Price (02 Aug 13 , HK$) 4.48
TP (prev. TP HK$) 5.00 (5.00)
Cost control the key to operating leverage
● We recently hosted a road show for Pacific Basin’s (PB) management following its 1H13 results announcement, which saw an improvement on last year's numbers as charter-in costs fell more than freight rates.
● Of the Asian-based clients that we saw, key concerns dealt with the perennial issues of supply, demand and when the excess of the latter over the former would lead to upward rate pressures.
● While (understandably) unable to pin-point the exact timing of a rates upswing, management has a sanguine view (that we share) for the next 18 months, with the supply side of the equation both muted and nigh impossible to alter. With operating costs increasingly locked in, PB's upside leverage has come positively amplified.
● We expect the company to charter in another 10,000 handysize revenue days during 2H13 and a further c5,000 handymax days. Timing these will be key to achieving our estimates, although the company will have a US$34 mn NPBT delta for every US$1,000/day increased rates. Maintain HK$5.00 TP and OUTPERFORM rating.
Ownership locks in cost; operational gearing takes care of the rest
Everything from the forward charter curve to the price movement of second hand vessels and the immutable characteristics of short-term supply tell us that we have arrived at the bottom of the dry bulk market (generally) and handysize (specifically) pricing cycle. Having spent several days on the road with one of the industry's more adept and transparent management teams, we are (at the risk of being accused of drinking too much of the corporate "koolaid") more convinced of this than ever. Key minor bulk imports into China (handysize operators' - of which PB is the world's largest - "staple diet") grew 13% in 1H13 on 1% growth in the fleet. While the former may decelerate along with the PRC's slowing economy, we still see an excess of demand over supply, resulting in upward rates pressure in the next 18 months.
At the same time, PB's changing ownership strategy is paving the way for long-term cost control and a P&L structure that enhances its already pronounced operating leverage. The key to cost control is the timing of asset purchases, with ownership costs the principal differentiation between operators. PB's management has timed the financing cycle to perfection, selling ships and chartering on short-term bases in the 2006-08 peak while purchasing assets and chartering long as vessel prices and rates bottomed over the last six-nine months. While this would seem an intuitive move for any manager, it has been its highly conservative balance sheet and high cash balances that have allowed PB this luxury, but again reflect its leadership's decisions to issue equity when it was expensive and no use debt when it is cheap (PB's recent US$85 mn Japanese ECA-backed facility was financed at ~3% vs. its blended 4.4% cost of funds).
The net result of its strategy is that it has steadily benefitted from falling chartered in costs, while recently increasing its proportion of owned revenue days as the costs of the two financing methods converge. It acquired 27 ships in 1H13 for an average of US$13.6 mn, with an average age of 8.7 years. This compares with a US$16.7 mn book value average for the total fleet, with an average age of six years—fairly consistent with the US$18 mn value for a second-hand 32,000 dwt handysize.
The most likely point at which the more benign supply-demand scenario is likely to be evident in rates is around the periods of peak demand for handysize/handymax tonnage, which tend to be the two hemispheres' grain seasons. We have been through the Southern harvest already, so anticipate the next upward push in rates to occur in Autumn. With nearly 70,000 revenue days likely marketed across its combined handy fleet and 50% of costs largely fixed, an average US$1,000/day rate increase translates into around US$34 mn in additional pre-tax profit—most of which would be distributed as dividends. While timing of PB's inward chartering and the upward push to rates will ultimately determine our expectations of the next six to 12 months profitability, we remain confident that the direction, if not angle, of earnings progression will remain unchanged.
Source/Extract/Excerpts/来源/转贴/摘录: Credit Suisse
Publish date: 07/08/13