Braemar Shipping Services — Ambition to double size in four years

Braemar is the second largest quoted shipbroker in the world, providing broking services to the dry cargo, deep sea tanker, specialised tanker, gas carrier and sale and purchase (S&P) markets. It also addresses the fast-growing areas of offshore and renewables, securities and financial markets, the latter through its corporate finance division Braemar Naves, which has strong synergies with the other divisions. Its key clients include shipowners, trading companies and lenders.

Braemar is currently reaching the end of a long period of reorganisation and is embarking on the next stage of its transformation into a streamlined global shipbroker. Allied to the transformation is the new strategy introduced last year, which is expected to see the company double in size over the next three to four years, to reap the benefits of scale and diversification. It is also developing an offering that addresses the increasing need for all global shipping to offset unavoidable carbon emissions through the purchase of carbon credits from a portfolio of carefully chosen nature-based projects. The International Maritime Organisation (IMO) estimates that shipping accounts for c 2.5% of global CO2 emissions.

Demand for ships and shipping has shown a long-term growth trend as sea-borne trade has steadily increased along with the global population and the relentless demand for global supply chains. Periodically, there have been, and will continue to be, fluctuations in demand volumes and/or charter rates and, although these can be very wide, they tend to be short-lived. Given that Braemar is adding to its broking exposure by both trade and geography, the financial impact of fluctuating markets should be minimised, thus improving the quality of its revenues.

We believe that the current share price and implied modest valuation multiples largely reflect Braemar’s indifferent financial history and modest market capitalisation, and do not fairly reflect the growth potential that exists within the group under the new management team. Our DDM suggests a value of 400p/share, assuming modest dividend growth of 5.5% per year. Our multiples-based model suggests a value of 391p, assuming a P/E of 17x in FY23e. Our DCF suggests that the average of these valuations implies a terminal value growth rate of c -5% pa. We would argue that all these valuations are modest in magnitude and higher values are likely if management can demonstrate successful execution of its growth strategy.

On current estimates, Braemar is trading on a P/E of 10.1x in FY23e (year ending 28 February), which compares very favourably with market leader Clarkson, which is trading on c 18x in FY22e (year ending 31 December). Given the ambition and proven ability to execute of Braemar’s management team, such a wide differential appears unjustified, a situation that could be addressed as Braemar delivers on its strategy.

We believe that at first glance, Braemar’s revenue history (Exhibit 1 below) hides much of the positive work that the new management team has achieved as it disposed of several low-margin and unrelated activities to refocus on pure shipbroking and related financial activities (Exhibit 2 below). After highlighting the group's history of underlying revenue growth, we can see that not only is the growth strategy achievable, but that it has been achieved before, between 2014 and 2019, a period that included the merger with ACM Shipping.

Furthermore, the balance sheet is unconstrained. At the interim stage of the current financial year to end February, Braemar reduced its net debt (including finance leases) to EBITDA ratio to 1.23x, thus achieving its stated aim of reducing the ratio to below 1.5x EBITDA. In its trading update on 3 February, Braemar also commented that trading in the second half to date had been ‘strong’ and that revenues for the year would not be ‘less than £101m’, driven by a volatile dry cargo market and significantly higher transactions on the S&P desk due to a strong dry cargo market and synergies gained from closer collaboration with the financials division on containers.

We also believe that Braemar is likely to engage in some M&A activity to achieve its stated strategy of doubling the size of the business. This would appear to be more achievable now that debt has been reduced. M&A may also be funded through equity, which should have the effect of increasing the liquidity of the stock, which may encourage a wider shareholder base.

Braemar is exposed to numerous external influences that can have an impact on revenue, either via volume of trade, which is largely macro related, or via shipping rates, which can be influenced by supply issues such as the blockage in the Suez Canal in March 2021 when the 20,000TEU (20 foot equivalent unit) container ship the Ever Given ran aground and completely blocked the canal for more than six days. On average, around 50 ships pass through the canal daily, so one isolated incident can have a material effect on charter rates.

