Description
Long CKN (Clarkson plc) - GBP 21.1
I like Clarksons. I think it offers the chance to own a market-leading franchise at a reasonable price. Clarksons is the world’s leading shipping services company. Results are reported across four segments: broking, financial, support, and research.
Clarksons recently closed on the acquisition of RS Platou, a Norwegian shipping brokerage and investment bank. Clarksons has traded off a bit since the announcement. For one, the timing wasn’t ideal: Platou derives much of its revenue from offshore oil & gas. The recent decline in oil prices and resultant slowdown in offshore activity means Clarksons may have overpaid. However, I think this provides an opportunity for new investors to buy into a market-leading franchise at a reasonable price.
Brokerages tend to be good businesses and I don’t think Clarksons is any exception. There are very limited capital requirements as this is a people-based business. The flip side is that employees also receive a large share of the economics of the business via annual bonuses. However, this makes the business resilient to the highly cyclical nature of the shipping industry. During times of stress, compensation decreases along with revenue, allowing Clarksons to maintain profitability. For example, Clarksons was profitable through the brutal ’08-09 downturn.
Clarksons Financials
|
|
2009
|
2010
|
2011
|
2012
|
2013
|
HY 14
|
|
Revenue
|
176.7
|
202.6
|
194.6
|
176.2
|
198
|
111.7
|
|
EBIT
|
22.6
|
34.5
|
30.2
|
19.1
|
24.9
|
15.6
|
|
EBIT %
|
12.8%
|
17.0%
|
15.5%
|
10.8%
|
12.6%
|
14.0%
|
| |
|
|
|
|
|
|
|
EBIT contribution by segment
|
|
|
|
|
Broking
|
26.7
|
41.3
|
35.9
|
25.2
|
27.5
|
14.9
|
|
Financial
|
(0.5)
|
(4.3)
|
(2.3)
|
(9.9)
|
(3.3)
|
0.3
|
|
Support
|
(0.4)
|
0.5
|
1.7
|
4.2
|
3.1
|
2.5
|
|
Research
|
1.1
|
1.5
|
2.0
|
2.8
|
3.0
|
1.4
|
| |
|
|
|
|
|
|
|
|
|
|
|
Before getting to Platou’s financials, I want to point out one thing: Clarksons has long sought to develop a meaningful shipping investment bank but has not had success over the years and their Financial segment has been an overall drag on results. This is the primary strategic rationale for the Platou acquisition, since Platou has been able to rapidly develop and grow a banking franchise since its creation in 2008.
RS Platou Financials
|
|
2009
|
2010
|
2011
|
2012
|
2013
|
HY 14
|
|
Revenue
|
88.1
|
108.1
|
102.2
|
89.6
|
140.2
|
60.9
|
|
EBIT
|
10.3
|
24.9
|
17.1
|
4.7
|
35.1
|
12.5
|
|
EBIT %
|
11.7%
|
23.0%
|
16.7%
|
5.2%
|
25.0%
|
20.5%
|
| |
|
|
|
|
|
|
|
EBIT contribution by segment
|
|
|
|
|
|
Shipbroking
|
6.1
|
8.0
|
3.0
|
(0.5)
|
2.4
|
|
|
Offshore
|
11.2
|
11.8
|
8.7
|
5.6
|
8.8
|
|
|
Markets
|
(9.3)
|
2.1
|
2.5
|
(1.9)
|
22.1
|
|
|
Finance
|
2.4
|
2.9
|
2.9
|
1.6
|
1.9
|
|
There are two areas where I think adjustments need to be made to arrive at “normalized” performance: Offshore & Markets.
For the Offshore segment, I am using the 2009 downturn as a model for what future performance may look like. During that downturn, Clarksons' shipbroking business saw a YOY 20% decline in revenue and margins compress from 23% to 19%. For Platou, a similar decline in topline and margins falling from 22% to 19% would see EBIT fall YOY from 80 NOK to 47 NOK (-40%).
In the Markets segment, Platou has done an impressive job of growing this business. FY14 results by segment have not be released yet, but dealflow seems to be running ahead of FY13. However, I’m wary of extrapolating growth in a cyclical industry. To try and arrive at a conservative estimate of normalized earning power, I dock EBIT contribution from this segment by (a somewhat arbitrary) 25%, offset by reductions in lossmaking in Clarksons' Financial segment, and no credit for revenue synergies.
Capitalization
The combined entity looks as follows:
| Shares Outstanding |
30.1 |
| Price |
21.1 |
| Market Cap |
635 |
| Cash |
95.8 |
| Investments |
35.3 |
| Debt |
(79.6) |
| Accrued Bonuses |
(44.6) |
| |
|
| EV |
628 |
On a TTM basis, EV/EBIT is 10x with no credit being given for any cost syngergies.
On a more conservative "normalized" basis that penalizes EBIT for Offshore (-40%) and Markets (-25%) with some offset from cost synergies, the multiple is a little under 11x. I think this is attractive given the market-leading and capital-light nature of the business. I also think that surprises to the upside are possible from a few different areas: 1) additional cost synergies, 2) margin upside from FX tailwind (revenues are primarily USD while costs are primarily GBP and NOK) and 3) general increase in shipping activity.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
Cash build
Release of financials for combined entity