Braemar Plc (BMS) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Braemar plc Investor Presentation. [Operator Instructions] Before we begin, I would like to submit the following poll. And I would now like to hand you over to CEO, James Gundy. Good afternoon to you.

Good afternoon, and thank you. Once again, thank you so much for joining us today. We really appreciate. Today, myself and Grant will talk you through the various slides and give you an update on where we are in the first half of this year and about some of the shipping markets, et cetera, and basically talks to the strategic framework of the business we put in place last May, et cetera. So thank you once again. Okay. Right. First of all, I'd like to say it's been -- it's definitely been a first half of some challenging markets. But at the same time, I think we can prove and show to you today that the resilience of the business and the diversification of where Braemar is today, we've been able to come through that first half, and we're looking very optimistic for the second half of the business going forward. On top of that, we had unchanged for our FY '26 numbers, a strong forward order book. We're still improving. As you can see later in the slides, we're now to strengthening from where we were at the end of -- end of August and further increase in September against what we would call geopolitical upheavals in the first half, the tariffs, et cetera. But at the same time, the business has proved itself very -- got very strong in that respect. That's basically proving the fact that we've added many streams to our bow on the back of the fact that our securities business has performed exceptionally well and a number of key hires have been made within the business. We've obviously -- you see that we've announced the fact that we've opened an office in Africa in Cape Town. The U.K. OTF license is live now with the intention to get our EU OTF license application progressing very well. And of course, we applied for DFIC in Dubai for our financial markets. Apart from that, we're still very clear on where our objectives were in May last year about where we are looking for opportunities to actively complement our present business. So thank you.

