Al Rajhi Capital starts Bahri coverage at ‘overweight;’ TP set at SAR 45.90

Al Rajhi Capital has initiated coverage of the National Shipping Company of Saudi Arabia (Bahri) with an “overweight” rating and a target share price of SAR 45.9, saying that the company is the third largest global player.

Bahri benefits from a “unique” business model that makes it resilient to business cycles, Al Rajhi added. It also provides cheaper bunker fuel costs (the key cost element), leading to better margins.

Its recent merger with Vela almost doubled Bahri’s VLCC (Very Large Crude Carriers) fleet to 31 from 17. Synergies from this merger should improve Bahri’s opex profile going forward, the note said.

Bahri is also expected to benefit from the exclusivity arrangements to ship Saudi Aramco’s crude sized cargoes (part of Vela merger agreement) and the freight rate agreement which will drive better revenue and earnings visibility.

Bahri’s revenues are expected to surge 86.2 percent this year while seen to grow 3.9 percent and 2.9 percent in 2016 and 2017 respectively.

Key upside risks are increase in freight rates, margin uptick in petrochemical/ cargo segments and merger synergies playing out.

Key downside risks are discontinuance of bunker subsidy and softening of freight rates.

Other risks include higher commissioning of crude/ chemical carriers globally (higher freight rates result in higher orders for VLCCs, thus increasing competitive intensity), increase in bunker fuel costs and interest rate as well as Middle East instability, Al Rajhi added in a report.

The oil transportation industry is on a strong footing as demand for VLCCs is being driven by increase in crude oil transportation volumes and floating storage requirement (particularly when oil prices witness a sharp plunge), resulting in higher freight rate, the brokerage firm added.