Other issues that can affect time charter rates include the risks associated with war or terrorism, which might have the effect of reducing market capacity by forcing vessels to travel on longer voyages, or more recently the effect of COVID-19, which meant there were transport shortages at ports, forcing vessel owners to ‘slow-steam’ to save fuel costs, and reduce congestion and waiting time at ports. This kind of disruption can be a positive for Braemar as, in effect, it reduces the number of vessels on the water and, with vessel supply being scarcer, rates tend to go up, which is beneficial for Braemar.

There is a potential impact from the Ukraine/Russia war and sanctions that have been imposed on the latter. In March, dry bulk exports from Russia were down 12.2% y-o-y, with coal, grain and steel down 11.9%, 2.3% and 26.2% respectively. Since then, sanctions have been tightened so it seems likely that exports, particularly of coal, will drop further. This implies that supplies from other parts of the world on longer voyages are likely to support dry bulk charter rates for the foreseeable future.

The Baltic Dry Index (Exhibit 3) gives an indication of rate volatility, but it is clear from the revenue charts above that such volatility is not usually reflected in the group’s underling revenue as the rate is effectively ‘spot’, but the time charter may last two to three years, thus spreading Braemar’s income and lowering risk and volatility.

Braemar is an ambitious global shipbroker that is looking to double the size of its business in the next four years, either through organic growth, acquisition or both. We believe it has the management, strategy and balance sheet in place to allow it to achieve this demanding but achievable target. It has already made several disposals and rescheduled the Naves acquisition liability, which has freed up capital, as well as simplifying the group’s structure, which should help set the tone for a period of global expansion. A timeline of events in the company’s 2021 Annual Report and Accounts provides more detail.

Braemar is the UK’s second-largest quoted shipbroker behind market leader Clarkson. As a full-service shipbroker, Braemar offers a comprehensive range of services to ship owners and operators from a global network of offices in the shipping centres of London, Aberdeen, Geneva, Athens, Houston, Melbourne, Perth, Sao Paulo, Singapore, Shanghai, Mumbai, Dubai and Beijing. 69% of its revenue originates in London, with another 13% attributed to Singapore.

These services address almost all aspects of the shipping markets including tanker trade (specialised and deep sea), dry cargo, S&P, gas, petrochemicals, offshore and renewables. It also offers a research function that provides market intelligence across the whole shipping spectrum, freight derivatives brokering, and has a financial division that acts as a corporate financial advisor to the maritime sector. Following the disposals, it will report divisionally as described below.

Exhibit 4 above illustrates how management sees the relative strengths of the group by region and market, which is relevant when considering the current expansion strategy. This is outlined in the next section on Braemar’s strategy.

A traditional shipbroker provides a financial service that matches vessel owners with investors and charterers, as well as managing exposure to market risk, in return for a fee that is usually a percentage of the overall cost of freight, vessel hire or the value of the asset itself. It is a specialist market where personal and corporate relationships form a key part of the business model. Individual brokers who generate fee income are paid salaries, but they also earn sizable bonuses based on the overall profitability of the business and the income they generate. In FY20, which includes revenue and costs relating to the logistics division (Cory Brothers, since sold), staff costs, ie salaries and bonuses etc, accounted for c 80% of the group’s total operating costs, highlighting the importance of employing the right brokers for the right trades.

A shipbroker is very similar to any other kind of broker, although ships and freight markets do not behave like stocks and shares, or even commodity markets. It provides a service for which it gets paid, much the same as a stockbroker or insurance broker. The more transactions it executes and/or the higher the price of the transactions, the more revenue it generates. There are several strings to a shipbroker’s bow: integrated brokers like Braemar are active in chartering, S&P, forward freight agreements (FFAs) and structured deals, which involve its corporate finance activities. In Braemar’s case it also generates income from providing market research. Each of these activities is briefly explained below:

Braemar also earns a modest income from subscriptions and project work that relates to the provision of market research and intelligence under the brand BraemarMarkets. Research income is spread across the desk to which it relates.

Braemar was the result of a number of acquisitions over a long period of time that left the company broadly spread across numerous maritime-related activities. The current board has decided to focus on its traditional core shipbroking business, with the added provision of expert advice in shipping investment, chartering and risk management.

