The author is an analyst of NH Investment & Securities. He can be reached at firstname.lastname@example.org. — Ed.
We view Pan Ocean’s mid/long-term earnings growth potential as remaining intact, as the company is likely to benefit from the greater introduction of CVC vessels as well as an improvement in industry conditions. Given such, we advise investors to greater focus on the firm’s mid/long-term growth prospects, rather than short-term earnings results.
Industry conditions to improve over mid/long term
We raise our TP on Pan Ocean from W4,700 to W5,400. Our TP was calculated by applying a target P/B of 0.9x to 2021F BPS. Our target P/B multiple was derived based on a sustainable ROE of 6.9% and COE of 8.0%.
We anticipate that supply-demand conditions in the bulk shipping industry will improve in 2021, backed by: 1) a hike in iron ore shipping on a rise in Vale’s iron ore production and greater Chinese steel manufacturing; 2) a plunge in bulk carrier delivery from 2021; and 3) rising vessel scrapping. We advise monitoring Chinese steel prices and Vale’s actual iron ore manufacturing in 2H20.
The BDI has recently shown an upsurge, thanks to favorable supply-demand conditions and greater shipping of Vale’s products. We believe that expanding volatility in freight rates in recent months evidences that supply is becoming increasingly tight. With orders for new vessels to remain limited, supply-demand dynamics should turn even more favorable from 2021.
Fleet expansion to lead to profit leverage effects
As of 2Q20, the number of Pan Ocean consecutive voyage charter (CVC) contract vessels came to 33. The firm plans to introduce 10 new bulk carriers (including 6 for which CVC contracts have been already signed with Vale) and 6 tankers over the next couple of years. We expect the introduction of new vessels to drive up Pan Ocean’s earnings over the mid/long term. With a shipping industry upcycle set to arrive soon, we anticipate that the firm’s efforts to greater adopt chartered-in vessels will result in profit leverage effects.
We forecast 3Q20 sales of W739.6bn (+8.4% y-y) and OP of W60.1bn (-5.2% y-y; OPM 8.1%), with OP slightly missing consensus. We estimate bulker OP at W58.4bn. While the average BDI slid to 1,500p (-26% y-y), profitability was likely defended by increases in the number of chartered-in vessels and CVC contract vessels.