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机构：中金公司
研究员：Gangxian LIU/Qibin FENG/Xin YANG
Pacific Basin Shipping announced its 1Q24 operating data: TCE rates of the firm’s handysize and supramax vessels were US$11,050/day (down 18% YoY) and US$13,610/day (flat YoY), exceeding the market spot index by US$540/day and US$1,300/day thanks to the firm’s flexible business strategy and fleet structure with a high proportion of vessels equipped with desulfurization towers. The desulfurization towers contributed excess returns of US$30/day and US$940/day for the firm’s handysize and supramax vessels.
Share buyback program shows confidence in operations. The firm announced that it plans to implement a share buyback plan from April 25, 2024 to December 31, 2024, with a maximum buyback amount of US$40mn (about HK$312mn). Based on the closing price on April 18, up to 2.45% of the firm’s issued shares could be repurchased. We believe the firm has a solid balance sheet and ample cash. It had available working capital of about US$550mn and total borrowings of less than US$300mn as of end-2023. The share buyback program shows management’s confidence in the firm’s operating capabilities and growth prospects. The program is subject to approval at a shareholders’ meeting.
Comments
Supply growth is still limited and demand may gradually improve; dry bulk shipping market to enter an up-cycle. Effective shipping capacity of dry bulk carriers has declined due to restricted access to the Red Sea and Panama Canal. The Baltic Supramax Index (BSI) and Baltic Exchange Handysize Index (BHSI) have risen 25.6% and 22.7% YoY YTD amid improving global economic activities. We think the restrictions on access to the Red Sea and Panama Canal may continue into 2H24, thus supporting dry bulk freight rates. As of April 2024, orders for handysize and supramax vessels accounted for 10.2% and 9.2% of shipping capacity, and vessels aged over 25 years accounted for 4.4% and 9.0% of shipping capacity. Clarksons predicts that shipping capacity of handysize and supramax vessels will increase by 4.4% and 3.3% in 2024 and 2025, and demand for small bulk shipping will increase by 4.0% and 3.3%. Considering the slowdown in shipping speed and the increase in ship dismantling amid tightening environmental regulations, we think effective growth in supply is likely to slow further. If demand for small bulk shipping increases amid improving global economic growth, we think the market is likely to enter an up-cycle.
The firm’s fleet structure continues to improve, boding well for its profitability. According to corporate filings, the firm sold a 20-year-old handysize vessel in 1Q24. In addition, the firm signed a long-term lease agreement to rent 11 new vessels in 2023 (eight vessels have yet to be delivered). According to corporate filings, these new vessels will have profitability about 20% higher than the firm’s current handysize and supramax fleet.
Financials and valuation
Considering the dry bulk shipping market is likely to enter an up-cycle, we raise our 2025 earnings forecast 38% to US$350mn. We keep our 2024 earnings forecast unchanged. The stock is trading at 6.3x 2024e and 4.7x 2025e P/E. We raise our target price 10.5% to HK$3.15, implying 8x 2024e and 6x 2025e P/E and offering 30.2% upside. We assume the firm will pay dividends at the promised minimum payout ratio of 50% in 2024, implying a dividend yield of 7.9%. If the dividend payout ratio in 2024 remains at last year’s level of 75%, it would imply a dividend yield of 12.2%. The firm’s dividend yield is attractive.
Risks
Dismantling of old ships slower than expected; global economic growth weaker than expected.