This focus led the company to dispose of several businesses including:

The board is now focused on doubling the size of the remaining business over the next three to four years through a combination of organic growth and M&A activity. Braemar fully recognises that its customers are increasingly global and it needs to be able to offer a fully global service. Looking at Exhibit 4, it is clear that a majority of the focus will be on expanding the business in a range of markets where it sees opportunities, especially in the Middle East and the Americas.

In November 2020, to best achieve the required outcome, Braemar invested relatively modest amounts of capital in Zuma Labs, a technology platform that allows information sharing across certain broking desks and clients. Further investment in access to data and market information is likely.

The current board is relatively new and, in our opinion, it therefore follows that strategic decisions are likely to benefit from a fresh perspective. The strategy to double the size of the business (described above) was put in place by the current board in 2021.

One of the recent senior appointments to the board was chairman Nigel Payne in May 2021. He has a wealth of board experience, both as a chairman and a chief executive. He is currently non-executive chairman of Gately and a non-executive director (NED) of GetBusy. He was CEO of Sportingbet from 2000 to 2006.

James Gundy was appointed chief executive on 1 January 2021, having previously been the CEO of Braemar’s shipbroking division. James joined Braemar when it merged with ACM Shipping Group in 2014, where he became MD of Shipbroking until 2020 and was responsible for driving growth post the ACM merger. He has been a shipbroker for 35 years, specialising in tankers and S&P projects.

Nick Stone (CFO) was appointed to the group in April 2019, having previously held the same position at The Appointment Group. He was also a director of Hornby and KBC Advanced Technologies.

Tris Simmonds joined Braemar’s board in August 2021 as group chief operating officer (COO). He joined Braemar when his own business, Atlantic Brokers, was bought by the former in 2018. Before setting up Atlantic, Tris worked for GFI Group for 14 years, latterly as head of European commodities. In total, he has spent c 30 years in the commodities industry.

Elizabeth Gooch, MBE was appointed to the board a non-executive director from 1 August. She has experience of governance, compliance and financial reporting of publicly listed companies, having founded and run AIM-listed software company EG Solutions from 2005 until 2017.

Joanne Lake was appointed as a non-executive director in March 2022. She holds a number of NED roles including Mattioli Woods, Made Tech and Gately.

The global deep sea shipping fleet has been steadily expanding. A key driver has been growing international trade, which we believe is likely to continue and should have a direct benefit on the shipbroking industry. While some charter rates are currently very high, for example container ship charter rates, others like the Baltic Dry Index are broadly within a historical average range and other indicators such as fleet age and low new vessel order books for certain key trades point to greater future demand, thus balancing risks and growth. Furthermore, growing demand for sustainability is adding new opportunities and income streams for shipbrokers (see New ‘green’ growth drivers section below). We believe Braemar is well placed to tap into these developing markets.

A traditional shipbroker provides a financial service that matches vessel owners with vessel operators (charterers) and trading companies in return for a fee that is usually a percentage of the overall time charter cost (see page 5). Therefore, a shipbroker’s income on a specific trade (ie dry cargo, tankers etc) can be very volatile. However, despite charter rate volatility, the overall volume of trades has steadily increased over time as the volume of shipping capacity has increased (see Exhibit 5 below).

Exhibit 5 shows that global deep sea fleet capacity has more than tripled in the last 20 years despite macro and geopolitical upheaval. This underlying growth could also be a driver of increased income because shipbrokers can become heavily involved in the newbuild market, where they will liaise between a potential ship owner and the shipyards that will be commissioned to construct the vessel. Again, fees will be generated both on newbuilds and where existing vessels or fleets change hands.

Generally speaking, shipbroking depends on building good relationships with most shipowners, charterers and shipyards specialising in a particular trade and on a limited number of shipbroking locations such as London, New York, Singapore and Tokyo. Other key locations are Oslo, Athens, Copenhagen and Geneva in Europe, Connecticut, Houston and Montreal in North America and Hong Kong, Shanghai, Delhi and Mumbai in East Asia and South-East Asia.

