HSBC has admitted it got it wrong when it downgraded Clarksons shares earlier this year over concerns about the weak tanker market.
But the UK bank has rectified its mistake following the shipbroker’s bumper interim results with an upgrade to "buy" and a new target price of £40 ($55.4) per share.
Clarksons shares have climbed by over 30% in the year to date, and last week touched an all-time high of £36.40, beating the previous high seen in early 2018. It gives the company a market capitalisation of over $1bn.
The London-listed broker recently booked a profit before tax of £27.3m, compared with £20.9m in the first half of last year.
“We downgraded Clarksons to 'hold' on 16 April, on concern that strong bulker earnings wouldn’t offset tanker declines and that foreign exchange would be a significant headwind,” said analyst Anand Date in a note to investors.
“Sadly (for us), the first 2021 results confirmed that strength in various business lines was more than strong enough to offset these issues.”
Date said Clarksons' results were “unambiguously positive” with a profit before taxes of £27.5m some 12.9% ahead of HSBC’s expectations.
“Each of Clarksons' divisions beat expectations, most notably shipbroking — arguably the major source of value — and financials — arguably a volatile lead indicator,” he said.
Date said Clarksons is the “dominant franchise” in its space, and it is “increasingly clear” its position is strengthening on top of which it has “demonstrated profitability through the cycle” and has a strong net cash balance sheet.
“On the negative side it has exhibited relatively low growth over the last decade amid a multi-year malaise in shipping rates and valuations,” he said.
However, Date said the outlook for each shipping sub-sector has improved materially with years of low new ship ordering. That may finally be resulting in tighter markets and higher rates, “the implications of which would be very positive for Clarksons”, he said.
“Given the shipping market backdrop, and Clarksons' increasing penetration into clients via Sea/ platform roll-out, we think there is scope for earnings to sustainably increase over the next few years,” Date said.
He said the biggest risk to HSBC’s forecasts is probably a renewed simultaneous downturn in shipping sub-sectors, albeit this would most likely be driven by macroeconomic or geopolitical issues.
Liberum Capital transport analyst Gerald Khoo was equally optimistic that Clarksons' positive momentum would continue due to recovering demand and constrained supply supporting charter rates and asset values in most shipping markets.
In a separate note, Shore Capital analyst Peter Ashworth said Clarksons will likely continue to benefit from its leading market position.
“The results highlight our view that shipping markets are in the early stages of recovery after a decade of unfavourable demand/supply dynamics,” he said.
This story has been updated since first publication with the correct target price.
