20171124-三星证券-Profitability_to_improve_as_BDI_climbs_12页_586kb

Pan Ocean Summary

Core Content

Pan Ocean, a major Korean bulk carrier company, is highlighted in this document as a potential investment opportunity due to expected improvements in profitability driven by a rising Baltic Dry Index (BDI). The report is authored by Youngho Kim from Samsung Securities and dated 2017.11.24.

Main Points

• BDI Outlook: The BDI is expected to rebound in 2018, averaging 1,500, which is a 32% increase from the previous year. This is anticipated to significantly improve Pan Ocean's profitability.
• Operating Leverage: Pan Ocean has 34 vessels without consecutive voyage charter (CVC) contracts, which are exposed to market fluctuations. These vessels are estimated to break even at a BDI of 1,100. With the BDI rising above this level, these vessels should become profitable.
• CVC Contracts: Out of 61 bulk carriers, 27 are under CVC contracts, which provide stable sales and margins. These contracts are believed to have been signed during a market boom, offering high margins.
• Share Price and Market Cap: The current share price is KRW5,680, with a market cap of KRW3.0t/USD2.8b. The stock has experienced a significant correction, making it an attractive buying opportunity.
• Shareholder Actions: The second-largest shareholder, JKL Partners, sold a portion of its stake in a block deal, causing a 22.7% drop in the share price. However, the overhang is limited due to the largest shareholder's call option and earnout rights.
• Valuation: The target price is set at KRW7,200, reflecting the anticipated profitability and the valuation basis shifted to 2018. The P/B ratio is at 0.98x, a 14% discount to the global peer average.
• Financial Metrics:
  • Revenue is forecasted to increase from KRW1,874 in 2016 to KRW3,045 in 2019.
  • Net profit is expected to grow from KRW97 in 2016 to KRW283 in 2019.
  • EPS is projected to rise from KRW184 in 2016 to KRW535 in 2019.
  • EBITDA margin is expected to increase from 18.0% in 2016 to 16.6% in 2019.
  • ROE is forecasted to rise from 4.0% in 2016 to 9.8% in 2019.
• Valuation Metrics:
  • P/E ratio is expected to decrease from 28.8x in 2016 to 9.9x in 2019.
  • P/B ratio is expected to decline from 1.1x in 2016 to 0.9x in 2019.
  • EV/EBITDA ratio is projected to fall from 12.2x in 2016 to 6.8x in 2019.

Key Information

• Target Price: KRW7,200
• Recommendation: BUY
• Earnings Growth:
  • 2017E: 36.2%
  • 2018E: 84.6%
  • 2019E: 15.7%
• Shareholder Structure:
  • JKL Partners (Poseidon2014) sold 5.1% of its stake.
  • Jeil Holdings has a call option to buy up to 30% of the remaining stake.
• Fleet Details:
  • Total vessels: 203
  • Dry bulk carriers: 61 (27 under CVC)
  • Other vessel types: containerships, oil tankers, LNG carriers
• Valuation Adjustments:
  • The valuation basis is changed to 2018.
  • A 10% discount is applied to the previous target multiple due to overhang risk.
• Market Performance:
  • The stock has corrected excessively after the block deal.
  • The company has shown strong performance in the past year, with a 68.6% increase in share price.

Summary

Pan Ocean is poised for significant profitability improvement as the BDI is expected to rise, offering a strong operating leverage effect. The company has a substantial number of CVC contracts that provide stable income, and despite a recent block sale by a major shareholder, the overhang is minimal due to the largest shareholder's rights. The current share price is seen as undervalued, with a target price of KRW7,200 and a BUY rating. The financial forecasts indicate strong revenue and earnings growth, supported by improved EBITDA margins and ROE. The company's valuation metrics are expected to decline, reflecting its improved financial position and market performance.