Precious Shipping

Precious Shipping Plc (PSL)

Far below estimate: PSL reported a net profit of Bt13m for 2Q12, down 97% YoY but a turnaround from the net loss of Bt41m it posted for 1Q12. Stripping out extra expenses, 2Q12 core earnings would be Bt12m, down 94% YoY but much better than the 1Q12 core loss of Bt19m. The result was weaker than our forecast and the consensus, due to lower-than-expected freight rates and higher-than-modeled depreciation expenses.
Results highlights: The YoY earnings contraction was due to: 1) lower freight rates (though PSL had more operating vessels) and 2) greater depreciation expenses. The QoQ earnings turnaround was led by: 1) higher freight rates, 2) a greater number of operating vessels and 3) lower SG&A expenses. The average freight rate dropped by 29% YoY but increased 10% QoQ to US$9,130/day/ ship, while the number of vessels in operation increased to 30 ships in 2Q12 from 21 in 2Q11 and 27 in 1Q12. In addition, the SG&A/sales ratio declined to 6.5% from 8.8% in 2Q11 and 8.0% in 1Q12.
Outlook: PSL's 3Q12 bottom-line is expected to soften QoQ, due to low seasonal demand for dry bulk shipping. Even though the 3Q12-to-date mean BDI has increased 6% QoQ, led by the Supramax and Handymax classes (which PSL operates), the shipping index is expected to soften in the near-term, as July-August is normally low season for grain trading. But the firm will have more vessels in operation in 3Q12 than it had in 2Q12, as it will take delivery of two newbuilds during the quarter.
What’s changed? We have slashed our net profit forecasts by 99% to Bt5m for FY12 and by 83% to Bt86m for FY13 to factor in: 1) a lower operating day assumption (down 7% to 10,880 days) and 2) a reduced gross profit margin assumption (to 25% from 36%). As such, we have cut our YE12 target price to Bt18.80 from Bt19—pegged to a YE12 PBV of 1.2x, 0.5SD below PSL’s long-term average. Given the disappointing 2Q12 numbers, we expect a precipitous consensus earnings forecast downgrade. 
Recommendation: Although anticipation of a QoQ profit contraction in 3Q12 may generate negative sentiment toward the stock in the near-term, we think the current share price has already priced in such concerns—PSL trades at a YE12 PBV of 0.9x, 0.9SD below its long-term average of 1.6x. Moreover, there is scope for earnings upside from its ongoing fleet renewal program. We maintain our HOLD rating.