Friday, October 25, 2013

Pacific Basin: given expectation on better spot rates in 4Q13 and 2014

BUY Pacific Basin (2343) given expectation on better spot rates in 4Q13 and 2014

Pacific Basin (2343, PB, $5.55), which provides marine transportation service through a fleet of Handysize and Handymax dry bulk ships, released trading update for 3Q13. Comment: The counter outperformed peers in terms of operating performance in 3Q13. PB achieved 3Q average daily earnings of US$9,550 net on 14,410 Handysize revenue days, compared to spot market rates average US$7,500 per day. Management attributed the premium against average spot rates to scale effect of fleet size and cargo-focused dry bulk business model. Management expected seasonally stronger demand combined with reduced newbuilding deliveries to support a stronger Handysize spot market in 4Q13. This will bolster the counter’s share price performance in upcoming two months.

In anticipation of better spot rates in 2014 given improving industry dynamics, management was not rash in securing contracts in 2014. Only 22% of its 30,400 contracted handsize revenue days in 2014 are covered at US$10,320. This coverage ratio is remarkably low compared to 32% in 9M11 and 26% in 9M12. This strategy will turn PB to be one of the key beneficiaries from the upturn of dry bulk shipping rates in 2014, in our view.

Management believed the trough of dry bulk shipping cycle was behind and therefore they aggressively targeted to expand their owned fleet from 39 in 2012 to 72 by this year end. Expansion of capacity indicates that volume growth could be a potential earnings driver for 2014. Based on consensus estimates, the counter is expected to deliver 11.9% of revenue growth (compared to 8.0% in 2013E), 10.1% gross profit margin (compared to 6.8% in 2013E, due to expectation of lower chartered in costs) and 155% EPS growth (compared to -23.5% yoy in 2013E), which implies the counter is presently trading at 14.6x 2014 PER or 0.98x 2014 PBR.

Historically, the counter has been traded at 1.2x PBR on average. In anticipation of improving spot rates in 4Q13 and 2014, we believe Pacific Basin’s valuation multiple, more specifically the PBR, is likely to move closer to its historical mean as we head into peak season of dry bulk shipping. We maintain BUY on Pacific Basin with 3-month target price of $6.23, implies a 1.1x 2014 PBR. Consensus target price is $4.93.

Publish date: 22/10/13

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