Thanks, James. Good afternoon, everyone. I'll talk about the group's financial performance. So revenue at GBP 63.9 million for the first half was 16% lower than the previous period, and that was really driven by weaker chartering performance and particularly in tankers, where we saw weaker rates and longer voyage times. Given the geopolitical upheaval, we saw vessels taking longer voyage times, which also led to fewer fixtures because there were fewer vessels available. In U.S. dollars, revenue was GBP 73.8 million, which is 13% lower. So we also suffered a bit from the weaker U.S. dollar in the period. Underlying operating profit before acquisition-related items was GBP 5.6 million, 29% lower than the previous period, really driven by those lower revenues. Underlying operating profit margin at 9% was 1% lower than the same period last year. And again, that was really just driven by the lower revenues. We have strong operational leverage in the business. And as you grow the revenues, you expand your operating profit margin. And as that revenue came down a bit, we saw a small decrease in the operating profit margin. The forward order book, as James mentioned, continues to be strong. At the end of August, it was $73.8 million, and in September, we've seen that increase further to $81.2 million, and that gives us confidence for the full year outlook. We declared an interim dividend of 2.5p, and that reflects the capital allocation framework that we launched in May when we announced our FY '25 full year results. At the period end, we had net debt of GBP 5.6 million, and that really reflects the usual working capital cycle of the business. We also completed a share buyback in this period of just under GBP 2 million. And of course, we saw a weaker performance in the first half, so we had slightly less cash coming in, in the first half. And pleasingly, at the end of October, that was net cash positive. So just looking at the income statement in a little more detail now. As I've said, revenue for the period was 16% lower at GBP 63.9 million, 13% lower in dollar terms. Chartering was 25% lower. Investment Advisory, which includes sale and purchase and corporate finance was 6% lower. And Risk Advisory, which is our securities business was 9% higher. Importantly, we call it Risk Advisory but we do not take market risk. It's a broking-only agency broking business where we just collect commissions. Operating expenses were 14% lower, and that was really primarily driven by lower bonus costs on the back of a lower revenue performance. Underlying operating profit before acquisition-related items, GBP 5.6 million, as I said, 29% lower with that margin reducing slightly to 9%. Underlying earnings per share, 9.3p and in line with our updated capital allocation framework, as I mentioned, the interim dividend is 2.5p. If we look at the breakdown of revenue in a little more detail, whilst overall revenues are down, you can really see the importance of having a more diversified revenue base and building resilience, and we've presented a very similar slide in previous periods. While total revenue was down 16%, Chartering revenues were actually 25% lower, where we had those lower rates and longer voyage times impacting revenues. And the Braemar Tanker Index, which is a measure of tanker rates, was actually down 29% versus the same period last year, whilst the Braemar Dry Index was down 17% than where it was a year earlier. Our offshore desk continued to perform strongly. Investment Advisory, as Purchase and Corporate Finance was GBP 1 million lower and the S&P team, the sale and purchase team were very busy in the first half but it was impacted to some extent by the ongoing uncertainty in the markets but they are very busy, and we expect to see a good performance from S&P in the second half. And corporate finance revenues, whilst not particularly large, we pleasingly saw a 49% improvement in those revenues as the team moved into different mandates. The lower revenues were partially offset by the Risk Advisory and securities revenues, which increased by GBP 1.1 million. And that was a strong performance from our wet forward freight desk, our coal desk and our natural gas desk as the organized trading facility or OTF went live in the U.K. and that allowed our clients to trade more products with us. Moving on to operating costs. They continue to be well controlled, and we're continuing to really focus on balancing between driving efficiencies and investing for the future. Staff costs were GBP 10.4 million lower, reflecting slightly lower headcount but primarily lower bonus costs on the back of the reduced revenue. We had an increase of GBP 0.5 million on one-off payments to leavers as we focus on efficiencies across the business. And office costs in the period were GBP 0.6 million higher as we had some space that was let, that tenants moved out, and we're now reletting that space at the moment. So at the end of the period, looking at liquidity, the group had a net debt position of GBP 5.6 million. And that really, as I said, reflects the typical working capital cycle of the group. We pay bonuses after the year-end, and then we build up the cash as we go through the period. That GBP 5.6 million includes GBP 1.9 million of restricted cash, which will be used to settle the commission obligation that went back to the investigation from 2023. So looking at the movements, the opening net debt on the 1st of March, GBP 2.5 million, operating cash flows of GBP 5.7 million. General working capital movements was a decrease of GBP 1.7 million. We paid financing tax of GBP 1.3 million. We continue to buy shares for the employee share ownership plan of GBP 1.5 million, of course, then the share buyback of GBP 1.8 million. We had lease repayments of GBP 1.4 million and various other cash flows of GBP 1.1 million to give us that net debt position of GBP 5.6 million. But as I said, at the end of October, the business returned to a net cash positive position. So just moving on to the key performance indicators. As I've said, revenue 16% weaker really reflecting those lower Chartering rates. Revenue per head improved slightly from the second half of last year to GBP 166,000 or $214,000, which reflects a slightly lower headcount in the period. Operating profit margin at 9%, slightly lower, just reflecting the operational gearing in the business. The forward order book remains strong at GBP 73.8 million and it's increased further in September. I covered off the debt and the dividend at 2.5p. Now just talking a little bit about the forward order book in a bit more detail. The forward order book is a measure of revenue to come in future periods, whether it be that we had vessels on time charter, which for a certain period, and we're going to earn commissions whilst the vessels on those time charters or sale and purchase transactions where it could be a secondhand vessel that's to deliver or a new build, which we get stage payments over many years. But we've seen that since 2022, the forward order book has strengthened significantly, up 46% from where it was at that point. At the end of September, we had $26.7 million of revenue, which is going to come through in the remaining 5 months. And you can see the amounts going into FY '27 and beyond are amongst the highest they've been. So we've really focused on growing that forward order book and the revenues looking forward. And you can see on the right there how that breaks down. Broadly, the breakdown of the forward order book is 50-50 between Chartering, time charters, et cetera, and sale and purchase, whether it be new builds or secondhand deliveries. I'll now hand back to James to give the strategy update.

