20140702-高盛-Off_Conviction_Buy_on_towage_and_cost_outlook__down_to_Neutral_15页_434kb

Pacific Basin Shipping (2343.HK) Summary

Core Content

Pacific Basin Shipping (2343.HK) has been downgraded from Conviction Buy to Neutral by Goldman Sachs due to a more challenging outlook for its towage segment and revised expectations regarding its dry bulk charter-in fleet cost trends. The downgrade reflects a reassessment of the company's financial performance and future prospects, particularly in light of recent impairment charges and market dynamics affecting its operations.

Main Points

• Downgrade Reason: The downgrade is primarily due to lower earnings expectations, a $61 million towage impairment charge, and the impact of higher charter-in costs on its dry bulk fleet.
• Earnings Forecast:
  • 2014 post-exceptional EPS is cut to $-0.03 from $0.04.
  • 2015 and 2016E EPS are revised down by 23‰ and 28%, respectively, to $0.03 and $0.04 from $0.05 and $0.06.
• Valuation Adjustments:
  • The 12-month target price is cut to HK$4.70 from HK$6.20, reflecting a 24% reduction.
  • The revised target price implies a 0.9X 2014E price-to-book (P/B) ratio.
• ROE Forecasts:
  • Revised ROE for 2015/16E is expected at 5%/6%, compared to previous estimates.
• Segment Performance:
  • Towage: The segment's net asset value was reduced by 29% due to impairment, with the company expecting a turnaround only in 2H 2015.
  • Dry Bulk: While rates are expected to improve in the second half of 2014, the company's cost base is anticipated to rise due to the high proportion (c.80%) of short-term and index-linked charters.
• Market Outlook:
  • The market may be over-estimating operating leverage due to the high percentage of short-term and index-linked charters.
  • There is a risk of rate pressure in 2016 due to the surge in new Handy vessel orders, which could lead to a 6% decline in rates.
• Financial Performance:
  • The company's revenue and cost trends show a decline in towage performance and an increase in charter-in costs.
  • The P/E ratio has increased significantly, from 76.6 to 103.9 in 2014E, but is expected to decrease in subsequent years.
• Dividend Yield:
  • The dividend yield is expected to rise from 0.5% in 2014E to 3.3% in 2016E.
• Balance Sheet:
  • The company has a strong net debt-to-equity ratio of 45% in 2014E, which is better than the industry average of over 90%.
• Key Risks:
  • Downside: Higher-than-expected charter costs, larger towage losses, bunker fuel volatility, and dilution risk from convertible bonds.
  • Upside: Successful disposal of the towage business at above book value, stronger-than-expected recovery in Handy rates, and the ability to secure long-term charter-in contracts.

Key Information

• Stock Performance: Since being added to the Conviction Buy List in October 2013, the stock has declined by 8% compared to the Hang Seng Index, which remained flat.
• Impairment: On June 25, the company announced a $61 million impairment and provision charge for its towage vessels.
• Cost Trends: The company's dry bulk fleet is heavily reliant on short-term and index-linked charters, which will increase its cost burden as industry rates improve.
• Rate Forecasts:
  • Handysize dry bulk rates are expected to increase to an average of $10,039/day in 2H 2014 from $8,700/day in 1H 2014.
  • However, a potential 6% decline in rates is anticipated in 2016 due to supply-demand imbalance.
• CROCI (Cash Return on Capital Invested):
  • CROCI for 2014E is 8.5%, and for 2015E is 10.1%, leading to an average of 9.3% for 2014-15E.
  • Previously, the CROCI was estimated at 10.8% for the same period.
• Valuation Metrics:
  • The EV/GCI ratio is revised to 0.88X for 2014E from 0.97X.
  • The target price is based on a 0.9X 2014E P/B ratio.
• Investment Profile:
  • The company's investment profile is compared against the Asia Pacific Transportation Peer Group Average.
  • Key financial metrics include revenue, cost of goods sold, SG&A, EBITDA, and net income, showing a mixed performance with declines in certain areas.

Conclusion

The downgrade to Neutral reflects a more cautious outlook for Pacific Basin Shipping, driven by challenges in the towage segment, increased costs from its charter-in fleet, and potential rate pressures in 2016. The revised target price and earnings forecasts suggest a fair valuation based on updated financial models and market expectations. The company remains a significant player in the dry bulk segment but faces headwinds that could impact its profitability in the near term.