Thursday, January 2, 2014

Shipping - Surf On The Rates Momentum (RHB)

Shipping - Surf On The Rates Momentum
We are NEUTRAL on shipping. The rate upswing across all segments in 2013 presents trading opportunities. The dry bulk sector’s valuation has somewhat  priced  in  optimism  of  a  recovery  while  we  see  tankers eventually  catching  up,  although  caution  is  advocated  due  to  the weaker macro prospects. We prefer MISC for its diversified exposure.

Baltic  Dry  Index  perks  up.  In  December,  the  Baltic  Dry  Index  (BDI) rose to its  highest level in 27 months on the back of  higher  imports of iron  ore  in  November  (+18%  y-o-y)  and  coal  from  China.  This  rising demand  also  boosted  iron ore and  coal prices.  Dry freight rates in the spot market  have  climbed  40-70%  in  the past 30 days,  with Handymax and Supramax seeing strong demand. The spike in  rates for the smallersized vessels will benefit Maybulk (MBC MK, NEUTRAL, FV: MYR1.75) given its 55% exposure in  these vessels  by deadweight tonnage  (DWT). The 6%  growth in  supply  of  total tonnage of dry bulk vessels  in  2013  is expected to marginally exceed the 5% growth in tonnage demand.  Thus, 2014 is poised to be a better year for overall freight rates as demand and supply will be more balanced. Clarksons Research expects both demand and  supply  to  grow  by  5%  in  2014,  while  we  expect  overall  rates  to improve by about 35%/25% for FY14/15 respectively.

Crude  tanker  rates  to  remain  volatile.  Crude  tanker  rates  remain volatile,  with  no  clear  indications  of  recovering  in  the  near  term  as overall demand for oil continues to remain weak amid an oversupply of crude tankers.  Meanwhile, chemical tankers in Europe are still hit by  a surplus  of  tonnage  despite  some  activities  on  the  Transatlantic Westbound  route.  Wood  Mackenzie  expects  China’s  oil  imports  to surpass  that of  the US in 2017, and be the key driver of a recovery in tanker rates by 2015 given that the longer distance from the Atlantic to China  will  absorb  the  excess  capacity  due  to  higher  vessel  utilization. Meanwhile,  tanker rates  are  expected to  remain volatile  in 2014  but we see  average rates  inching up  by  15%  in 2014  and 25%  in  2015 as the stronger demand eases the over-supply.

More caution on LNG shipping. The shale gas boom in the US has not only  dimmed  the  outlook  for  crude  tankers  but  also  that  for  LNG shipping.  We  have  seen  LNG  buyers  show  hesitation  in  signing  longterm contracts  out of  fears  that LNG prices and shipping costs  will  get cheaper in the future.  Moreover, the slew of  new  LNG vessels coming into  the  market  next  year  will  exacerbate  the  situation  and  inevitably result in a  glut.

Maintain NEUTRAL on Shipping.  In our view,  investors can trade on this sector  on any  rates  upswing across shipping segments, but keep a close eye on the rates and stock prices. That said, rates would need to be stronger vs our assumptions to warrant any upgrades to our fair value estimates.  MISC  is  our  only  BUY  in  this  sector  given  its  diversified exposure as its non-shipping segment will mitigate the concerns  arising from the LNG segment  when  the upcoming  short-term vessel contracts expire

Baltic  Dry  Index:  The  best  sector  to  be  in  now;  but  has  valuation  reflected optimism?

The Baltic Dry Index inches higher.    The BDI  has  reached its highest level in 27 months on the back of  higher  imports of iron ore and coal from China. This was also reflected in iron ore and coal prices. Dry freight rates in the spot market have risen by 40-70%  from the first week of  November up to the present,  with Handymax and Supramax  vessels drawing strong demand. The strong rally in the  smaller-sized  vessel  segment  will  benefit  Maybulk  (MBC)  given  its  55% exposure to these vessels by DWT.

