Regional Container Lines

Regional Container Lines Plc (RCL)
 

Below estimate: RCL posted a 1Q12 net loss of Bt494m, shallower than the net loss of Bt714m in 1Q11 but deeper than the Bt392m net loss reported for 4Q11. Stripping out a gain on sales of fixed assets of Bt36m, an FX gain of Bt152m and a provision for an unrealized loss on derivatives of Bt1m, the 1Q12 core loss would be Bt683m, shallower than the 1Q11 core loss of Bt724m but deeper than the core loss of Bt320m posted for 4Q11. The core result was somewhat below our estimate and the consensus, due to lower-than-expected lifting volume and heavier-than-modeled operating costs.
Results highlights: The shallower YoY loss was due to reduced SG&A expenses and increased income from investments (accounted for under the equity method). The deeper QoQ red ink was because of: 1) lower lifting volume, 2) higher operating costs, especially the bunker oil cost (up 9% QoQ to US$735/tonne) and 3) greater SG&A expenses. Lifting volume declined by 12% YoY and 5% QoQ to 533,982 TEUs. The gross loss margin improved slightly to -9.6% from -9.9% in 1Q11, but weakened from a gross profit margin of 0.04% in 4Q11.
Outlook: Core numbers are expected to improve QoQ in 2Q12 (albeit still mired in red ink), driven by greater demand for container shipping (demand normally peaks in the third-quarter), upward adjustments to freight rates and lower bunker oil costs (aligned with falling crude prices). However, the prevailing oversupply in the container shipping industry will continue to keep freight rates subdued.
What’s changed? We have revised our FY12 net loss forecast deeper to Bt956m (from Bt328m) to reflect the worse-than-expected loss in 1Q12. As such, our YE12 target price falls to Bt6.75 (from Bt6.80), pegged to a YE12 PBV of 0.47x (1.3SDs below RCL’s long-term mean)—the valuation that the stock traded at during FY08-09, when it was posting yearly losses.
Recommendation: We think the improved bottom-line outlook should help support the share price, so downside risk appears limited from here—RCL currently trades at a YE12 PBV of only 0.5x (1.4SDs below its long-term average). We, therefore, maintain our HOLD rating. Within Transportation space, we prefer inland operators (BTS and BECL) to shipping stocks, given that they currently have better fundamentals and stronger earnings growth prospects.