Not so rosy outlook for Maybulk

by **Cals** Thu 03 Oct 2013, 09:51

Business & Markets 2013

Written by RHB Research

Thursday, 03 October 2013 09:40

MALAYSIAN BULK CARRIERS BHD []
(Oct 2, RM1.83)
Downgrade to sell at RM1.82 with a revised target price of RM1.70 (from RM1.66): Since the beginning of September, the Baltic Dry Index has soared 86% to 2,127 points, hitting a 21-month high. This was largely due to strong rate hikes for Capesize vessels, driven by a surge in Chinese iron ore imports (+27% year-on-year [y-o-y] in August; 16% year-to-date [YTD]) on restocking activities.

This, combined with the relatively stable iron ore prices, has absorbed the excess supply of spot iron ore in the short term. The upward trend in rates brought joy to vessel owners — notably those with Capesize and Panamax vessels in their fleet — helping them to increase their cash earnings well above break-even levels.

Looking ahead, we expect the daily earnings of Capesize vessels to hover around the sustainable US$35,000 (RM113,400) level. This is reflected in the aggressive spot prices locked in through forward freight agreements (FFAs) for October and the fourth quarter of 2013 — at daily rates of US$36,250 and US$32,000 respectively.

Time charter deals are also being concluded at levels not seen since 2010. This is also the case for the Panamax due to higher grain activity.

Though the seasonal year-end pullback in dry bulk shipping is expected from November onwards, it will unlikely be a sharp one. Capacity growth in dry bulk shipping will continue to exceed demand growth this year, albeit with a more narrow gap.

We make no changes to our earnings forecasts. As the stock has been on an uptrend, we are downgrading our recommendation to a “sell”, albeit with a slightly higher fair value of RM1.70 (from RM1.66), as we roll over our valuation to 0.9 times FY14 price-to-book value, in line with peer average. We believe Maybulk’s earnings could continue to disappoint as it has no exposure to Capesize vessels where the spike in shipping rates is the strongest. — RHB Research, Oct 2

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This article first appeared in The Edge Financial Daily, on October 03, 2013.