Regional Container Lines

Below estimate

RCL posted a 3Q14 net profit of Bt60m, a turnaround from the net loss reported for 3Q13 but down 80% QoQ. Stripping out an Bt11m gain on sales of fixed assets and a Bt32m FX loss, 3Q14 core earnings would be Bt81m, a turnaround from a core loss in 3Q13, but down 70% QoQ. The result was somewhat below our estimate, due to lower freight rates than expected. 

Results highlights

The YoY core operational improvement was because of lower operating costs (down by 9% YoY [and 2% QoQ] to $185/TEU), despite 9% YoY lower lifting volume and flat freight rates. The QoQ core earnings contraction was due to: 1) lower freight rates (down 7% QoQ to US$209/TEU), 2) weaker lifting volume (down 1% QoQ to 474,594 TEUs) and 3) higher SG&A expenses—the SG&A/sales ratio increased to 8.3% from 7.8% in 2Q14. 

Outlook

RCL’s core numbers are expected to weaken QoQ in 4Q14 (but a YoY improvement is expected), as the fourth-quarter is normally low season for container shipping—historical data suggest that lifting volume typically declines about 4% QoQ in the fourth-quarter. Moreover, the prevailing oversupply of container vessels will keep freight rates subdued. 

What’s changed?

We have revised down our FY14 net profit forecast by 9% to Bt267m to reflect a 2% lower freight rate assumption to US$218/TEU.   

Recommendation

The share price rally over the past few months has already priced in a YoY bottom-line turnaround for 3Q14, we believe. Moreover, the firm’s 4Q14 earnings are expected to weaken QoQ, due to the advent of low season which will persist through 1Q15. As such, there aren’t any obvious catalysts for the share price in the near future. Valuation-wise, RCL currently trades at a YE15 PBV of 1.0x (0.6SD above its long-term average). Its valuation is no longer attractive. We have, therefore, downgraded our rating from TRADING BUY to HOLD.