Defying  the  typical  year-end  slump.  Of  late,  smaller-sized  vessels  saw  a stronger  year-end  jump  in  freight  rates  on  expectations  that  the  Chinese economy is on track for a solid recovery. Average fixture rates for 1Q2014 point to a weighted average freight rate of USD12,211/day, which is higher than the average  USD8,968  that  Maybulk  will  likely  achieve  this  year.  While  rates  are expected  to  remain  volatile,  signs  are  pointing  to  a  rising  trend.  Our  current
assumptions  for  Maybulk  include  a  35%/25%  improvement  in  overall  rates  for FY14/15 respectively.

Rate  outlook  for  2014.  The  6%  growth  in  total  capacity  tonnage  of  dry  bulk vessels  this  year  is  expected  to  marginally  exceed  the  5%  growth  in  tonnage demand. 2014 is poised to be a better year for overall freight rates as demand and  supply  will  be  more  balanced.  Clarksons  Research  expects  both  demand and supply to grow 5% in 2014.

Asset  prices  on  an  uptrend,  but  could  be  cause  for  concern.  Dry  bulkers have been optimistic this year given the strength of orders, as vessel prices (for both  newbuilds  and  second  hand  vessels)  have  been  on  an  uptrend  since bottoming early this year,  rising  in tandem with the  a growing  orderbook to total fleet size ratio (measured by DWT). Prices of  Capesize  vessels  have surged at the strongest pace – at 16-30% - over the past three months. In the longer term, however,  this  may  revive  worries  of  an  oversupply  as  we  anticipate  more deliveries  from  2015  onwards,  which  could  cap  the  increase  in  rates  as  the utilisation rate remains lower than anticipated. Nevertheless, while orders are on the rise, we note that the percentage of slippage to total DWT ordered in 2013  –at 36% -  is the highest  since 2010, which helps  ease concerns of an oversupply in  the  shipping sector.  This  also  means  that only  64%  of the  projected  vessel orders  were delivered  this year.  The high slippage is due to  a  tighter financing environment whereby shipyards are already in dire need for working capital.

MAYBULK  not  a  BUY  yet.  Maintain  NEUTRAL.  We  think  the  market  has already  priced  in  the  uptrend  in  rates,  judging  from  the  32%  YTD  surge  in Maybulk’s share price  in spite of  continued losses in its core shipping business, even at current freight rates. Moreover, if we value associate POSH at a 25% premium to its purchase cost  –  which will  imply  a 13x FY14 P/E for its offshore division  -  this would value Maybulk’s shipping operations at a steep FY15 P/E of 28x vs the sector’s FY14 average of  22.5. As such, we maintain our NEUTRAL rating on Maybulk,  with an unchanged FV of MYR1.75,  premised on a valuation target of 1x FY14 P/BV that is in line with the peer average.

Tanker Shipping (crude and LNG): Volatility to persist

Volatility  to  reign  in  crude  tanker  rates.  Crude  tanker  rates  remain  volatile, with no clear indications of recovering in the near term as overall demand for oil continues  to  remain  weak  amid  an  oversupply  of  crude  tankers.  The  daily earnings  of  very  large  crude carriers  (VLCCs) showed  a  very  strong  seasonal rebound  at  the  start  of  September  due  to  improved  demand  emanating  from activities  in  the  Far  East,  as  long  haul  voyages  to  some  extent  mitigated  the tonnage  oversupply.  Aframax  tankers,  in  which  MISC  (MISC  MK,  BUY,  FV: MYR6.09) has significant exposure, continue to face  an  oversupply as demand for these ships in the Gulf of Mexico remains weak, no thanks to the discovery of the  cheaper  shale  gas  that  has  made  the  US  less  dependent  on  oil  imports.

