Welding together non-broking business

Having just profiled Clarksons, its impossible not to compare fellow shipbroker Braemar Shipping Services. Both provide a wide range of services, but primarily they broker deals (charters) between ship owners and business that need goods transported and deals between buyers and sellers of ships.

Unlike Clarksons, in terms of revenue Braemar's non-broking services are as significant as broking. Last year, the company brought in nearly ''62m from shipbroking and nearly ''64m from its technical, logistics and environmental divisions combined.

All four divisions made an operating profit, but the numbers tell a different story: Shipbroking earned Braemar ''14m, an operating margin of 22%. The other three divisions earned less than ''3m, with operating margins between 3% and 6%.

Despite recycling profits from shipbroking into acquiring shipping services, shipbroking still drives the company's performance which probably explains why its share price fell so sharply in September when it revealed income from shipbroking would decline 18% this year. Although the company says other income will increase 7%, movements in shipbroking income have a bigger impact on profit.

In its half year results the company blamed a glut of ships, which has driven down freight rates and, presumably, the fees it receives. Meanwhile sales and purchases are subdued because finance is hard to come by and ship owners are reappraising the value of the ships they might buy or sell. Ghoulishly demolition is the growth area.

The sensitivity of shipbroking (not yet as evident in Clarksons' results and announcements) to freight rates, goes some way to explaining Braemar's strategy. Its multifarious service businesses, like port agency, freight forwarding, loss adjusting and engineering services, are more predictable because they depend on the volume of shipping trade, rather than the more volatile supply and demand for ships.

I'll say more about the shipping cycle in another blog, for now I want to focus on Braemar, and why it should chose to diversify into such low margin businesses. Here's a chart cobbled together from the annual reports showing operating margins resolutely above 20% for broking and mostly below 10% for non-broking.

My theory is the company doesn't think shipbroking will be as profitable over the next, say, decade, as it was in the 2000's, and its non-broking activities might be more profitable than they have been. In other words, the disparity in operating margins will narrow and profits will be less volatile.

The first half of that equation is down to the shipping cycle, which looks like its in the early stages of a significant downswing (more on that later), and the second half depends on how effectively Braemar welds together the businesses it's acquired, sometimes out of administration, in recent years.

The changing and cyclical business model makes Braemar a riskier proposition than its record since 2006 suggests, which may explain why the share price is low. It's trading at just above book value, which is remarkable for a company that consistently earns a return on equity around 20%.

These are the stats, straight out of my screen (source: Sharelockholmes.com).

I've left the higher rated Clarksons in for comparison.