Wednesday, October 23, 2013

Pacific Basin Shipping : The rising tide of asset values (CIMB)

Pacific Basin Shipping
Current HK$5.50
Target HK$6.55
The rising tide of asset values

 We have re-examined our valuation of Pacific Basin’s fleet in light of the rising secondhand ship prices and hence, raise our SOP by 15%. The stock continues to trade at an undeserved discount to its underlying fleet values, despite its strong balance sheet.

Furthermore, Pacific Basin’s core bulk shipping business has remained profitable since the GFC. We share the company’s view that spot handysize and handymax rates will gradually recover in the medium term, which will the key re-rating catalyst. We lower FY13 EPS as we nudge down expectations for the towage arm, but raise FY14-15's on better dry bulk rate forecasts. Maintain Outperform, with a higher SOP-based target price.

What Happened
Pacific Basin continued its above-spot market performance for 3Q13, as disclosed in its recent trading update, with its handysize rates 27% above spot Baltic Exchange rates. It expects 4Q rates to be higher due to seasonality, but rates should soften again in 1Q14, as had been the case in the past two years. Since September 2012, it has acquired 32 bulkers and chartered 23 more for the long term. With asset values now on the rise, it will acquire at a slower pace as good opportunities are more scarce.

The company warned that its 3Q performance for the towage side was affected by one-off costs in winding down the Gladstone projects, start-up costs for the new iron ore trans-shipment contract in Australia and the Newcastle towage business, and the reduced value-add of its Gorgon LNG contract. However, Pacific Basin guided that the towage division will still register profits in 2H13. The towage business is at the very early stages of being offered for sale.

What We Think
We believe that the average dry bulk fleet supply will rise 4.9% yoy in 2014, which is marginally higher than the 4.6% demand growth, and spot rates should generally be stable. But rates should rise more convincingly in 2015 when the average fleet may grow only 2.2%. However, Pacific Basin is more aggressively expecting demand to rise 7% next year, which would support our call on the stock even more.

What You Should Do
Pacific Basin’s stock has performed very well since our upgrade on 1 March [PDF], and as freight rates and asset values continue to recover, we expect even more upside to crystallise. Our target price has been rolled over to end-2014. Stay invested.

Dry bulk supply-demand balance
We expect demand to grow 5.1% yoy this year and 4.6% in 2014, with the slowdown next year largely attributable to a slower pace of Chinese iron ore imports after the strong 9% yoy rise during 9M13. But Pacific Basin expects a stronger demand increase of around 7% in 2014, following an 8.1% yoy rise in demand in 2013 (based on R.S. Platou's forecast). Although its year-end fleet growth is forecast to be only 2.7% yoy in 2014, we believe that it is more useful to look at the 2014 average fleet growth of 4.9%, as some vessels are delivered closer to end-2013 and will only contribute to supply for the whole year in 2014. Based on our forecast, we expect stable-to-rising rates on average in 2014, but a more pronounced rate movement to happen in 2015. However, if Pacific Basin’s demand forecast for 2014 is correct, the rate recovery will happen faster. Pacific Basin highlighted that for 8M13, China’s imports of seven key minor bulks rose 19% yoy, or 10% yoy if excluding bauxite, which was coming from a particularly low base in 2012. Meanwhile, Chinese log imports rose 16% yoy for 9M13.

Dry bulk rates
Spot rates have done well since 3Q13, particularly for the capesize and panamax sectors, mainly due to Chinese iron ore restocking – as explained in our 12 September note [PDF]. Supramax and handysize rates are also beginning to catch the wind of better seasonality, and the yoy rise so far this October has been particularly sharp against a weak base comparison in 4Q12. On the assumption that the average rates for 1-18 October 2013 will sustain for the rest of 4Q13, capesize rates are on average going to be 117% higher yoy in 2013 vs. 2012, 30% higher for panamax rates, but only 4-5% higher for supramax and handysize rates However, Pacific Basin is of the opinion that the sharp rise in capesize rates is most likely “a short-term seasonal improvement”, a view which we share, that is likely to be followed by a softer 1Q14, highlighting the rate volatility of the larger vessel sizes. Also, the sharp rises in capesize and panamax rates must be seen in the light of their very weak 2012 levels, when supramax and handysize rates often traded higher than their capesize and panamax cousins.

Pacific Basin has locked in 44,968 handysize days to-date at an average rate of US$9,407/day. For the rest of 2013, it has 2,652 days currently unhedged, and we forecast that it will enter into short-term charters for a further 3,471 days; both are expected to fetch an average rate of US$10,950/day. This takes our full-year average handysize rate assumption to US$9,592/day for 2013. Meanwhile, Pacific Basin has locked in 18,739 handymax days to-date at an average rate of US$10,819/day. For the rest of 2013, it has 271 days currently unhedged, and we forecast that it will enter into short-term charters for a further 1,272 days; both are expected to fetch an average rate of US$13,200/day. This takes our full-year average handymax rate assumption to US$11,000/day for 2013.

In addition to benefitting from the spot market movements, Pacific Basin’s strategy also entails entering into long-term freight contracts with its customers. Although freight rates are currently low, Pacific Basin has also managed to lock in low asset prices for its owned/finance-leased fleet and low charter rates for its chartered-in fleet, that will still give it a “reasonable return”.

Secondhand ship prices
Ship prices have risen throughout this year from their very depressed start-of-year levels, and this is mainly due to: (1) the stabilisation of freight rates, (2) the general lack of good-quality sales candidates, and (3) the growing belief among many market participants (Pacific Basin included) that we have likely seen the lowest point in secondhand values. Five-year-old 32,000 dwt handysize ships have seen their values rise 19% from US$15.5m in January 2013 to US$18.5m in September, and we have reflected the rise in values into our Pacific Basin SOP. Pacific Basin has been particularly aggressive in its asset acquisition spree, and its owned and finance leased fleet is expected to rise from 50 ships (as at 1 January 2013) to 74 ships (as at 31 December 2013), and then rising further to 80 ships by end-2016. Pacific Basin’s strong balance sheet and low gearing levels will make it easy for the company to fund its acquisitions via debt. Moving forward, Pacific Basin said that it will slow down its vessel acquisitions, as the rise in asset prices has made it more difficult to find attractively-priced candidates.

Source/Extract/Excerpts/来源/转贴/摘录: CIMB-Research,
Publish date: 21/10/13

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