Thank you, Grant. Okay. So for us, we put some things in place, as I mentioned earlier, back in May last year and strategic framework. So basically diversification, the most important thing was 5 years ago when I came into the CEO role was to diversify the business and mainly concentrating on the ship broking business and businesses that we diversify to complement those business that we've done. And that's proving very clearly. For example, I can tell you that tanker rates were down some 25% in the last 6 months. So our cargo rates are down some 17% in the last 6 months but our revenue fell by 16%. So that shows you that by having a diversified model that we're seeing our other departments compensate for those downward trends. So obviously, for us, it's about also obviously globalizing the business and moving into new jurisdictions, which is done. We've ticked that box already in Cape Town. And obviously, next thing we need to do is to move on the consolidation and target complementary business that we have been doing. We've rolled out many business that did not complement the business and did not work for certain aspects. But the fact is we've maintained the discipline, and we've also proven the fact that the acquisitions we have made in the last 2 or 3 years have complement the business and highly improved on the margin of the business. Operational excellence, that's the graph very much on top of the focus on data and technology, a larger company with some 45 years of data going back is obviously imperative for the markets and seeing where the trends are for our clients. We continue to invest in compliance. That's becoming an important factor for our business. Shipbroking is not necessarily regulated, but it's moving more and more towards that case and compliance is a large part of our business and our clients are expecting it. And it's also potentially helping us as far as acquiring smaller business because the cost of those small business having compliance, et cetera, and is needed so much that's easy for us. And obviously, we want to drive efficiency and reward performance. Now we also mentioned in May that we intend to move the business to a GBP 200 million group revenue by FY '30. I got to mention the broking alone is making $65 million of revenue some 10 years ago. So we've already come a long way. We're also setting ourselves some strong targets. The Risk Advisory business, we are saying -- we've mentioned the fact that we want to be at GBP 30 million by FY '30, and we're very confident on that. We've grown that business. Underlying operating profit margin by 15% by FY '30 and net debt maintained below 1.5 EBITDA. Now we set some targets about 10 new hires. We're well on track for that and we have some very key staff within the business. So you can see from that progress report at the bottom, we've moved on very clearly on that strategy there. We mentioned about the fact we want to move into one new jurisdiction. We've done that in Cape Town. That business we knew very, very well. And I can tell you now that the reason why they want to join us is because they felt they were too small in what was becoming and more becoming in a business that is consolidating. So that made it very easy for us. So we've obviously done that already. The globalization of globalized tank operations, this is about more about efficiency and making sure that [indiscernible] work together, and we will look to obviously see how we can obviously improve the margin there with looking elsewhere on the claims side of the business. So you can see we're moving across those arrows there. As regarding the -- as I said, we've completed one transaction. So as far as that, we were on -- we're definitely on track for our strategic framework. Now the outlook and summary. Okay. Chartering markets, as I said -- as I mentioned to you before, the fact that the tanker rates was hugely down in the first 6 months of the year, I mentioned some 25% and the dry cargo was down 17%. You can see from our Braemar index there. But the good news I can tell you is in the last 2 months, the markets have massively returned, although there was uncertainty in the tariffs and as it was going on between the U.S. and China, that seems to settle down. We've seen some recent issues with some major companies being sanctioned again. This is creating the rates to move up. And I can obviously say from -- I can tell you now that some of the dark fleet and gray fleet is moving out of the market or moving into a storage situation. So the rates are moving massively, and we're seeing more longer haul business. The Dry Cargo market has picked up as well in the last couple of months. And so we're seeing strength there. And we are definitely gaining our dry cargo presence in Australia as we've seen a strong harvest in the year as well. Okay. Looking further ahead on demand, global GDP is on target. I think you can see that on the graph, you're well aware on that. China industrial growth. We've mentioned before in the past, we were expecting probably a bit more of China to come out after COVID but that didn't necessarily happen. We saw major housing crisis, et cetera, in China. That's starting to turn again, and we're seeing that in the markets, which we are involved in. And the oil demand index, well, that's obviously, since Russia has been had more squeeze on the sanctions, as I said to you, that's increasing the OPEC outflow, which is creating more longer haul, especially U.S. exports as well. So that's all in a good [indiscernible].

