Precious Shipping

Precious Shipping Plc (PSL)  

 

Below estimate

PSL reported a net loss of Bt403m for 2Q15, deeper YoY and QoQ. Stripping out Bt32m in FX losses, Bt13m loss on sales of vessels, and a Bt4m reversal of bad debt expense, the 2Q15 core loss would be Bt362m, a reversal from core profit posted for 2Q14 and deeper QoQ. The result was somewhat weaker than our forecast and the consensus, due to lower-than-expected freight rates and extra losses. 

Results highlights

The core operational weakness was led by: 1) a lower average freight rate, 2) higher SG&A expenses and 3) higher interest expenses. The average freight rate dropped 34% YoY and 5% QoQ to US$5,757/day/ship. The SG&A/sales ratio rose to 9.0% from 7.0% in 2Q14 (but was stable QoQ). In addition, interest expenses increased 28% YoY (but was flat QoQ) to Bt135m, due to higher loans outstanding. Note that the number of vessels increased to 45 in 2Q15 from 40 in 2Q14 (but remained unchanged QoQ). 

Outlook

The average BDI in 3Q15-to-date has increased 54% QoQ to 975 points, led by a 111% surge in the Capesize index on the back of Chinese iron ore restocking followed by a 28% increase in the Supramax index and a 18% rise in the Handysize index. Also, the freight rates are expected to improve further in late 3Q, driven by the North American grain trading season. As such, we expect PSL’s average freight rate and its core operations to improve QoQ in 3Q15 (but to remain in red ink). However, the freight rates in 3Q15 are expected to slide YoY, due to oversupply in the dry bulk shipping market. Its 3Q15 core operation is therefore expected to weaken YoY. 

What’s changed?

The fragile outlook for the dry bulk shipping market prompts us to slash our freight rate and gross profit margin (GPM) assumptions by 5% to US$6,517/day/ship and GPM of -5% (from 7%) for 2015 and by 1% to US$7,821/day/ship and GPM of 12% (from 28%) for 2016. We have also deepened our FY15 net loss forecast to Bt1,110m (from Bt604m) and revised down our FY16 earnings forecast to net loss of Bt432m. We have also reviewed down our YE15 target price to Bt10 (from Bt10.30), pegged to PBV multiple of 1.0x (0.5SD below its long-term average of 1.3x; the valuation of the stock in trading during a low-freight-rate environment). 

Recommendation

In our view, the weaker operational performance in 2015, to be brought about by weak global demand, will apply downward pressure on the share price going forward. However, we think the current share price, which trades at a YE15 PBV of 0.8x—1.1SD below its long-term mean—has already priced this in.