Precious Shipping

Below estimate

PSL reported a net loss of Bt147m for 3Q14, a reversal from the net profit posted for 3Q13 and deeper into the red QoQ. Stripping out a Bt40m gain on the cancellation of ship-building contracts and a Bt1m gain on FX, the 3Q14 core loss would be Bt187m, deeper YoY and a reversal from the core profit posted for 2Q14. The result was much weaker than our estimate of a slim profit, due to lower-than-expected freight rates and higher bunker oil expenses than assumed. 

Results highlights

The core operational weakness was led by: 1) lower freight rates and 2) higher bunker oil expenses. The average freight rate fell by 7% YoY and 24% QoQ to US$6,575/day/ship. Meanwhile, bunker oil expenses surged by 75% YoY and 154% QoQ to Bt222m, due to increased voyage charters. Note that PSL’s 3Q14 mean freight rate underperformed the industry benchmark—the Supramax and Handysize indices declined by 1% and 16% QoQ, respectively.

However, the greater number of operating vessels and lower SG&A expenses mitigated the negative impact of the aforementioned factors on 3Q14 earnings. The number of vessels rose to 43 in 3Q14 from 40 in 3Q13 and 2Q14. In addition, the SG&A/sales ratio dropped to 6.8% in 3Q14 from 8.2% in 3Q13 and 7.0% in 2Q14.

Outlook

The average BDI in 4Q14-to-date has increased 7% QoQ to 1,020 points, as high seasonal demand for dry bulk shipping persists. We expect this uptrend to prevail in the short-term, as high seasonal demand normally lasts through the first six weeks of the fourth-quarter. Meanwhile, PSL’s number of operating vessels will increase to 44 in 4Q14. However, bunker oil expenses will remain high, due to expected high voyage charters. We, therefore, expect the 4Q14 core operation to remain in red ink and weaken YoY (but the QoQ loss should be shallower).   

What’s changed?

We have revised our FY14 forecast from a net profit of Bt328m to a net loss of Bt108m, to reflect: 1) a 14% lower freight rate assumption and 2) a higher bunker oil expense assumption. Our YE15 target price is now Bt30 (down from Bt31.25)—pegged to a PBV of 2x, 2SDs above PSL’s long-term mean.

Recommendation

Expectations of a better QoQ bottom-line in 4Q14 and a turnaround next year, buoyed by a better dry bulk market, should boost the share price going forward. Even though PSL currently trades at a YE15 PBV of 1.5x—0.7SD above its long-term mean of 1.2x and a premium to the Asian 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), the stock traded at a forward PBV of2x, 2SDs above its long-term average.