PSL

PSL Plc 

Above estimate
PSL reported a net loss of Bt53m for 2Q14, a reversal from the net profits
posted for 2Q13 and 1Q14. Stripping out a Bt75m one-time write-off for
deferred upfront fees tied to the cancellation of loan facilities and a Bt400k FX
gain, 2Q14 core profit would be Bt21m, a reversal from a core loss in 2Q13
but down 81% QoQ. Core earnings beat our model, due to higher freight
rates than assumed, but were lower than the street estimate.
Results highlights
The YoY core operational improvement was due to: 1) higher freight rates, 2)
more operating vessels and 3) lower SG&A expenses. The average freight
rate increased 16% YoY to US$8,687/day/ship. The number of vessels rose
to 40 in 2Q14 from 39 in 2Q13. Also, the SG&A/sales ratio dropped to 7% in
2Q14 from 10.4% in 2Q13. The QoQ core earnings dive was due to: 1) lower
freight rates, 2) greater vessel operating expenses, and 3) heavier SG&A
expenses. The average freight rate slipped 3% QoQ, while vessel operating
expenses rose 3% QoQ to $4,769/day/ship. Moreover, the SG&A/sales ratio
increased from 6% in 1Q14. But the number of vessels rose from 39 in 1Q14.
Note that PSL’s 2Q14 mean freight rate beat the industry benchmark—the
Supramax and Handysize indices dived by 23% and 27% QoQ, respectively.
Outlook
The average BDI in 3Q14-to-date has slumped 18% QoQ to 804 points, as
the first six weeks of the third-quarter is normally a weak period, due to low
industrial output in OECD nations and reduced coal demand during the
Northern Hemisphere summer. But freight rates are expected to resume
rising in the final six weeks of 3Q14, driven by grain exports from South
America (Argentinean shipments were delayed in anticipation of a peso
slump), North American grain trading season, iron ore restocking and
stronger coal demand ahead of winter. PSL also received two new vessels in
July; it now has 43 operating vessels (40 in 3Q13). We expect the 3Q14 core
operation to improve both YoY and QoQ.
What’s changed?
We have slashed our FY14 net profit forecast 31% to Bt328m to factor in the
extra expenses booked in 2Q14. Our YE14 target price is now Bt30.75(down
from Bt31)—pegged to a PBV of 2x, 2SDs above PSL’s long-term mean.
Recommendation
Upcoming high season, expectations of a QoQ earnings improvement in
3Q14 and a better dry bulk market outlook should catalyze the share price
going forward. Even though PSL currently trades at a YE14 PBV of 1.5x—
0.7SD above its long-term mean of 1.2x and a premium to the regional
average of 1x, we think it will re-rate further toward its earlier peak cycle
multiples. In 2006 (the start of the last up-cycle), PSL traded at a forward
PBV of2x, 2SDs above its long-term average.