Thanks, James. I'll just talk a little bit more about our Risk Advisory or Securities business. So you can see quite clearly here the success we've had growing this business. It comprised 20% of revenues for the first 6 months of the year, up from 16% for the full year last year. And you can see quite clearly on the chart here, this particular revenue stream up 254% since 2022. And we've got plans to continue to grow that. So we said, as I said earlier, our U.K. organized trading facility, which is a specific venue that you need to trade certain securities products on went live in May. Our U.K. clients are using that, and we can trade more products. We're expanding that offering by establishing a European OTF and that progress, it's a very time-consuming process. Our U.K. OTF took over 18 months to obtain. Our Spanish OTF is where we're putting in Europe is progressing well. We expect to have that in the first half of calendar year 2026. And we're also establishing a presence within the Dubai International Finance Center. We have a freight desk in Dubai but we're going to expand our securities offering there as well, again, to service our clients and their requirements going forward.

Thank you, Grant. Okay. So summary and outlook. I think we -- as you hear from the presentation today that we've explained where the first half was, and we can feel that the resilience of the business and diversification story has pulled us through what we can say was a weak freight market and chartering market. So it shows the business is very robust, and we're building that business out to help that to help accommodate those freight problems. Underlying operating profit margin down by slightly 9% returned to net cash position in October, as Grant talked about the U.K. OTF and the European OTF, and were interim dividend at 2.5p. So on the outlook, expectation in line with where we were for '26, remains unchanged. To start the second half, we've seen the markets return. We're feeling a lot more bullish than we were a few months ago. The forward order book is helping as we further build the forward order book and our future departments are doing very well on the back of the volatility in the markets today. So that leads us down to what our framework we put in place back in May, and we feel we are very much on track to deliver what we said we'd deliver. The pressure is upon us to deliver that. I think hopefully, you can see that some of the businesses we bought already are proving very well, and we've definitely ironed out a few things that didn't work, but we are focusing on ones that can work and complement the business. And the market fundamentals remain strong. So we're feeling good about the next 6 months.

That's great, James Grant. Thank you very much indeed for your presentation.

[Operator Instructions] I would like to remind you that recording of this presentation along with a copy of the slides and the published Q&A can be accessed via investor dashboard. James, Grant, if I may now hand back to you and kindly ask you to read out the questions where appropriate to do so, and I'll pick up from you both at the end. Thank you.

Thank you very much. I'll read the questions here that come on the iPad. Question is, what is the ideal long-term balance between Chartering, Investment Advisory and Risk Advisory to smooth the earnings cycles? I would say I'll take that first. I think that -- I don't think there is an ideal balance. I think that by virtue of the fact that we are diversified, that does give us the balance. So if you look back on that slide a couple of presentations ago, you would have seen that we had a very strong performance from tankers and a weaker performance in dry cargo. So overall Chartering was flat and we grew in Investment Advisory and Risk Advisory. And you've seen weaker performance in Chartering but we've seen an improvement in risk advisory. So I don't think there is an ideal balance per se that we want x percent of this and x percent of that. But I think it's important to continue to grow all of those revenue streams with hiring individuals or teams or completing M&A acquisitions, which are complementary to build the scale within the business. And so you just continue to drive the growth. I don't think we have -- I don't think necessarily that we have a specific percentage target for each of division. James, you want to add?

No, I'll just slightly add to that. How I see it is that because the business is more simplified in the last 5 years and we understand the sectors that we're in fully. Of course, the most important thing is to build the breadth out of the business but making sure that the complementary of the business works. The fact is the desks work in harmony. If the spot market is rising, the futures market is busy. If the futures market is busy and the spot market is busy, the S&P transaction owners will be buying ships on the back of the present spot market. On the basis that our desks are talking to each other, there's a good reason why we're ahead of the curve compared to our competition. And we are, for sure, seeing the rewards on that as the markets pick up.

