2021 earnings preannounced at US$830-850mn
Pacific Basin released a profit alert: the company expects net profit attributable to shareholders for 2021 to be US$830-850mn, including a US$152mn reversal of impairment losses recognized in 2020 (which led to a US$208mn net loss for 2020). Excluding this, we estimate earnings from operations were US$680-700mn, in line with our forecast.
Trends to watch
Supply-demand conditions continue improving, with certainties coming from supply. We think new environmental regulations, such as IMO’s EEXI and CII rules coming into effect in 2023, and tightening shipyard capacity (as a result of a container shipping boom), will dampen the willingness of minor bulk operators to build new vessels until new technology matures. New vessel contracts for handysize and handymax vessels were 10.7mn dwt in 2021, flat YoY compared to 2020, even as freight rates surged and profitability improved. As a result, the order book-to-fleet ratios for handysize and handymax vessels have fallen to multi-decade lows of 4.7% and 6.0% (as of February). Given tight shipyard capacity, we expect new vessel deliveries to be limited for the next few years, laying a foundation for continued market strength.
Freight rate surge after CNY holiday may beat expectations. A sharp freight rate correction from multi-year highs in the 4Q21 traditional peak season caused some concern among investors, but it was mostly concentrated in larger vessel segments such as Capesize. We expect freight rates to rise, as Chinese demand should bounce back after the Chinese New Year (CNY) holiday, acting as a catalyst for freight rates and stock prices. In fact, in the past 3 days, the Baltic Dry Index (BDI) has surged 36% and stabilized at a higher level than last year. We expect government stimulus policies to provide support for minor dry bulk demand.
Valuation and recommendation
We raise our 2021 earnings forecast 20% to US$843mn, to reflect the impairment loss reversal, and lift our 2022 forecast 9% to US$785mn due to higher rate assumption; we introduce a 2023 earnings forecast at US$856mn. The stock trades at 3.0x 2022e P/E. Maintain OUTPERFORM rating and raise our target price 11% to HK$5.10, implying 4.0x P/E 2022e P/E and 34% upside. Assuming a 50% payout ratio (for 2021, exclude non-cash impairment loss), we estimate the dividend yield will be 14.7% and 16.7% in 2021 and 2022.
Risks
Lower-than-expected dry bulk demand; less congestion due to higher port efficiency.