However, a few like Braemar and Clarkson have become integrated shipbrokers that cover most of the key trades, and offer financial (corporate finance) and research services as part of the overall package of activities.

There are a number of trends in shipping which suggest that income for shipbrokers is likely to be buoyant for the foreseeable future, with the war in Ukraine adding to the tightness of rates due to the potential impact on trade flows. Trends include global economic growth, an ageing fleet, cost inflation, lack of spare shipbuilding capacity because yards are full of container new builds and high steel prices, encouraging owners of older vessels to sell tonnage for scrap.

Dry bulk time charter rates were at relatively elevated levels in autumn 2021, before dropping back as a reaction to the International Monetary Fund’s (IMF) downgrading of 2022 global growth expectations, from 4.9% to 4.4%, in January. The IMF cited the latest COVID-19 variant travel restriction as one driver of the reduction. In addition, it suggested higher energy prices and continued supply chain disruptions, as well as a slower recovery in private consumption that would cap growth prospects. The outlook for the Chinese economy is important for the dry bulk market as it accounts for 44% (BraemarMarkets – The big picture: Global economic outlook) of all bulk carrier demand in deadweight ton days (dwt days).

That said, in recent weeks as the conflict in the Ukraine has intensified, the one-year Time Charter Index has risen c 50% as uncertainty surrounding trades flows and security of shipping has increased.

It remains to be seen where rates settle in future months but, with 790 vessels on order for the industry globally, of which 269 vessels or c 2.4% of the current fleet (11,440 vessels) are set for delivery this year (source: Braemar), rates could remain at current elevated levels for a while. There are relatively few dry bulk vessels that are older than 20 years and therefore time charter rate support from higher levels of scrappage look modest at best.

As can be seen from Exhibits 9 and 10 below, very large crude carrier (VLCC) five-year time charter rates in 2022 are at the low end of the historical range, suggesting little optimism for improved prices in the market. This is because post COVID-19 economic recovery is likely to be met with increased vessel delivery. However, according to research from BraemarMarkets, there is scope for a more optimistic view, which may be augmented by the impact of sanctions relating to the Russia/Ukraine conflict in our opinion.

This more optimistic view stems from a combination of factors, including:

Braemar’s third-largest chartering revenue income stream is specialised tanker revenue, behind deep sea tankers and dry cargo. It is made up of revenue from a number of differing trades split broadly evenly between oil products, chemicals, liquefied petroleum gas (LPG) and liquefied natural gas (LNG).

The outlook for charter rates appears to be encouraging as global trade is growing and most of the tanker shipyards are nearing full utilisation for the next three years, mainly taken up with container ship orders and some LNG volumes. It therefore appears unlikely that most specialised charter rates will be hit by an oversupply of tonnage. According to BraemarMarkets’ report The Big Picture: Tanker supply dated 4 February 2022, 2023 delivery slots were filled in Q121. Around 25m gross tonnes of capacity contracted in 2021 is now expected to be delivered in 2024.

S&P activity is very important to Braemar as it accounts for c 20% of group revenue, with the majority of income generated from second-hand trading activity and scrap sales that have different drivers from the newbuild market.

Generally speaking, in the newbuild market, there are three reasons why potential ship owners commission new capacity. Firstly, the market is expected to grow and owners want increased exposure to it. Secondly, vessels may be heading towards the end of their economic lives, which is generally considered to be c 20 years. Thirdly, there may be environmental or legislative changes that will render existing capacity uneconomic, or even illegal, for example single hull tankers that were phased out between 1995 and 2015.

The charts below illustrate the current situation clearly. Global order books for newbuild dry bulk carriers and tankers are at, or close to, historically low levels and the total amount of capacity that is heading towards, or is already older than the typical 20-year life expectancy, is increasing sharply. This suggests that the order book should be close to an inflection point.

The shipping industry is becoming increasingly complex from a regulatory point of view and navigating the compliance landscape requires expert counsel, which Braemar is able to provide.

