makes money by charging a fixed commission in basis points on broking transactions
  • Transactions are determined by volumes multiplied by rates
  • Rates in 2009 were very depressed with many operators operating at cash b/e.  Volumes weren't wonderful either.
  • Rates in 2010 have recovered and longer term rates should return to a level that allow operators to earn their cost of capital
  • Toll on global GDP growth as shipping volumes expand. As one data point,  the global fleet for Dry bulk has grown tonnage by 60% from 2004 through 2010. Other disciplines have increased fleet size as well (e.g. Tankers, Containers, LNG, etc.) and it is not inconceivable that respective fleets are markedly larger five years from now. 
  • Financial segment includes I Banking and internal hedge fund that are not currently profitable
  • 2009 was a crummy year for the shipping industry and the company made £22.7m, putting the valuation at an EV of ~5x EBIT on a trailing basis for 2009 results
  • 2009 earnings were further depressed by severance to former CEO and losses in financial services division (call is 25m if you want to normalize)
  • 2010 should be better than 2009 (see interim trading statement that says "We have experienced steady improvements in the trading environment since the beginning of the year")
  • Business is less cyclical than one might suspect due to the broking business having a forward order book that generally covers 30-40% of each year's broking revenue.  Forward book actually spreads out decades (albeit small portion), but the company only discloses that portion which will be realized in the next calendar year
  • I believe good chance that order book at end of 2010 is bigger than it was going into the year
  • Hedge fund has had good numbers but lacks critical mass
  • I Bank is partnership with Johnson Rice that is embryonic
  • 2009 historical and my 2010/11 forecast figures incorporate divisional losses on Ibank and hedge fund, however valuation provides no optionality for success
  • Will shut down both of above if not at b/e within 18 months
  • FWIW CEO believes investment services could make a meaningful contribution to EBIT in the next few years
  • Stealth play on Sterling weakness as largely USD revenue and Sterling costs. In 2004-2007 the company made £20-25m with Sterling ~25% above current levels. If Sterling stays around current levels or weakens further, much of the differential will drop down to the bottom line.  Partial hedge in place for 2010, but will roll off in 2011, suggesting ceteris paribus higher earnings in 2011 vs 2010.
If interested in the name Panmure is house broker

Catalyst

High quality global franchise that fundamentally has leading market positions and attractive economics
Absolutely cheap valuation with 5% dividend yield
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