• Reiterate Sell, Lower Fair Value to AED0.43: We reiterate our Sell rating as we lower our fair value to AED0.43 from AED0.51, which implies 30% downside potential. The stock has fallen by 15% since we downgraded our recommendation to Sell in November 2009 but we believe the shares have further to fall. While the macro environment for shipping has improved, the current share price assumes a much stronger recovery, which is unlikely to materialise in our view. Also, we believe Gulf Navigation’s balance sheet asset value is overinflated as it does not reflect the recent severe decline in asset prices.
• Outlook Improves but Priced In: Shipping rates have gradually improved in 2H2009 with both tanker and dry markets recovering from their lows. That said, the markets have weakened following the recent spike, which illustrates that the recovery is fragile. Going forward, we expect the market to remain volatile but to gradually improve in 2010 as demolition rates pick up. It is worth emphasising that estimates are factoring in a recovery in rates and this is also reflected in Gulf Nav’s share price.
• Fair Value of AED0.43 Supports Sell Recommendation: We have changed our valuation methodology in favour of a combination of DCF, NAV and Peer Group. Our DCF value remains at AED0.51. The adjusted NAV suggests a fair value of AED0.29, which is significantly below the balance sheet value, which does not reflect the severe decline in asset prices. In addition, we have valued Gulf Nav at a 15% PER premium to NSCSA on 2011 earnings, as it has a more diversified portfolio, which implies fair value of AED0.41. With a weighting of 0.5 in favour of DCF and 0.25 for NAV and Peer Group, our new fair value arrives at AED 0.43, which offers 30% downside potential.
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