It is well known that the global shipping industry is responsible for c 2.5% of global carbon emissions and has put in place commitments to reduce emissions by 50% from 2008 levels by 2050 (see timeline below). The industry is addressing this in a number of ways, including the introduction of Flettner rotors (spinning ‘sails’), hull coatings and bulbous bows, to switching from marine fuel oil to natural gas and even battery technology as ways of reducing greenhouse gas (GHG) emissions.

However, there is mounting pressure on the industry, for example from the COP26 climate summit, the EU, the Paris Agreement and the Poseidon Principles, to adopt zero emission targets by that date. This will be very hard to achieve because there are 175 member countries within the organisation, all with different agendas and financial situations.

Another issue that is delaying decisions is the nature of the technology that needs to be in place to achieve the target. Shipping assets are long term by nature and very costly, so understandably nobody wants to ‘back the wrong horse’. An industry-led proposal has been submitted to the IMO to create a $5bn research fund to find the right technology, but no decision has yet been made.

The IMO estimates that the cost of achieving net-zero emissions by 2050 is $2.4tn, with c $500bn required by 2030. However, if even a fraction of it is undertaken we believe that shipbrokers with S&P desks like Braemar will have a material role to play in matching capital, ship owners, operators and shipyards.

Braemar is particularly sensitive to the level of global trade and the shipping charter rates that prevail at any given time. There are a number of factors that can have an impact on the former that fall outside Braemar’s control, such as a recession. Equally, a different set of factors can contribute to charter rates and, again, falls outside Braemar’s sphere of influence, as described in the Markets: Outlook for growth section above. However, there are often offsetting factors. For example, strong charter rates for a particular trade, such as containers currently, lead to a surge in S&P activity that Braemar may be able to leverage. If that surge in orders leaves the market oversupplied in future years, charter rates would probably fall and the income for a broker would be lower than hoped. This volatility can be seen in the Baltic Dry Index.

Currently the events unfolding in Ukraine could have a knock-on effect on the company as ‘normal’ international trade is disrupted. Trade flows of oil and gas from Russia, for example, are likely to be hit by sanctions, which could mean that oil is supplied to international markets from other sources. This potentially means longer trade routes and vessels out of position, which would have the effect of pushing up time charter rates, especially in the short to medium term.

Other factors can contribute to time charter volatility. For example, when the 20,000TEU vessel Ever Given blocked the Suez Canal in 2021, it effectively took capacity out of the market and pushed up container charter rates. Other geopolitical situations could have a similar effect of reducing capacity by forcing vessels to take alternative and longer routes. Even COVID-19 has had an impact as ports became blocked with vessels queueing to be unloaded.

As an international company, Braemar could be affected by exchange rate fluctuations. Most, if not all, international trade is denominated in US dollars, so when the dollar is weak versus sterling, its reporting currency, sterling income will be negatively affected. Currently the opposite is true, with the US dollar strengthening versus sterling from $1.42 in May 2021 to c $1.25 currently.

For Braemar specifically, the share price has potentially been held back because broker bonuses have been largely paid in Braemar stock. This has led to a dominance of small private investors on the register and, arguably, to an unwillingness by institutional shareholders to buy stock. Liquidity has therefore been less than the 100% free float might suggest. Braemar is addressing this issue by reducing the share element of bonuses. If institutional buyers subsequently began to appear on the register, the share price might be re-rated upwards.

Braemar has a February year end and its latest published results cover the six months to August 2021. These results revealed that revenue, excluding logistics, grew by 10.8% to £47.4m. Both the remaining divisions, shipbroking and financial, reported strong growth, with the latter performing particularly well having earned revenue from some large transactions. Underlying operating profit increased by 10.1% to £5.6m, excluding Cory Brothers. Profits from shipbroking were broadly flat due to mix, implying that all reported growth was accounted for by the financial division.

In February 2022, Braemar released its full year trading update, which revealed that it expected ‘continuing’ revenue to grow c 20%, from £84m to c £101m, and operating profit to grow from £7.7m (excluding Cory, £8.9m including Cory) to c £9.8m, implying margin expansion from 9.2% to 9.7%. These strong figures reflect favourable conditions across numerous markets and investments made by the company in increasing the breadth, focus and depth of its broking activities. Net bank debt fell from £8.9m at the end of February 2021 to £2.8m at 3 March 2022 after receiving the Cory disposal proceeds.

