Price (18 Oct 13 , HK$) 5.50
TP (prev. TP HK$) 5.80 (5.65)
3Q13 trading update: Following seas into 4Q13
● Pacific Basin (PB) has released its 3Q13 trading statement revealing that revenues contracted and realised for its core dry bulk business thus far this year have risen 15%, with a strong finish expected to the year.
● While PB generated its typical premium to benchmark rates (27% for handysize and 12% for handymax), time charter equivalent rates contend to ease during the period, despite a strong finish.
● With rates having rallied into 4Q, we see little risk to our dry bulk expectations, although we have adjusted earnings for the effect of some one-time hits to the towage unit, lowering 2013E NPAT 8% to US$50 mn, but little change elsewhere.
● As vessel values continue to firm (up 19% YTD), we now believe that there is little daylight between PB's recorded and marked-to-market book value and hence we have lifted our TP from HK$5.65 to HK$5.80/share to reflect this…equivalent to 1x 2014E P/B. Fundamentals continue to improve for PB and the industry at large and our OUTPERFORM rating is unchanged.
4Q13 is pivotal
The key to hitting our numbers lies in the PB's ability to contract in more vessels and to garner higher rates in 4Q when a combination of seasonal demand strength and supply constraint will work in its favour. To hit our numbers we need rates for uncovered contracted days to average US$11,400 for handysize and US$13,500 for handymax vessels, with 15-20% more operating days achieved across both classes. Spot rates today are close to US$9,000 and US$12,000, respectively before any "PB premium" is added or the further rise anticipated as the grain shipping season peaks. With 32 vessels added to the owned fleet and 23 more chartered in the last year (a 32% increase in fleet size alone), we believe that our operating days target will be comfortably met and with them our above consensus earnings estimates.
While recording some good wins in terms of project extensions – the Gorgon, cornerstone clients in Newcastle and long-term transhipment barging in the Northern Territories, we did detect further downward management of PB Towage's 2H contributions. This reflects start-up costs associated with the new projects and Gladstone-related wind-down costs, as well as the absence of Rena salvage-related work that boosted 4Q12. We have cut our NPAT contribution estimates to US$31 mn for 2013E (down 18% YoY), accounting for the reduction in headline expectations.
Looking forward, the seven product categories that PB tracks in terms of needle-moving minor bulk trades into China have risen 18% over Aug-13 YTD and were up 40% YoY in August itself. This compares with a 1% decline in the size of the global handysize fleet as at the beginning of October.
This has contributed to the > 50% rise in the Baltic Handysize Index since February's lows and with the fleet expected to fall another 2% in size over the next two years, we see rates firming up further on an annualised average basis. 1Q14 should see freight rates tail off based on previous seasonality, but we expect the YoY gap to increase.
Publish date: 21/10/13