Monday, August 5, 2013

Pacific Basin Shipping 1H13: Turns Around In A Sluggish Freight Market (UOBKH)

Pacific Basin Shipping
Share Price HK$4.27
Target Price HK$4.48
1H13: Turns Around In A Sluggish Freight Market

1H13: Turns Around In A Sluggish Freight Market
PBS reported a net profit of US$0.3m in 1H13, vs a net loss in 1H12. It has outpaced the spot freight market despite the dry bulk market conditions remaining sluggish. We are still cautious on the dry bulk sector, but considering the defensiveness of PBS for being Handy market-focused, maintain HOLD. Target price: HK$4.48. Entry price: HK$3.80.

• Net profit turnaround in 1H13, in line with expectation. Pacific Basin Shipping (PBS) reported revenue of US$766.8 (+11% yoy) and net profit of US$0.3m in 1H13, turning around from a net loss of US$196m in 1H12. Even excluding the US$190m RoRo impairment in 1H12, the underlying profit in 1H13 was US$13.6m, surging 325% yoy, mainly due to more contribution from the dry bulk segment and reduced losses from discontinued RoRo business.

• Dry bulk: Improved performance in a weak market. The dry bulk division contributed a net profit of US$11.3m in 1H13, up 52% yoy. Handysize contributed most of the profit, at US$22.4m, but down 2% yoy. Handymax contributed US$4.3m, turning around from a net loss in 1H12. The average Handysize and Handymax daily time-charter equivalent earnings (TCE) in 1H13 were US$9,290 and US$10,570, declining 12% and 14% yoy respectively. Improved net profit from the dry bulk sector was mainly due to increased revenue days (fleet expansion) and lower daily vessel cost as a result of lower chartering cost.

• Towage: Remained healthy. The towage division posted an 11% yoy decline in net profit of US$12.6m in 1H13. This was due to start-up costs relating to the entry into the port of Newcastle, which resulted in a 3% decline in harbour towage profit and a 21% increase in direct overheads.

• RoRo: PBS has sold all its six RoRo vessels in Sep 12 and regarded RoRo as a discontinued business. Hence, profit in 1H13 improved without the losses in the RoRo business and the huge impairment expense for RoRo vessels.

Stock Impact
• Core strategy remains on fleet expansion by ordering cheap vessels. In 1H13, PBS expanded its operated dry bulk fleet size to 246 dry bulks, from 187 as of end-12. PBS believes the sharp decline in newbuilding prices enables it to strategically focus on measured expansion of its dry bulk fleet at comfortable prices and secure long-term chartering vessel at a lower fixed rate. As a good execution of this strategy, PBS has a longterm charter for nine vessels and acquired 27 Handysize ships and 4 Handymax ships. Ytd, 25 of the acquired vessels are second-hand vessels and 6 are newbuildings. An adequate cash of US$455m and a healthy net gearing ratio of 29% would fund further fleet expansion in the future.

• Unique business model helps it to outperform in the weak market. PBS focuses on the Handysize and the Handymax markets by securing forward cargo cover. PBS has covered 64% and 66% of Handysize and Handymax revenue days for 2H13, at daily TCE of US$9,350 and US$10,060 respectively. Its daily rate of US$9,290 for handysize ships and US$10,570 for Handymax ships in 1H13 outperformed the market by 32% and 28% respectively in 1H13. This ensures a positive underlying profit in weak industry conditions.

• Net profit in 1H13 ensures our forecast of an earnings turnaround in 2013. We still expect the bulk market to remain sluggish in 2013. However, considering that PBS is more defensive than larger vessel operators thanks to the steadier Handy rates and an unique business model, we expect it to record a net profit of US$36m in 2013.

Earnings Revision/Risk
• None.

• Maintain HOLD but we cut our target price to HK$4.48 from HK$5.50,by lowering the 12-month forward P/B to 0.8x from 1.0x to reflect the deep and long downcycle in dry bulk shipping. PBS is more defensive than larger vessel operators, but upward catalysts remain limited. Entry price is HK$3.80.

Share Price Catalyst
• Freight rate recovery.

Source/Extract/Excerpts/来源/转贴/摘录: UOB Kay Hian research
Publish date: 02/08/13

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