Next question, do you consider the current sentiment valuation to be in a trough with a decent rebound ahead as markets normalize? I assume we're talking about the share price here. Look, you can look at any of the analysts that are covering the stock and the target price that most of them have is certainly above where we're trading at the moment. So they clearly believe that there's upside. There's obviously the challenges that the U.K. market is particularly small cap faces at the moment with the significant redemptions, which are weighing not just on Braemar but on a number of many, many stocks in the small and mid-cap sector. So I think that's certainly having an impact. And I would like to think as we start to see fund flows come back into not just the FTSE 100 but start trickling down to the mid and small cap that we'll see some improvement as more funds come in.

And we've proven the fact that we put a buyback out, which we successfully completed back in September. So we the shares are undervalued. But at the same time, we will build the business out to grow that, and we have confidence that we can move that share price in the right direction.

A question here about what we consider the company could be a takeover target. We've got a view on that. We're just focusing on delivering what we are, many U.K. listed businesses are looking cheap at the moment. So I want to...

No, I just think that the shipbroking space is -- I've been in this business some 40 years. So I've seen weak markets and I've seen bull markets. And this market definitely feels different to where it was during the -- back in 2008 before the crash. It feels there's a lot more longevity for many, many reasons. I mentioned before the fact that we're seeing some 25% cut in shipbuilding capacity. So leading back to the question, yes, I mean, look, that's always a potential possibility someone comes forward but the fact is we feel we're undervalued and our job is to build ourselves out. And we feel there's a lot of things that we can get into that still complement the business and parts of the world we can reach to create more business.

Question here on costs. How much of the 30% rise in central cost is one-off? And should we expect margin improvement in H2? There is an element of one-off costs. If you look at the RNS, you'll see how we split it down. It's up 30%. There's a couple of elements in there. First of all, the one-off restructuring costs as we focus on efficiencies and that was staff related. That was GBP 0.5 million, which was a one-off in the first half. I mentioned that we had some additional property costs in there in respect of the space that we're actually -- it was let. We're in the process of reletting it taken at the moment. I'm hoping that, that won't be in there for the full second half and should be lower. But if you think about the margin improvement, this business is very operationally geared and the revenue -- we're expecting the revenue to improve in the second half. So if you look at the first half versus second half, you would naturally see an improvement in operating margin. What is the outlook for Tanker and Dry Bulk charter rates? Would you expect them to fall back now that China-U.S. trade tensions have eased certainly talked about the chart on that?

Yes. Look, I mean, I think it's a situation, the impact on the various sanctions recently, and obviously, that -- so what I'm trying to say here is the fact the sanctions in Russia have increased and made it more difficult. So where some of that oil is going into to India to be blended and move out and that's not happening so much. So we're seeing less of those dark fleet ships that were doing that business now falling into a different scenario, which means that, as I mentioned earlier, going into storage, which potentially leads to believe there could be a massive contango in the forward markets. So it brings in more modern ships of the unsanctioned ships that doing longer-haul voyages out of the U.S., et cetera. So we're just seeing more ton miles, and we've just seen the market massively rebound in the last 3, 3 months. So at the moment, we don't see that going away. I think if you also want to look at some of the equities in tanker stocks across the globe, you'll see they've also massively rallied in the last 2 or 3 months, and that's exactly for the reason why I just mentioned.

Question here, what is the reason for the -- the second half bullishness. I think we talked about that when we've seen where the rates are. I think it's also worth mentioning, if you look at -- the business has an element of seasonality in it where second half, you do generally see an improvement in revenues in the second half driven by colder winters, et cetera. Last year, you didn't see that. It was very much a one-off. If you look back historically, you'll see second half performance will be first half performance, and we expect to see a return to normality in the second year, and that's added a bit more around what we've seen on rates, et cetera. Trend in -- what is the trend in fixture volumes? Is the increase in charter rates enough to more than offset any decline in fixture volumes? We've definitely, as I said at the start, there are longer voyages, so there's fewer ships available to fix. And of course, there's been -- approximately the best estimate we've got is that there's sort of 1,400 vessels are now in dark fleet. So they're out of the fixture pool, if you like. So yes, there has been a downward trend in fixtures, but we believe that what we're seeing on rates will offset that and mitigate that. Given the rapid rise in the LNG fleet, is that a vertical you should have a much larger exposure to? If so, how can you expand this?