Looking into FY23 and beyond, we currently forecast modest annual revenue growth of c 3-4% per year, which we consider to be conservative given that much of the potential growth is likely to come via the acquisition of teams of brokers or entire businesses, both of which are impossible to forecast but provide scope for uplifts to earnings estimates. Following the most recent trading update on 20 May, we forecast c 20% growth in normalised operating profit, with some margin expansion reflecting the growth strategy and supportive markets. A key feature of the forecasts is a reduction in net bank debt, which we estimate will fall to £5.6m at end February 2022 and move to net cash of £1.5m by end February FY23. Our estimated net debt including leases is £14.2m and £7.1m respectively.

The company expects to pay a total dividend of 7p per share for FY22, which would be c 2.4x covered by earnings. Braemar’s current stated policy is to pay a progressive dividend in the future which leads us to assume that dividends will grow in line with our forecasts. Meanwhile, with our estimated end-FY22 net debt, including leases, of £14.2m (implied net debt/EBITDA of 1.06x with Braemar targeting a reduction in net debt/EBITDA to less than 1.5x), the group has, in our view, sufficient flexibility to pursue acquisitions while growing the dividend.

We believe that Braemar’s revenue history hides much of the positive work that the relatively new management team has achieved, as it disposed of several low-margin and unrelated activities, and refocused the company on pure shipbroking and related financial activities. Once the group’s underlying revenue growth history is highlighted, we can see that not only is the growth strategy achievable, but that it has been achieved before, between 2014 and 2019. Furthermore, the business remains cash generative with low levels of bank debt. We believe it is now just a matter of time before the current management makes its next move to expand the business.

Looking at Braemar’s headline historical revenue performance (Exhibit 16) gives a distorted view of its history and a disguised picture of its future expectations. Exhibit 17 gives a much clearer picture of the historical performance of the remaining core businesses in the group and is a clear marker of future growth expectations.

The principal difference between the two charts is the exclusion of several business that have now been sold:

The growth in the core business has been achieved by building out the breadth of services in the core shipbroking operations, both by type of line and geographically, and by the acquisition of NAVES Corporate Finance in 2017 for up to €29m post the earnout measurement.

The forecast period shows a step-up in continuing revenue in 2022, due in part to strong markets. Thereafter, we forecast only modest overall growth, which does not wholly reflect the company’s stated strategy to double the size of the business in three to four years. This is because a proportion of the growth is likely to be achieved via acquisitions, which we cannot predict. We would therefore suggest there is upside risk to our estimates.

However, looking at the revenue history, it is easy to see that the company has doubled in size before, between 2014 before the Braemar/ACM merger and in 2019, so it is certainly conceivable that the current growth ambitions are realistic and achievable.

Fundamentally, shipbroking is a cash-generative activity where the main costs are staff salaries, bonuses and social security costs. In addition, the logistics division, which was part of the group until the end of FY22, was a cash flow-positive operation, taking in revenue and passing on fees to third parties. Although this benefit will cease, Braemar will remain operationally cash flow positive, which should help finance the expansion of the group in line with its strategy.

Braemar enjoys a strong balance sheet with expected net bank debt of c £5.6m at the end of FY22, down from £8.9m at the end of FY21 and £20m the year before. This implies gearing of c 8%. We expect net bank debt to continue to decline by c £5m pa, which implies that it enters a net cash position in FY23.

In addition to bank debt, Braemar has outstanding loan notes of £2m and deferred consideration due of £2.9m, both of which relate to the purchase of NAVES in 2017. It also has ‘bank loans and other borrowings’ totalling c £6.5m which relate to unexpired lease liabilities. The total debt detailed here is expected to be reduced by the earnout proceeds from the disposal of the logistics division. The total disposal consideration is likely to be at least £10.25m, with an initial cash payment of £6.5m followed by three further payments of between £1.25m and £3m. Because of the business’s positive cash flow characteristics, there should be a working capital adjustment at disposal, which is likely to totally offset the expected £6.5m initial cash payment.

