Precious Shipping

Precious Shipping Plc (PSL)
 

Below estimates: PSL posted a 4Q11 net profit of Bt9m, down by 98% YoY and 96% QoQ. Stripping out an FX loss of Bt2m and a gain on sales of assets of Bt0.4m, 4Q11 core earnings would be Bt10m, down by 96% YoY and 85% QoQ. The result was somewhat below our estimate and the consensus, due to lower-than-expected freight rates and higher-than-modeled financial costs. PSL also reported an FY11 net profit of Bt719m, down 37% YoY.
Results highlights: The earnings contraction was due to: 1) lower freight rates (despite an increase in the number of operating vessels) and 2) greater financial costs. The 4Q11 freight rate dropped by 22% YoY and 7% QoQ to US$9,705/day/ship, while the number of vessels in operation increased QoQ to 25 ships from 21 in 4Q10 and 22 in 3Q11. In addition, financial costs surged by 99% YoY and 40% QoQ to Bt154m, due to the payment of extension fees in order to maintain a secured debt facility and a one-time charge related to the cancellation of another credit facility.  
Outlook: We are now in a period of low seasonal demand for dry bulk shipping and newbuilds continue to flood the market. As such, the average QTD BDI has plunged 48% QoQ. However, PSL will have more vessels in operation in 1Q12 than in 4Q11, as it takes delivery of two second-hand ships this quarter. So, despite the low freight rate environment, we expect 1Q12 core earnings to improve QoQ, driven by the normalization of financial costs. Moreover, an increased number of operating vessels should support revenues and profitability.
What’s changed? We maintain our FY12 net earnings forecast at Bt1,001m, up 39% YoY, driven by fleet expansion. 
Recommendation: Concerns about the global economic slowdown—which may impact on demand for shipping—and weak 4Q11 earnings are already reflected in PSL’s share price, we believe. Furthermore, market anticipation of QoQ profit expansion in 1Q12 and the DPS for 4Q11 of Bt0.15 (XD on Feb 16; payment on April 5) will support the stock price. There is also scope for bottom-line upside from the ongoing fleet renewal program. Valuation-wise, PSL is currently deeply discounted—a YE12 PBV of 1.0x, compared with a mean PBV of 2.0x during the 2002 trough and a long-term average of 1.6x.