That's an interesting one, okay, because we're discussing that this morning. The LNG fleet has massively risen, and we are involved in LNG newbuildings and we have an LNG desk. The fact is the market is in its worst doldrums at the moment. And we feel we slightly were able to avoid some big hires we might have made a couple of years ago when the market crashed because a lot of the big transactions or deals that are supposed to happen like Mozambique coming on stream this year has been delayed by another 2 or 3 years. So we're seeing the rates very weak. We're seeing newbuilding prices falling down in LNG because we realize the rates aren't there. So for us, this gives an opportunity to build the next 2 or 3 years for a market which we feel will return then. So moment we feel opportunities come open to us. But at the same time, for those having a large LNG desk, we'll be feeling the cost of that.

What's caused the newbuild purchase market to improve recently given the delay to the IMO net zero framework? Is it greater confidence in future rates and demand or availability of shipyard capacity?

I'd say I touched base on that earlier as well. I mentioned the fact that the shipbuilding capacity is cut by some 20%, 25% since the 2008 crash. There's obviously a big talk the last 2 or 3 years about alternative fuels, whether that be LNG fuel ships or ammonia or methanol, et cetera. We're seeing less on the ordering of those ships but we're seeing more increase in orders on conventional ships. So at the moment, we are seeing -- we're seeing ships now. We've been working some deals where we thought we could get delivery by second half '28, it's now moving into '29. The market is obviously strong. There's an aging fleet. IMOs are sometimes slow to react on certain things. We worry as a broker looking at certain aspects of the business, how many ships are in the dark fleet and gray fleet as we would call it, flying probably on the flags of nonshipping national. So we worry about certain things that potentially these ships aren't being maintained correctly. So I think at the moment, there's just a demand to build ships and the yards are definitely holding that. But also on top of that, it's slightly different from it was in 2008. It's so much more diversified as in what ships are being ordered because most markets are in a good shape. So that's putting pressure on the prices.

Just a question here. The analysts over the last 5 years have been generally positive with a buy recommendation but the shares have generally traded [indiscernible] look, I think that's frustrating for us. There's no doubt about that as well. And I think if you follow the story, you'll see that we recently -- obviously about a year ago now, we changed corporate broker. We've changed our financial adviser. We are making steps to articulate our equity story perhaps clearer than it has been historically. And so we are trying to address that. It's obviously a frustration internally as well as it must be for our existing shareholders.

Perfect. That's great, James. Grant, thank you for addressing all those questions from investors today. And of course, the company can review all questions submitted today, and we'll publish those responses on the Investor Meet Company platform. But James, before I redirect investors to provide you with their feedback, which is particularly important to the company, could I please ask you for a few closing comments?

Yes. First of all, I'd say thank you for taking time to listen to our presentation today for the first half of '26 results. I'd like to emphasize again that we feel it's going to be a year 2 halves for sure. I think the first half has been a bit more challenging but I'd like to see from the results here, you can hear the fact that the business has been diverse to sort of take some of those punches on low chartering rates by building the model out, and we're feeling confident for the second half because the rates are returning. And you can see our forward book is increasing dropping into this year. And we're excited. We feel we're in a good place. There is always some challenges in a broking business but the most important thing is we've got a good young team across the globe in some 19 offices around the globe in 13 different countries. And it feels at the moment that everyone is exceptionally busy, and that's the most important. And on top of that, I think we're seeing the dollar turning a bit more in our favor, which is always a bit more healthy compared to the first half. So listen, first of all, thank you. Thank you so much for taking time. And by the way, myself and Grant are always there to answer any e-mail questions if you have further questions to ask afterwards. Okay. But thank you so much.

Thank you.

Fantastic. James, Grant, thank you once again for updating investors today. Could I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the Board can better understand your views and expectations. This will only take a few moments to complete, and I'm sure will be valued by the company. On behalf of the management team of Braemar plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.

Thank you.

Bye-bye.