We now expect Pan Ocean to report operating profit of KRW63.4bn (+0.7% QoQ) on sales of KRW591.2bn (-6.8% QoQ) for 4Q20, meeting the consensus estimate of KRW59bn. Operating profit from bulk shipping is estimated at KRW60.6bn (+6.0% QoQ), reaching decent levels despite QoQ declines in the average USD/KRW rate (-5.8%) and BDI (-8.0%).
Results were likely in line with expectations on: 1) full-quarter contribution of earnings from the charter contract with Vale for two VLOCs (commenced in July/September) and two Newcastlemax bulk carriers (September); and 2) reversal of fuel expenses booked by the charter business following the sharp oil price hike (+36.1% QoQ) in 3Q20. We also believe Pan Ocean saw margin gains from the end of low-freight rate contracts of affreightment in 1H20.
Expectations growing for EM-led uptrend in BDI and LNG shipping
Emerging market (EM) economies are recovering from the shock of COVID-19. The EM currency index started to recover on the easing of lockdowns in June and market release of COVID-19 vaccines in November last year. Oil consumption has also been steadily improving from April lows. We believe overall improvement will continue through 2021 with expansionary measures introduced by developed countries to drive up income and consumption levels, and in turn lead to export growth and economic recovery at emerging countries. As seen during the EM economic recovery of 2016-2017, we expect the BDI to trend upward in 2021 as a result.
Market conditions are also seen favorable for improvement of the BDI with: 1) China’s steel inventories remaining at low levels; and 2) shortage of bulk carriers caused by the China-Australia trade dispute unlikely to ease in the near term. We believe near-term risks of a sharp decline in BDI are limited compared with past years, when steep correction was sparked by the decline in industrial activity in China ahead of the Lunar New Year holiday.
Meanwhile, the combined capacity of LNG liquefaction plant projects pursuing final investment decision (FID) approvals in 2021 amounts to 200mn tons (roughly enough to fill 217 vessels). Pan Ocean boasts the strongest financial health among global shipping peers at a debt-to-equity ratio of 60%. Backed by its stable financial structure, the company should be able to increase order placements for LNG carriers and secure more long-term shipping/charter contracts going forward.
Target price raised to KRW6,500 for sector top pick
We retain BUY on Pan Ocean and raise our target price to KRW6,500, based on 2021F BPS of KRW6,141 and a target PBR of 1.1x (10% discount to the PBR average recorded during the EM economic boom of 2017). Pan Ocean is our sector top pick on forecasts for: 1) share price gains in 2021 on an uptrend of the BDI backed by EM economic recovery; and 2) expansion of the company’s LNG shipping business based on stable financials.
Source: Hellenic Shipping News Worldwide