Global values GNH stock at AED2.34 and recommends 'BUY' on the stock

20 July 2008

Global Investment House - UAE - Gulf Navigation Holding PJSC (GNH)- Gulf Navigation Holding PJSC (GNH) registered a strong topline growth of 66.3% on an annualized basis registering revenue of AED272.1mn during the 12M ended 31st Dec'07 compared to AED163.6mn recorded during the 12M ended 31st Dec'06. Revenue increased at a 2-year (2005-2007) CAGR of 74.3%. The major contributor of revenue is the Chartering segment that contributed 92.8% of revenue in 2007. The other three segments Ship Agency (5.7%), Commercial Agency (1.6%) and Ship Management (0.02%) segments combined contributed the remaining 7.2% of the total revenues. We expect the company to register revenues of AED373.2mn in 2008.

Increasing time charter freight rates are contributing to the improving gross margins. We expect the company to register a gross profit margin of 55.8% in 2008. Also, the net margin is expected to be 42.5% in 2008. With the recent sharp rise in freight rates, the margins of shipping companies have fared well and we expect the trend to continue up to 2010 as a result of tight tonnage and limited supply of vessels. We expect that the company should post a net profit of AED158.5mn in 2008 (EPS of AED0.096) and AED228.8mn in 2009 (EPS of AED0.138). GNH currently has an operative fleet of 9 vessels.

Based on the current market price of AED1.60per share (as on July 14, 2008), GNH is trading at a 2008E P/BV multiple of 1.5x. Our estimated value for this scrip works out to be AED2.34per share based on DCF (80%) and Peer Group Average P/B valuation (20%). According to our fair value computation, this scrip offers an upside of 46.3% on the closing price of AED1.60per share (as on July 14, 2008); we therefore recommend a "BUY" on the scrip with a medium term perspective.

Financial Overview

GNH registered a strong topline growth of 66.3% on an annualized basis registering revenue of AED272.1mn during the 12M ended 31st Dec'07 compared to AED163.6mn recorded during the 12M ended 31st Dec'06. GNH was incorporated on 31st Oct'06 and it published its first annual report as a corporation for the 14M period ended 31st Dec'07. Revenue increased at a 2-year (2005-2007) CAGR of 74.3%.

The trend of increasing trade activities in the Middle East region has driven the demand for carrier services in general and seaborne carriage in specific. Keeping in view the increasing demand for seaborne carriage, the company has increased its fleet size in the recent years. Also, increasing gap in demand for commodities and limited supply of carrier services in last few years has lead to increasing realizations on account of higher freight rates.

In addition to its tie-up with major GCC manufacturers viz. SABIC, GNH is making efforts to strengthen its presence in the chemical carrier segment by entering into two 50/50 joint ventures with Stolt-Nielsen according to the terms of which the JV would own three and operate six new 44,000 dwt coated chemical tankers. The ships will be traded in the Stolt Tankers Joint Service (STJS), with technical ship management provided by the second joint venture company, Gulf Stolt Management JLT, owned by the two companies. GNH will take delivery of two additional sister ships in 2009.

Stolt-Nielsen will take delivery of four tankers ordered from SLS Shipbuilding in South Korea during 2008 and 2009. One of the four Stolt-Nielsen ships will be sold to GNH who will bareboat charter the three ships to the joint venture to create the 50/50 joint venture comprising the six ships. Meeting the long-term tonnage requirements of the rapidly growing producers in the Arabian Gulf is a key element of GNH's growth strategy.

Increasing time charter freight rates are contributing to the improving gross margins. We expect the company to register a gross profit margin of 55.8% in 2008. With freight rates peaking unto 2010, we expect the gross margin to increase further unto 59.2% in 2009 and 63.1% in 2010.

On the back of rising freight rates and successfully executed time charters, we expect that GNH should post incremental profits during the period 2008 to 2010. We expect that the company should post a net profit of AED158.5mn in 2008 (EPS of AED0.096) and AED228.8mn in 2009 (EPS of AED0.138).

Financial Performance -1Q08

GNH registered a strong 66.5% YoY growth in revenues registering AED94.8mn in 1Q08 against AED56.9mn in 1Q07. This increase in revenue is as a result of increase in average time charter rates in 2008. Cost of revenue increased to AED34.0mn in 1Q08 as compared to AED27.1mn in 1Q07 to reflect the increase in ship running costs. This translated into a higher gross margin of 64.3% gross margin in 1Q08 compared to a 52.5% margin in 1Q07.

SG&A expenses increased from AED3.8mn in 1Q07 to AED4.9mn in 1Q08 registering a YoY increase of 28.3%. Higher interest expenses were on account of end of moratorium on bank loan. The net profit increased from AED24.0mn in 1Q07 to AED44.7mn in 1Q08 registering a YoY increase of 85.9% on account of higher margins resulting out of favorable environment in time charter rates in 2008.

The Balance Sheet size increased mainly on account of advance payments to vessel building yards for construction of six new vessels. The cash & near cash items were AED742.9mn as at the end of Mar'08 as compared to AED736.9mn as at end of Dec'07 registering a YTD growth rate of 0.8%.

GNH with its tread careful policy is expected to do well on the back of business focus on the tanker market and its strong tie ups with the major manufacturers in the GCC region. The company is also in a position to take advantage of the innovative means of increasing its footprint by pooling of vessels. The recent partnership with Stolt Nielson, a major chemical carrier on similar lines is expected to provide mileage to the business model of the company.

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