Approaching calmer seas
1H13 core profit was above our but in line with consensus at 94% and 49% of FY13 estimates, as bulk losses were lower than feared. A slow but gradual recovery in bulk rates is in the offing, and Maybulk could benefit from its ability to buy cheap ships using its cash balances.
We upgrade from Neutral to Outperform after increasing FY13-15 EPS on narrower dry bulk losses as we were previously over-conservative on cost. Our target price continues to be based on SOP and is raised to reflect Maybulk's higher cash position at end-FY13. Re-rating catalysts include continuing profitability improvements at its dry bulk division as freight rates recover.
Highlights of 2Q13
The dry bulk division posted its fourth consecutive quarter of losses in 2Q13 amid weak charter rates. Freight rates dipped 13% yoy as demand was still unable to absorb the large oversupply of ships. The division's losses likely originated from its six long-term charters, where charter rates are likely to be higher than the earnings Maybulk can obtain with the ships given current low rates. Tanker earnings mitigated part of the weakness in bulk while its offshore associate POSH made another commendable showing with a RM18.2m contribution to Maybulk, up 3.9x yoy, lifting the company into profitable territory.
Despite continued losses, bulk losses have narrowed as rates have gradually improved since early-2013. With rates continuing to rise so far in 3Q13, bulk shipping losses should continue to shrink slowly. While losses in the division may be here to stay till FY15, we expect losses to narrow as time passes.
Armed for expansion
Maybulk is a savvy investor, buying ships near the bottom of a cycle and selling them for a profit when rates are much higher. The company has net cash of RM131m and is in a position to take advantage of low vessel prices. Six new vessels are in the pipeline for delivery in 2014/15.
Valuation and recommendation
Upgrade to Outperform. We are upgrading Maybulk back to Outperform following its 6.4% share price correction over the past two weeks. The shipping company is a shrewd investor with a strong balance sheet, giving it the ammunition to purchase vessels at low prices. Improving dry bulk time charter equivalent (TCE) rates should help Maybulk narrow its dry bulk losses. The reduced cash burn will provide the company with more flexibility when scouting for cheap, well-built ships.
POSH listing not a re-rating catalyst. Recent media reports suggest that POSH will list in Singapore at a market capitalisation of US$1bn-1.3bn. Listing at such valuations will price Maybulk's 21.23% stake in POSH at US$212m-276m. When Pacific Carriers Ltd (PCL) sold the stake to Maybulk back in 2008, the former gave a put option to the latter to sell back the stake at a 25% premium over Maybulk's cost, if POSH is not listed within five years (by end-2013). If Maybulk exercises the put option, it will be able to receive US$276.25m, higher than the amount it will receive if POSH listed at the rumoured values. We have assigned a US$276.25m value to Maybulk's stake in POSH on our SOP and further upside to this value appears limited for now. We value Maybulk on its SOP, which is mainly based on the expected end-2013 secondhand value of its fleet. The increase in earnings estimates results in a higher net cash position at the end of the year and consequently a 2 sen increase in our target price to RM2.02.
Publish date: 22/08/13