The author is an analyst of Shinhan Investment Corp. He can be reached at [email protected]. — Ed.
3Q20 OP in line with consensus at KRW62.9bn (-2.1% QoQ)
Pan Ocean reported operating profit of KRW62.9bn (-2.1% QoQ) on sales of KRW634.4bn (-7.2% QoQ) for 3Q20, coming in line with market consensus of KRW62.6bn. Operating profit from the bulk shipping division is estimated at KRW56.1bn (+26.7% QoQ), with growth driven by the addition of four consecutive voyage charter (CVC) contracts signed with Vale and the 96.9% QoQ increase of the average Baltic Dry Index (BDI). However, the division’s top-line growth (+1.3% QoQ) remained limited compared to the hike in freight rates as the company failed to actively expand its charter fleet during the temporary market upturn in 3Q20.
After coming in strong for 2Q20, operating profit from containerships dropped by 62.3% QoQ and tankers by 84.2% QoQ in 3Q20. The rise in oil price was the main cause of the drop in profits for both, but tankers saw an even steeper decline with the QoQ base raised from a hike in freight rates on the surge in oil storage demand in 2Q20.
China’s economic turnaround not enough to spark uptrend in BDI; need to wait for emerging market recovery in 2H21
For full-year 2020, the BDI is expected to come in at an average of 1,054.6pt (-21.7% YoY). Market conditions temporarily weakened in 1H20 due to the COVID-19 pandemic, but recorded an upturn in 2H20 on China’s fiscal stimulus measures such as the issue of municipal bonds and injection of liquidity. Fixed asset investment in China rebounded by +0.9% YoY in May.
However, we believe China’s economic turnaround will not be enough to spark an actual uptrend of the BDI in the near term. In 1H21, we expect developed countries to implement fiscal measures. Subsequent recovery of developed market economies will likely prompt an upturn in imports from emerging countries and investments, leading to improvement in demand for raw materials and rise in bulk cargo volume. The resulting recovery of other emerging economies in 2H21 will then drive an actual uptrend in freight rates. For 2021, we forecast the BDI average at 1,219.1pt (+15.6% YoY).
Retain BUY and target price of KRW4,800
We retain our BUY rating for Pan Ocean at a target price of KRW4,800, based on 2021F BPS of KRW6,245 and a target PBR of 0.8x (PBR average just before the economic recovery of 2016). Unlike in 2016-2017, data from 2018-2020 shows that share prices recorded a wider gap with freight rate trends during periods of a seasonal upturn in BDI.
Once the BDI uptrend starts in earnest in 2H21on the recovery of emerging market economies, we expect to see visible improvement in freight rates, earnings, and share prices.
