Valuhunteruk

Clarkson Plc (LON:CKN) is the world’s leading shipping services group. To me, the easiest comparison is with a broker-dealer, although this doesn’t completely fit. The vast majority of revenues are made in broking (i.e buying and selling) ships and offshore rigs which includes newbuilds. The newbuilds bit is pretty important as this kind of business is closer to investment banking than trading. CKN also has important operations in trading and structuring shipping derivatives, ship support (largely repair and loading/unloading) and research. This makes CKN slightly different from most companies as its most important asset is people and it makes money by being able to stand in the middle of a lot of volume. As with broker-dealers it also means that it has to cross-subsidize parts of its business or make decisions that don’t seem to make sense. For example, its research division doesn’t make much money however, it is probablly the most important part of the business. Its clients know CKN stands in the middle of a lot of flow and therefore, its research is going to be good. The result is more business for its broking division. Likewise, its derivatives division wouldn’t be viable as a stand alone business.

Taking this into account we have to come up with a value for the business as a whole. The most important thing here is that CKN is the leading broker in most of the markets it operates in. CKN sees the most flow meaning more liquidity for its clients and better trades. The shipping market is also fairly illiquid and price discovery is probablly quite weak, again benefitting CKN and explaining its dominant position. Its dominant position and the natural confines of the market are the essential part of CKN’s competitve advantage. The other important factor is that CKN’s main operating asset is its people. One issue this raises is that although CKN’s main asset is the cash needed for broking, which produces a clear idea of the equity in the business, we have no real idea of operating assets. Likewise, the only cash the company needs for “capex” is to buy property for operations. The danger here is the people might disappear overnight but as they are paid roughly 80% of the revenue there presumably isn’t any sign this will happen at the moment and I think CKN again benefits from its strong competitive position here too.

CKN made £23m net to shareholders in the last year and it is trading around £230m at the moment with a 4% yield. The earnings yield is therefore, around 10%. Earnings yield is probablly the most straightforward way to value CKN, in particular, I don’t feel that anything that involves the balance sheet will be particularly helpful. The valuation suggests a decent, but not absurd, undervaluation. The stock has run up quite a lot recently however, I think going forward things are probablly only going to get better. In its annual report, it mentions it has increased its investment in people and tried to expand its reach while competitors are struggling. The suggestion is that when the shipping market recovers, CKN will be well-positioned to add more market share. Regardless, I believe the current price represents a good opportuntity to buy a share in a business with a pretty compelling competitive position.

On a side note, the annual report also makes some a few interesting comments about its views on the future of shipping prices and in particular, newbuilds. The company projects that towards the back end of this year we will see some improvement in the market and notes how the current prices make more expansion of supply uneconomic and that supply is probably adequate until 2014 at least. Interestingly, this was something that was echoed in the last Diana Shipping conference call in which the COO (I perhaps wrongly remember) suggested that some significant, but small, proportion of orders for ships would get cancelled.