2021 results in line with preannouncement
SITC announced its 2021 results: Revenue rose 78.8% YoY to US$3,012mn and net profit rose 230.7% YoY to US$1,163mn, or US$0.43 per share. This was in line with the company’s preannouncement (net profit US$1,150mn) and attributable to the increase in both average container freight rate (+52% YoY) and container shipping volume (+20% YoY). Gross profit increased by approximately 196.5% from approximately US$445mn. Gross profit margin was 43.8%, up 17.4ppt YoY, which we attribute to delivery of its own low-cost vessels with better energy efficiency, effective cost control per TEU and freight rate hikes in 4Q21 peak season. Factoring in the special dividend and the proposed final dividend, payout ratio reached 95% in 2021.
Trends to watch
Earnings boom extends into 2022 with more clarity. In our previous note , we highlighted that investors may wait for more clarity about 2022. Currently, based on ongoing supply chain inefficiencies and a consequent congestion-absorbed fleet, we expect the spot freight rate to remain elevated in 2022, and the renewed contract rate to move upward accordingly. Although vessel charter cost may face sharp rises in 2022, we expect SITC’s scheduled delivery of a total of 21 new vessels in 2022-2024 may reduce charter-in vessels or switch to smaller less-expensive vessels for charter, thus keeping costs at a controllable level and boding well for another year’s earnings growth.
Key market debates remain on demand trend and vessel delivery in 2023-2024. Even taking more potential scrapping into account, Alphaliner forecasts 8% global net fleet growth in 2023. Carbon-emission related regulation rules such as EEXI and CII will come into force that year and push older vessels to slow steaming and eventually to be scrapped earlier. With a lower orderbook-to-fleet ratio for small vessels (12% for 3,000TEU) compared with 31% for 8,000TEU+ fleet, we expect supply-demand in SITC’s segment to improve, providing balanced demand and supply conditions; however, it remains to be seen whether additional capacity loss due to this effect can support freight rates.
Financials and valuation
We raise our 2022 and 2023 earnings forecasts 9.4% and 14.6% to US$1,452mn and US$1,193mn due to higher freight rate and demand assumptions. The stock is trading at 7.7x 2022e and 9.4x 2023e P/E. We maintain OUTPERFORM and our TP of HK$38.60 (9.1x 2022e P/E and 11.1x 2023e P/E), offering 18.6% upside from the current price.
Risks
Capacity addition after port congestion relief or from new vessel delivery.