Braving the public markets (Tradewinds Jan 8)

 

A London-listed broker has been developing new ‘practical’ revenue streams to keep investor confidence high.  

In the eyes of public stock markets how do you solve a problem like shipbroking?

That might sound like a corny line from an old musical but it goes to the heart of a key issue facing some of the world’s biggest and most influential brokers, several of which are based in London.

Bumper profits made by brokers in the good times are absolutely no problem at all. Even mundane earnings when markets are flat are still acceptable. Cash revenues are always welcome, whether a broking shop is publicly owned or privately held.

The problems come when volatile commission-based income streams run nearly dry when markets crash, with little steadier fee income to soften the blow. That has been the risk in the past year.

For privately owned outfits, the issue is frustrating but manageable: staff can be laid off, costs cut and belts tightened all round.

But for public, stock market-quoted companies, the intense cyclicality of shipping risks eroding hard-won investor confidence, share values and, ultimately, company stability.

So how are London’s major shipbrokers facing up to ever more intense scrutiny from investors looking for steady, long-term earnings growth? Both the market’s two biggest players, Clarksons and Braemar Shipping Services, have nailed their future, perhaps inevitably, to a commitment to growth outside their core shipbroking businesses.

Clarksons – arguably still the biggest beast in the market – is putting its resources into developing an investment and financial services division.

Its board, several of whom are former investment bankers rather than brokers, hopes the strategy will earn significant fee income from financial advisory services.

It is a strategy that fits with peddling an image of shipbroking as just a heartbeat away from the well-padded world of investment banking.

But as the past 18 months have shown, when markets crash and liquidity dries up, so does the appetite for mergers, acquisitions and initial public offerings (IPOs).

Braemar, on the other hand, has quietly taken another route entirely. It has taken a more pragmatic and perhaps less immediately glamorous diversification strategy to focus on other practical – rather than financial – service sectors of the industry.

So much so, its corporate brochure bears the legend “Shipbroking + Technical + Environmental + Logistics” superimposed on the obligatory picture of dolphins frolicking ahead of the bow of a ship.

And so far, the North London-based company appears satisfied with steady results from the strategy.

Quentin Soanes, the Braemar director and broker who heads two of the group’s growing subsidiaries, says the strategy should not be labelled “diversification” but the development of new revenue streams.

Speaking to TradeWinds recently just before heading to Singapore for a management meeting, he says the strategy is fundamental to Braemar’s growth as a publicly listed company (PLC).

Shipbroking is – and clearly will remain – a key core part of Braemar’s business. However, shipping’s relatively small scale in global terms means broking alone simply cannot promise the long-term revenue growth on a scale sufficient to propel Braemar forward as a PLC, he argues.

Soanes, one of Braemar’s four executive directors, foresees in the long-term future that Braemar could be made of four or five complementary businesses, each the size of the shipbroking division.

Already the group’s non-broking activities make up more than one-third of operating profits.

In the half year to the end of August 2009, Braemar made pre-tax profits of £7m on revenues of £57.1m, down from £9.8m on revenue of £69.1m in the same period a year earlier.

But the headline figures only tell half the story. Delve a little deeper into Braemar’s accounts and you find that its non-broking operations helped a little to insulate the group’s results from a sharp fall in shipbroking profits during the slump in shipping markets.

Broking profits fell to £5.5m in the six months to the end of August from £8.9m a year earlier, while its logistics division for example lifted profit to £993,000 from £213,000 over the same period.

Like all other London firms, the overall figures were flattered by the boost provided by the weakness of sterling.

Among the businesses that Braemar has invested in are consultancy, insurance, environmental and technical services.

Soanes says the expansion strategy is driven by looking for complementary connections to its existing businesses.

Braemar group finance director James Kidwell adds that the group respects the divisions between its subsidiaries and does not “cross-sell”.

He says some clients could be “a bit spooked” if they were approached on that basis. However, where clients might benefit from synergies between different Braemar operations “they would be there to help”, he adds.

Offshore engineering consultancy Falconer Bryan was acquired in July 2007 and since renamed Braemar Falconer. Although it has won new contracts in China and Vietnam, the economic downturn has put pressure on chargeable rates for its rig consultancy rates.

Loss adjuster Steege Kingston was bought more recently in March 2008. Now branded Braemar Steege, it has been performing “in line with expectations”. A quiet hurricane season in the Gulf of Mexico was offset by new business from Latin America and Singapore.

Linking with these operations is Braemar Marine, a recently launched marine surveying and adjusting concern for the hull, cargo and protection-and-indemnity (P&I) insurance market.

Denis Petropoulos, a Braemar executive director, adds that the involvement in the offshore sector through these two operations had provided some counter-cyclical insulation from the shipping downturn over the past year.

Further expansion has been generated at Braemar Howells, the group’s oil-spill response and environmental operation, and Cory Logistics, Braemar’s forwarding and ship’s agency business.

Of course, historically, shipbrokers have not proved to be the best owners and managers of non-broking operations.

There have been a number of much-trumpeted acquisitions that have slumped into losses, only to be shut down or sold.

Braemar’s executive team appears aware of the potential pitfalls and appear not to be seeking “trophy” acquisitions.

Soanes says the recent acquisitions are now settling in and will soon be able to generate their own organic growth using their own resources.

The fee-based revenues of its new consulting and service operations offer a good counterbalance to the commission-driven broker earnings.

However, both Soanes and Kidwell admit that the consultancies are not comparable with broking, which when successful generates far higher margins.

That is why Braemar says its expansion will not be at the expense of its central shipbroking team, headquartered in its iconic Conway Street offices.

Petropoulos says it will continue to invest in new talent. And with 50 brokers under the age of 30 in its London head office alone, Braemar’s confidence in its future is clear. 

By Julian Bray London

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