The author is an analyst of NH Investment & Securities. He can be reached at firstname.lastname@example.org — Ed.
In 2021, the scale of Pan Ocean’s OP growth scale is set to expand on operating leverage effects in response to freight rate hikes and operating fleet expansion. Also boding well is Pan Ocean’s securing of long-term earnings growth momentum via strengthening LNG market exposure. We raise our TP from W5,400 to W6,400.
Operating leverage effects to appear in 2021 on freight rate hikes
Adhering to a Buy rating, we raise our TP on Pan Ocean from W5,400 to W6,400. Our TP increase reflects an upward revision in our target P/B (0.8x → 1.0x) in light of: 1) improving bulk shipping industry conditions; and 2) the firm’s securing of long-term earnings growth momentum thanks to operating LNG carrier fleet expansion.
We see 2021E OP of W275.3bn (+22% y-y), with OP growth being spurred by: 1) an anticipated rise in bulk freight rates amid an improving supply-demand balance for the bulk industry; and 2) likely stronger operating leverage effects on an increased number of chartered vessels and owned Consecutive Voyage Charter (CVC) vessels (start-2020: 33 → end-2021E: 38).
In 2021, we believe that global bulk market improvement will become clearly visible, noting that cargo trade volume is projected to climb 3.8% y-y to 5.3bn tons, whereas fleet supply is forecasted to widen by just 1.5% y-y. Given low inventory levels for commodities, ongoing price uptrends for major commodities (including coal, iron ore, and grain) should translate into higher bulk cargo demand.
LNG business expansion to reduce valuation discount
In Dec 2020, Pan Ocean signed chartering contracts for three new LNG carriers. Taking into one optional carrier (option to take effect in Jun 2021), Pan Ocean’s total number of operating LNG carriers is to expand to 5, with delivery of the carriers to take place in order from 2023. Assuming an Internal Rate of Return (IRR) of 10%, the company should be able to generate stable related earnings. Although mid/long-term bulk cargo trade volume is expected to decline on decreasing demand for coal, this negative should be offset by the expansion of Pan Ocean’s LNG domain, in turn starting to erase the valuation discount applied to the firm.
Despite a drop in the average dollar/won rate (4Q20: -5.5% y-y), we estimate that quarterly OP rose to W60.2bn (+17.8% y-y; OPM 10.4%) in 4Q20 on the company’s: 1) introduction of two CVC ships at end-3Q20; 2) chartered vessels expansion; and 3) container business improvement. We expect the bulk market to improve in earnest from 1Q21 in line with China’s accelerating demand for coal and iron ore.