Pan Ocean reported a 2Q21 earnings surprise thanks to high freight rates and operating fleet expansion. Earnings improvement should continue in 3Q21 on a contraction in bulk carrier supply and favorable seasonality. However, an iron ore price rebound will likely be necessary for mid/long-term valuation growth.
Freight rates remain strong due to supply disruptions; iron ore price to be key variable for valuation expansion
We maintain a Buy rating and TP of W9,500 on Pan Ocean.
As of Aug 12, the BDI stood at 3,503p, having reached a new 2021 high. We hike our OP estimates for 2021 and 2022 by 23% and 14%, respectively, to reflect operating leverage effects from fleet expansion and stronger-than-expected freight rates. Sustainable ROE (2021E~2023F average ROE) is also raised by 17% from 9.3% to 10.9%. However, we maintain our TP despite the upward earnings revisions, as we have removed the valuation premium factor of 15% in consideration of the firm’s DY of 1.2%, which is lower than competitors’ 7.4%.
Considering the structural slowdown in supply growth due to contracted bulk carrier orders and the effect of operating disruptions at major global ports, freight rates should remain strong in 2H21. On the demand side, coal and grain trade volume continues to prove brisk, but worries over a contraction in freight volume have escalated amid a 17% slide in the price of iron ore over the past two weeks. Although the current strong freight rate cycle is likely to sustain thanks to limited supply growth, an iron ore price rebound will likely be necessary for further valuation expansion.
Logs 2Q21 earnings surprise; profit leverage effects to be maximized in 3Q21
Pan Ocean recorded a 2Q21 earnings surprise with sales of W1.13tn (+65.3% y-y) and OP of W112bn (+74.3% y-y), exceeding our estimates and consensus by about 25%. The number of bulk carriers operating at end-2Q21 was 257, increasing by 71 carriers from end-2020. At the bulk division, OP reached W100.5bn (+183% y-y; OPM of 11%) thanks to both efforts to increase operating leverage and high freight rates. Of the bad debt for freight services reflected in 1Q21, W6.5bn was reversed and reflected as a one-off gain.
So far, the average BDI in 3Q21 is 3,239p, up 16% from the average BDI of 2,792p in 2Q21. In 3Q21, as the effects of operating fleet expansion and high freight rates should be maximized, overall OP is expected to improve further to W132bn (+110% y-y).
Source: Business Korea