The author is an analyst of NH Investment & Securities. He can be reached at [email protected]. — Ed.
Even amid highly volatile market conditions, Pan Ocean saw profits rise in 1H20 via strengthening of its cargo networks and expansion of its operating fleet. In 2H20, Pan Ocean’s earnings and valuations should improve on an increase in bulk freight rates driven by improved global commodity demand.
Posts differentiated 1H20 results on profitability improvement
Adhering to a Buy rating on Pan Ocean, we raise our TP from W4,000 to W4,700 to reflect upward revisions in our 2020 and 2021 OP estimates by 34% and 16%, respectively. In calculating our TP, we increased our target P/B multiple from 0.7x to 0.8x in consideration of a rise in sustainable ROE.
Pan Ocean’s strong 1H20 earnings are attributable to expansion of its operating bulk fleet. In our view, in order to safely pursue operating fleet expansion, a firm must possess both a robust ability to predict bulk shipping market conditions and a strong network for securing cargo volume. Even amid a volatile market for freight rates, Pan Ocean has proved its strengthening profitability via a differentiated 2Q20 earnings performance, helped by its superior market prediction abilities and rock solid sales network.
Signals of improvement in bulk shipping market being seen; fleet burden falling as well
In 2H20, bulk shipping market conditions are forecast to improve on greater demand for marine transportation driven by economic recovery in China and a resultant strengthening in commodity demand. We note favorable leading indicators, such as a rebound in Chinese steel prices, drop in steel inventories, increase in blast furnace utilization rate, and growth in iron ore imports.
We expect bulker fleet growth to fall from 4.0% in 2020 to 1.3% in 2021. Moreover, the orderbook-to-fleet ratio should decline from 10.2% in 2019 to 5.6% in 2020 to 4.6% in 2021, significantly helping to ease supply burden.
Pan Ocean’s 2Q20 results topped both consensus and our estimates with sales of W683.4bn (+8.1% y-y) and OP of W64.3bn (+27.3% y-y; OPM of 9.4%). Despite tepid freight rates, Pan Ocean logged strong earnings at both the bulk and container businesses. In 3Q20, we expect the firm’s OP to expand further centering on the bulk business, mainly driven by a rise in bulk freight rates.
