Bulk Carrier Supply-demand Conditions Expected to Improve
The author is an analyst of NH Investment & Securities. He can be reached at ys.jung@nhqv.com. -- Ed.
Pan Ocean’s 1Q20 results satisfied consensus, which was recently lowered due to weak freight rates. Though market conditions will likely remain difficult in 2Q20, expectations for an improvement in bulk carrier supply-demand conditions remain valid. Pan Ocean is expected to see its market share expand and valuations normalize thanks to its relatively sound financial structure and competitiveness in securing cargo.
Short-term demand contracting, but expectations for mid/long-term supply-demand improvement valid
We maintain a Buy rating and TP of W4,000 on Pan Ocean.
Despite recovering commodities imports in China, bulk carrier demand will likely remain sluggish in 2Q20 due to reduced output at Japanese steelmakers and export disruptions in Brazil. As of May 12, the Baltic Dry Index (BDI) stood at 433p, which is a difficult level for bulk shipping companies to turn a profit. An improvement in demand is unlikely over the near term.
However, expectations for a turnaround in supply-demand conditions over the mid/long term remain valid. Thanks to greater demolitions and reduced new orders over 2019~2020, bulk carrier supply/demand should become balanced from 2021. Pan Ocean is expected to see its market share expand and valuations normalize thanks to its competitiveness in securing cargo volume, stable profit, and sound financial structure. The stock is currently trading at a 2020E P/B of 0.6x, which is lower than its historical average of 0.7x
1Q20 earnings satisfy lowered consensus
Pan Ocean’s 1Q20 results satisfied consensus (which was lowered due to sluggish market conditions), with sales of W558.8bn (+4.5% y-y) and OP of W37.8bn (-15.9% y-y, OPM 6.8%). NP (excluding minority interests) came to W21.7bn (-30.0% y-y), falling below our estimate due to an asset impairment loss of W6.0bn for a capesize vessel that the firm plans to sell.
In 1Q20, the company’s fleet was composed of 65 owned vessels and 102 chartered vessels. The number of chartered vessels was higher than our forecast. At the current level of freight rates in the spot market, it is difficult to make profit with inhouse vessels. In order to make up for this, Pan Ocean increased the size of its chartered fleet. We note that when demand is sluggish, only companies with differentiated competitiveness are able to secure sizable cargo volume. We also point out that Pan Ocean continues to expand its fleet. As of end-April, the company operated 190 vessels. Despite difficult market conditions, OP should increase slightly q-q in 2Q20 thanks to lower fuel costs, increased transportation volume, and favorable forex rates.