Precious Shipping

Precious Shipping Plc (PSL)
 

Below estimates: PSL reported a net loss of Bt41m for Q1 2012, a reversal from net profits of Bt109m in Q1 2011 and Bt9m in 4Q11. Stripping out extra expenses, the Q1 2012 core loss would be Bt19m, a reversal from core profits of Bt116m in Q1 2011 and Bt10m in Q4 2011. The result was weaker than our forecast and the consensus, due to a lower-than-expected freight rate and higher-than-modeled depreciation expenses.
Results highlights: The dive into red ink was due to: 1) lower freight rates (despite more operating vessels) and 2) higher depreciation expenses. The average freight rate dropped by 31% YoY and 14% QoQ to US$8,314/day/ ship, while the number of vessels in operation increased to 27 ships in Q1 2012 from 21 in Q1 2011 and 25 in Q4 2011. Even though the delivery of newbuilds and second-hand vessels brought about a jump in depreciation expenses of 21% YoY and 12% QoQ, operating costs declined by 10% YoY and 1% QoQ to $4,390/day/ship.
Outlook: PSL's Q2 2012 bottom-line is expected to turn around QoQ, driven by high seasonal demand for dry bulk shipping. The average BDI in 2Q12 QTD has increased 15% QoQ, led by the Supramax and Handymax classes, which PSL operates. Moreover, the firm will have more vessels in operation in Q2 2012 than in Q1 2012, as it took delivery of two newbuilds during Q1 2012.
What’s changed? We have slashed our FY12 net profit forecast by 61% to Bt393 mn to reflect a lower mean freight rate assumption (down 36% to US$7,150/day/ship). As such, we have cut our YE12 target price to Bt19 from Bt20—pegged to a YE12 PBV of 1.2x, 0.5SD below PSL’s long-term average. Given the weak Q1 2012 numbers, we expect a consensus earnings forecast downgrade. 
Recommendation: Although the Q1 2012 loss may generate negative sentiment toward the stock in the short-term, anticipation of a bottom-line turnaround in Q2 2012 should help support the share price. Note that PSL currently trades at a YE12 PBV of 1.0x, 0.75SD below its long-term average of 1.6x. Moreover, there is scope for earnings upside from the ongoing fleet renewal program. We maintain our HOLD rating.