Braemar Shipping Services plc: profit warning and dividend cut. What next?

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Disclosure: Roland owns shares of Braemar Shipping Services and Lamprell.

23/01/2017: Braemar Shipping Services plc (LON:BMS) shares fell by 16% today after the group announced a profit warning and dividend cut.

It wasn’t the best start to the week, but in some ways it wasn’t a big surprise.

Dividend cut: Braemar’s 8% forecast yield was always likely to be cut, given the lack of earnings cover and weak underlying market conditions. Today’s update advised investors that the final payout will be cut by 70% to 5p, giving a total payout for the year of 14p (2015/16: 26p).

Assuming that next year’s interim payout is cut proportionally, then shareholders are looking at a 2017/18 dividend of about 7.7p. That’s a yield of about 3.1% at current prices, which seems about right to me.

Profit warning: The group’s shipbroking and oil and gas exposure was always a risk. As it turns out, shipbroking performed well last year and is on track to meet full-year expectations. The culprit behind the profit warning was the group’s Technical division, which has heavy exposure to the oil and gas market, where conditions have worsened “further than the board originally expected”.

Helpfully, Braemar provided precise guidance on revised profit expectations for the year ending 29 February:

… underlying operating profit before interest, acquisition related costs and tax for the year ended 28 February 2017 is now expected to be within the range of £3.0 million to £3.5 million.  This excludes a one off gain before tax from disposal of its interest in The Baltic Exchange of £1.7 million and one off costs associated with restructuring of approximately £2.7 million.

I’m not entirely sure how to map this onto broker consensus (prior to today) of adjusted post-tax earnings of £6.58m, but it’s clearly a decent-sized miss.

Back in October, the firm expected a stronger result in H2. It’s disappointing this hasn’t materialised. Given that management is experienced, this suggests that earnings visibility is poor. I guess this may continue for a little longer yet.

The much-flagged recovery in the oil price will take a while to translate into increased activity levels for service providers. How long appears uncertain. I wouldn’t be surprised to see more updates in the vein of today’s from both Lamprell and Braemar.

So what does the future hold?

The good news in today’ statement was that Braemar expects to end the year with net cash of £1.7m and an unused debt facility of £30m. Clearly the group’s balance sheet remains in good health and the business has generated cash this year. Albeit with some risk the debt facility may come into use this year.

Restructuring activity has intensified and annualised cost savings of £6m are expected this year. That’s quite significant for a company that reported full-year earnings of £6.8m last year.

My view that the company is a good quality business with attractive medium-term potential hasn’t changed. As I suspected, I bought too soon at 329p, but I’ve no intention of selling. I may average down at some point, although I haven’t done so yet.

As with Lamprell, I’d expect to see some signs of progress during the second half of 2017. For now, I’m sitting tight and doing nothing.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.