We trim our earnings estimates and TP for Pan Ocean in line with the decline in freight rates. Trade volume concerns appear to already be reflected in the share price. Thanks to an expansion of its bulk carrier fleet and investments in LNG carriers, Pan Ocean’s mid/long-term profit level is rising.
Share price reflecting contraction in trade volume in advance
We maintain a Buy rating on Pan Ocean but lower our TP by 20% to W7,200. Our 2022 and 2023 OP forecasts are trimmed by 8% and 19%, respectively, to reflect shrinking demand for raw materials due to prolonged lockdowns in China and global economic slowdown, as well as a reduction in the firm’s bulk carrier fleet. Given a hike in risk-free rate estimate from 2.5% to 3.5% in line with interest rate rise, our target P/B multiple is cut from 1.1x to 0.9x.
Concerns remain over slowing raw material trade due to global economic slowdown and prolonged lockdowns in China. With demand for raw materials in China continuing to contract, bulk carrier backlogs have decreased, and BDI and sector share prices have weakened amid supply expansion. As of Sep 22, Pan Ocean shares traded at a 2022E P/B of 0.6x, with valuation levels falling to those at the time of the Covid-19 outbreak, and concerns over cargo volume appearing to be reflected in advance.
Expansion of bulk carrier fleet and long-term ROE of more than 10% possible through investment in LNGCs
Pan Ocean’s mid/long-term ROE is expected to top 10% on: 1) bulk carrier fleet expansion; and 2) mid/long-term profit level growth at the LNG transportation business to beyond pre-Covid-19 levels. In our view, the firm’s valuation levels should rise accordingly.
The size of Pan Ocean’s operating fleet is estimated to have decreased from 278 in 2Q22 to 260 or less in 3Q22 on near-term risk management to address the recent rapid market slowdown. However, the firm is expected to maintain its strategy of maximizing profit leverage through mid/long-term bulk carrier fleet expansion. In our view, its robust financial capacity and friendly relationships with shipowners should enable rapid expansion of the company’s operating fleet. Profit leverage effects should reappear when market conditions improve.
Mid/long-term business growth remains in play at the LNG transportation business. From 2023 to end-2025, 10 LNGCs and 1 bunkering vessel are set to be introduced. In the case of LNGCs, stable revenue generation has been secured by determining freight rates through long-term ship rental contracts of four~five years or more with global energy companies. Per ship, it should be possible to generate OP of at least W10bn per year (assuming an exchange rate of US$/W1,250), and higher profit levels are possible depending on specific fares. Moving ahead, sustained profit levels are predicted to climb through LNG business expansion.
Source: Business Korea
