Precious Shipping

Precious Shipping Plc (PSL) 

Better than estimate

PSL reported a net loss of Bt21m for 4Q14, a reversal from the net profit posted for 4Q13 but the loss was shallower QoQ. Stripping out a Bt5m gain on FX and a Bt2m bad debt expense, the 4Q14 core loss would be Bt23m, deeper YoY but shallower QoQ. The result was somewhat better than our estimate and the consensus, due to higher-than-expected freight rates and lower SG&A expenses than modeled. PSL also reported an FY14 net loss of Bt80m, a reversal from the net profit posted for FY13. 

Results highlights

The YoY core operational weakness was led by: 1) a lower average freight rate and 2) high vessel operating expenses. The average freight rate fell 4% YoY to US$8,032/day/ship, while vessel operating expenses increased 4% YoY to $4,824/day/ship. 

The QoQ core operational improvement was driven by: 1) a higher mean freight rate (up 22% QoQ), 2) more operating vessels and 3) lower SG&A expenses. The number of vessels rose to 44 in 4Q14 from 40 in 4Q13 and 43 in 3Q14. The SG&A/sales ratio dropped to 3.5% in 4Q14 from 6.7% in 4Q13 and 5.8% in 3Q14. Note that PSL’s 4Q14 mean freight rate outperformed the industry benchmark—the Supramax and Handysize indices rose by 10% and 16% QoQ, respectively. 

Outlook

The average BDI in 1Q15-to-date has dived by 47% YoY and 35% QoQ to 608 points, led by a slump in the Capesize Index (brought on by lower Chinese iron ore imports). We expect a rebound to build steam into February, driven by restocking ahead of Chinese New Year (Feb 19). But it will be followed by a seasonal decline. Then, we expect the BDI to resume rallying in late March, fueled by iron ore restocking season. Historical data suggest that the average BDI in the first-quarter of each calendar year normally plunges by about 30% QoQ. As such, we expect PSL’s average freight rate and its core operation to weaken both YoY and QoQ in 1Q15.  

What’s changed?

Our FY15 net profit forecast stands unchanged at Bt550m.  

Recommendation

Expectations of a weaker operational performance in 1Q15, to be brought about by low season, will put downward pressure on the share price in the near-term, we believe. However, we think the share price weakness will bring an opportunity to accumulate the stock ahead of the coming high season. Note that PSL’s FY15 bottom-line is expected to turn around to profit. And the current valuation is undemanding—the stock trades at a YE15 PBV of 0.9x—1SD below its long-term mean of 1.2x and on a par with the regional average.