Pan Ocean: On the Verge of a Rebound

Capesize rates rebound with BDI reaching 2,944p (+17.8% WoW)

The Baltic Dry Index (BDI) fell 25.6% in the one-month period ending June 8, putting an end to the uptrend since the year’s start, due to concerns over China’s steel production restrictions. The Chinese government on May 12 announced restrictions on steel production to stabilize commodity prices, which have proven successful in dampening short-term speculative demand.

Freight rates for capesize bulkers, which rely heavily on iron ore transports for China, dropped 52.8% during the same period, with: 1) iron ore purchases delayed on expectations for price declines; and 2) some infrastructure projects postponed to 3Q21. Meanwhile, panamax, supramax, and handysize rates rose 4.0%, 13.7%, and 10.8%, respectively, backed by economic recovery in emerging markets (excluding China) and continued growth in grain demand.

Iron ore prices rebounded on June 8 thanks to inventory depletion and increase in steel production. This has led to the recovery in capesize rates and BDI from June 9. The BDI should trend upwards through 3Q21, driven by: 1) strong seasonality for bulkers; 2) tight vessel supply caused by weak order placements since US-China trade disputes in 2H18; and 3) continued recovery in emerging economies.

Fleet expansion to pay off from 2Q, driving up OP by 99.4% QoQ

We forecast operating profit to jump 99.4% QoQ to KRW97.5bn in 2Q21. Pan Ocean has increased its bulker fleet to 231 vessels from 4Q20’s 186. With charter rates on an uptrend at end-2020 and early 2021, the company bought three used vessels at some loss. Charter contracts were signed for some 60 vessels, of which 19 are long-term charters (one year) and the remaining for a six-month period (vs. three months on average). The leverage effect of contracts signed in 1Q21 is already visible.

Retain BUY and target price of KRW10,000for sector top pick

We retain our BUY rating on Pan Ocean for a target price of KRW10,000. We applied a target PBR of 1.68x (10% premium to 1.53x PBR high recorded during the emerging market boom of 2017) to a 12-month forward BPS of KRW6,201. Pan Ocean shares have corrected 11.9% in the past month due to BDI declines. However, the BDI and the share price should move upwards going forward given that: 1) emerging economies (excl. China) have only begun to recover; and 2) cargo volumes are set to continue on a demand-driven uptrend. Shares of global peers, Star Bulk Carriers and Golden Ocean Group, are rallying again to new highs. Pan Ocean remains our top pick in the transportation/shipping sector.
Source: Business Korea