We estimate that the group’s total assets will amount to c £164.0m in FY22 but, as is typical of a broker, the principal asset on the balance sheet is ‘goodwill’, which is largely the result of the acquisition of ACM Shipping in 2014 and NAVES in 2017.

We believe the current share price and implied valuation multiples largely reflect Braemar’s indifferent financial history and modest market capitalisation, but do not fairly reflect the growth potential that exists within the group. Our DDM suggests a value of 400p/share assuming modest dividend growth of 5.5% pa. Our multiples-based model suggests a value of 391p assuming a P/E of 19x in FY23e. Our DCF suggests that the average of these valuations implies a terminal growth rate of c -5% pa. we argue that all these valuations are modest in magnitude and higher values are likely if management can demonstrate successful execution of its growth strategy.

Shipbroking can be a fairly volatile market, as demonstrated by fluctuations in tanker charter rates, for example, over the last two years, where rates were extremely high in the early months of lockdown as the market was awash with products, but have now fallen to rates rarely seen. However, Braemar is a diversified broker covering numerous markets and therefore although individual income streams can fluctuate, the collective income stream is generally more robust. The revenue and operating profit streams and current forecasts can be seen in the following two charts.

Given the historical lack of growth, and the yet to be proved growth strategy, we believe that valuing Braemar on a DDM basis is appropriate as management can influence the size of payments, taking a view on current trading, the outlook for revenue and the company’s financial situation.

Using 7p dividend/share as a base and applying our estimate of the cost of capital and dividend growth rates of 7.25% and 5.0% respectively, we arrive at a valuation of 311p, modestly above the current share price. However, we also know that management is trying to double the size of the business in the next three to four years, so a dividend growth rate in excess of 5% is likely over the longer term. Applying a growth rate of 5.25%, in line with the long-term historical growth rate of competitor Clarkson, implies a value of 350p. Arguably modest in the scheme of things, a growth rate of 5.5% implies a value of 400p, and c 40% upside. The table below suggests a range of implied values for differing costs of capital and dividend growth rates.

Braemar is currently trading on a normalised P/E of c 10.1x in FY23e, while its direct competitor Clarkson trades on a P/E of c 18x in FY22e. Although the latter is a larger organisation generating revenue around four times that of Braemar, the discount between the two ratings appears wide, and we believe it gives little or no credit to Braemar’s ambition to double the size of the business. That said, it is worth commenting that there is material potential dilution in Braemar’s share count, which implies that FY23e EPS falls from 27.9p to 23.0p on a fully diluted basis. This equates to a P/E that rises from 10.1x to 12.2x on a diluted basis, still materially lower than Clarkson’s.

If we were to value Braemar on, say, 17x its 2023e diluted normalised EPS of 23.0p, it would imply a value of 391p, broadly in line with our DDM above. Arguably, this valuation under-estimates the potential valuation because the current EPS forecast does not reflect any success in executing on the stated strategy. Equally, if we apply a multiple of 15.0x, allowing a P/E discount of c 20% relative to Clarkson to account for the broader reach of operations and longer dividend track record, we would still reach a valuation of 345p per share.

The table below compares the headline figures of Braemar and Clarkson. Clearly, Clarkson is the bigger and more highly rated of the two, but this perhaps highlights the potential upside. For example, within the operating margin it should be noted that pre-central costs, Clarkson generates a margin of 21.6% from shipbroking compared to Braemar’s 16%, suggesting some upside. We estimate that the two companies make similar margins on their financial divisions.

As a final cross-check to test the valuation of Braemar suggested above, we have constructed a DCF which suggests that a valuation of c 400p/share can be justified on the assumption of a terminal growth rate of c -5% pa. We would argue that this is very low.

Other key assumptions include:

To put the DCF into context, a zero terminal growth rate implies a value of 509p/share and, at a modest 2%, the implied valuation would be in excess of 617p/share (not shown in Exhibit 24), more than twice the current share price.