Malaysian Bulk -
Riding On High Waves?
The Baltic Dry Bulk Index has recently surged due to a significant rise in Chinese iron ore imports. We do not expect sharp seasonal drops in shipping rates as aggressive spot prices have been locked in through forward freight agreements (FFAs). Moreover, the gap between demand and supply is narrowing. Nonetheless, we are downgrading MBC to SELL as its earnings are still expected to disappoint.
- Seasonal rush. Since the beginning of September, the Baltic Dry Bulk Index has soared 86% to 2,127 points, hitting a 21-month high. This was largely due to strong rates hikes for Capesize vessels, driven by a surge in Chinese iron ore imports (+27% y-o-y in August; 16% YTD) on restocking activities. This, combined with the relatively stable iron ore prices, has absorbed the excess supply of spot iron ore in the short term. The upward trend in rates brought joy to vessel owners, helping them to increase their cash earnings well above breakeven levels , notably for those with Capesize and Panamax vessels in their fleet.
- Pullback in rates unlikely to be sharp. Looking ahead, we expect the daily earnings of Capesize vessels to hover at the sustainable USD35,000 level. This is reflected in the aggressive spot prices locked in through forward freight agreements (FFAs) for October and 4Q13 – at daily rates of USD36,250 and USD32,000 respectively. Time charter deals are also being concluded at levels not seen since 2010. This is also the case for the Panamax due to higher grain activity, while the Handymax is expected to see weaker rates as charterers are in no rush to cover forward rates. Though the seasonal year-end pullback in dry bulk shipping is expected from November onwards, it will unlikely be a sharp one. Capacity growth in dry bulk shipping will continue to exceed demand growth this year, albeit with a narrower gap.
- Downgrade to SELL. We make no changes to our earnings forecasts. As the stock has been on an uptrend, we are downgrading our recommendation to a SELL, albeit with a slightly higher FV of MYR1.70 (from MYR1.66), as we roll over our valuation to 0.9x FY14F P/BV, in line with peer average. We believe MBC’s earnings could continue to disappoint as it has no exposure to Capesize vessels where the spike in shipping rates is the strongest.
Publish date: 02/10/13