Calmer waters could see Clarkson surge by a quarter

A lot can change in a year and the fortunes of shipping services firm Clarkson have seen somewhat of an upturn since last July.

Less than a fortnight after the UK's vote to leave the EU, the FTSE 250 firm saw its share price slump to a three-year low 1,692p, though that had little to do with the Brexit result which moved shares just 7% lower. The stock dropped by a further 23% early July after a profits warning saw forecasts slashed.

In the end last year's results weren't as bad as feared and the stock recovered pretty swiftly to trade above 2,300p by its first-half 2016 update 12 months ago. The re-rating continued into full-year results in March and the share price hit 3,000p, a record high.

Since then, a downtrend has been established and Clarkson closed last week down 13%. However, shares ticked modestly higher Monday, gaining 1.75% to trade at 2,689p, on "a strong set of interim results".

While freight levels remain low, with the ClarkSea index - a weighted average measure of earnings for the main vessel types - just 2% higher than this time last year, "indications of a recalibration in some areas are appearing", according to chief executive Andi Case.

The Baltic Dry index, which measures changes in the cost to transport various raw materials, averaged 979 in the first half of 2017 - double 2016's all-time low level. Chairman James Hughes-Hallett also pointed to "very early signs of recovery" after challenging market conditions prevailed in recent years.

Now, though, Clarkson is debt free, having repaid its outstanding loan notes related to the February 2015 acquisition of RS Platou ASA in June. Case says its solid cash position - net funds stand at £71.4 million, 53% up year-on-year - will help it invest in the business and take advantage of strategic opportunities as they arise irrespective of market conditions.

It also means Clarkson, which has hiked the dividend paid in every year since 2002, can continue to deliver increasing returns to shareholders. Accordingly, the interim payout was 1p, or 4.5%, higher at 23p.

Underlying pre-tax profit for the six months ended 30 June 2017 was £24.5 million, up 12% year-on-year, on revenues up 6.5% to £156.8 million. Strip acquisition-related costs out of the pre-tax profit before figure and the increase is 25% to £21.9 million. Underlying earnings per share ticked up 9% to 57.5p.

As mentioned, shares only modestly improved this morning and broker forecasts for 2017 were unchanged, but Clarkson now has momentum. Case tells us he's "optimistic in [Clarkson's] ability to capitalise on the upturn in the markets when it occurs", though that isn't expected to happen in the near term according to Hughes-Hallett.

Colin Smith at Panmure, a long-time fan of the company, agrees with Case. He expects Clarkson to be fully able to leverage a return of more benign market conditions.

Further, a very material increase in shareholder distribution is also expected now the firm is free from debt. He thinks "Clarkson will make a more aggressive move with the final dividend", pencilling in 70p. That's expected to increase by 10p in each of the two subsequent years leading to a prospective 2019 yield of 3.5%.

At Smith's target price of 3,000p - the lowest of the trio of brokers we have seen - Clarkson would trade in line with its historic average on a price/earnings (PE) basis, 19.4 times, by 2018.

At a current price of 2,689p, on numbers from Gerald Khoo at Liberum Clarkson trades on a forward PE of 23.5 times, falling to 20.4 in 2018. This is a "clear premium to the market and its nearest peer, Braemar Shipping Services".

"Although we recognise that some of this premium reflects the anticipation of higher earnings when shipping markets eventually recover, we believe a premium is more than warranted by Clarkson's unrivalled breadth and depth of capability, its multiple market leading positions, and its growing digital capabilities," he adds.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.