Regional Container Lines

Regional Container Lines Plc (RCL)

Above estimates: RCL posted a positive surprise for 2Q12—a net profit of Bt5m, a turnaround from net losses of Bt478m in 2Q11 and Bt494m in 1Q12. Stripping out a gain on sales of fixed assets of Bt41m and an FX loss of Bt125m, the 2Q12 core profit would be Bt88m, a turn-around from core losses of Bt520m in 2Q11 and Bt683m in 1Q12. The result was better than both our number and the consensus; we expected red ink. The black ink on the bottom-line was due to lower operating costs and SG&A expenses than expected.
Results highlights: The earnings turnaround was due to: 1) higher QoQ lifting volume, 2) a higher YoY freight rate, 3) lower operating costs, especially the bunker oil cost (flat YoY but down 9% QoQ to US$667/tonne) and 4) lower SG&A expenses. Lifting volume declined by 11% YoY but increased 4% QoQ to 554,505 TEUs. Gross margin turned positive (+12.5%); it was -4% in 2Q11 and -9.9% in 1Q12.
Outlook: Core numbers are expected to improve further QoQ in 3Q12, driven by greater demand for container shipping (demand normally peaks in the third-quarter), freight rate increases and lower bunker oil costs. The average bunker oil price in 3Q12 QTD has declined by 6% QoQ to US$629/tonne. However, the prevailing oversupply in the container shipping industry will continue to keep freight rates subdued.
What’s changed? We now expect a shallower FY12 net loss of Bt297m (we previously modeled for Bt956m), which reflects the surprise 2Q12 earnings. As such, our YE12 target price rises to Bt7.50 (from Bt6.75), pegged to a YE12 PBV of 0.5x (1.4SDs below RCL’s long-term mean)—the valuation that the stock traded at during FY08-09, when it was posting yearly losses. We also expect a consensus bottom-line forecast upgrade.
Recommendation: We think the 2Q12 profit surprise together with earnings growth momentum in 3Q12 will prompt a share price re-rating. Valuation-wise, RCL currently trades at a YE12 PBV of only 0.4x (1.5SDs below its long-term average), so downside risk appears limited from here We have, therefore, upgraded our rating to TRADING BUY from HOLD.