Meanwhile,  chemical  tankers  in  Europe  are  still  hit  by  a  surplus  of  tonnage despite some activities on the Transatlantic  Westbound route. Wood Mackenzie expects China’s oil imports to surpass the US’ in 2017, and be the key driver of a recovery in tanker shipping rates by 2015 given that the longer distance from the Atlantic to China will absorb the excess capacity.  Meanwhile, volatility in tanker shipping  rates  is  expected  to  persist  in  2014,  but  we  expect  average  rates  to jump  15%  in  2014  and  25%  by  2015  as  the  supply  situation  eases  owing  to stronger  demand.  With  the  worst  being  over  for  petroleum  tanker  shipping,  a recovery in the segment’s earnings for MISC next year is on track.

Iran’s  potential  end  to  embargo  could  pose  downside  risk.   A  potential downside risk to crude tanker rates is the lifting of sanctions on Iran as this could potentially result in  the  conversion of the  country’s floating storage tankers  and as  a  result,  exacerbate  the  oversupply  situation.  In  a  bear  case  scenario,  the conversion  of  these  vessels  could  potentially  add  6%  more  capacity  to  the current  VLCC  fleet.  However,  as  these  floating  vessels  will  be  brought  out  of near lay-up conditions,  we believe time and cost considerations may reduce the likelihood of Iran’s floating storage vessels entering the market all at once.

A more  cautious tone on LNG shipping.  The shale gas boom in the US has not  only  dimmed  the  outlook  for  the  crude  tanker  space  but  also  that  of  LNG shipping. We have seen some hesitation on the part of LNG buyers to sign longterm contracts  for fear that LNG prices and shipping costs  will be cheaper in the future.

  This  is  in  contrast  to  the  strong  optimism  seen  after  the  Japan earthquake, which drove  up  trade demand for  LNG cargoes  and vessel orders. The  hesitation  of  LNG  buyers  and  their  inability  to  secure  long-term  contracts have  been the cause for delays  in completion of mega LNG projects ,  which are in turn  also  experiencing  cost overruns and technical challenges.  Exacerbating the situation further is  the slew of LNG vessels coming into the market  in  2014, resulting  in  a  potential  glut.  This  does  not  bode  well  for  MISC  as  five  of  its vessels  are  on  short-term  contracts  that  will  expire  on  gradually  over  the  next few  years.  MISC  stated  that  one  liquefied  natural  gas  (LNG)  vessel  charter  is expected to expire in June 2014, but talks are already ongoing with Petronas, which is keen on chartering the vessel.

MISC  remains  a  BUY.  Nevertheless,  MISC  remains  our  Top  Pick  in  the Malaysian  shipping  space  despite  the  increasingly  challenging  landscape  for tankers.  Our FV is unchanged at MYR6.09,  premised on SOP (please see table overleaf for the valuation details). Our investment thesis for MISC is centered on its  diversified  businesses,  which  are  still  reporting  earnings  growth  (except  for the  heavy  engineering  division),  that should  cushion  the  losses suffered  by  its petroleum and chemical shipping business. We anticipate a recovery in earnings (at least  at  the EBIT level) this year.  Furthermore, we hold the view that there is still  value  in  its  liquefied  natural  gas  (LNG)  segment  even  though  its  parent company, Petronas, has said that it will be acquiring its own LNG fleet. In our opinion, such a move signals the possibility of a second attempt by the national oil company to take its 63%-owned subsidiary private.

Maintain  NEUTRAL  on  Shipping.  We  maintain  NEUTRAL  on  the  shipping sector.  In  our  view,  this  is  a  trading  sector  play  on  rates  upswing  across  all shipping segments, but investors should closely monitor rates and stock prices. Any  selldown  in  the  share  prices  of  shipping  stocks  opens  up  a  trading opportunity. However, rates would need to be stronger than our assumptions to warrant for any further upgrades in fair value.

Source/Extract/Excerpts/来源/转贴/摘录: RHB-Research,
Publish date: 31/12/13

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