Analyst Expects PSL to Recover in 2Q as Negativity from COVID-19 Bottomed Out

Maybank Kim Eng has given a “BUY” recommendation on Precious Shipping Public Company Limited (PSL) with a target price at ฿7.24/share after seeing that the bulk shipping has bottomed out and expecting to return to profit in 4Q20.

 

PSL closed the morning session of June 9, 2020, at ฿5.35/share, increased ฿0.10/share or 1.90% with a trading value of 26.8 million baht.

 

In Maybank’s analysis after PSL joined MKET’s Logistic Week Zoominar, the security company stated that the bulk shipping has bottomed in 1Q20 and although there is still pressure on operators arising from supply/demand due to Covid-19, the easing of global lockdown and upcoming Chinese economic stimulus program will drive recovery.

In addition, the approval of the debenture extension restores financial flexibility. Maybank expected PSL’s outlook to improve and operations to return to profit by 4Q20. PSL’s share price trades at 0.7x P/BV, on par with multiple seen in the 2008 GFC when global trade ceased due to halt in funding, while 2020 is different given that economic disruption is due to the pandemic.

In this regard, Maybank maintained BUY rating on PSL with a target price of THB7.24 pegged to 1.0x P/BV, the sector average.

 

Industry bottomed out, but oversupply remains in 2020

Management views that the reviving Chinese economy plus the fiscal measures will help boost demand for steel by over USD660b, in turn driving demand for bulk carriers starting 3Q20 or early 4Q20 and holding throughout 2021. However, currently the industry is still managing the 3.14% increase in supply to 900m DWT against 1.2% growth in demand on ton-mile equivalent (TME) basis. Easing of lockdowns will allow movement of cargoes.

 

Improvement in earnings begins in  2Q20

PSL posted a 1Q20 loss of THB117m, vs THB25m profit in 4Q19 and a 1Q19 loss of THB83m. Its average daily freight rate was at USD8,398/ship, -21% QoQ, -9.4% YoY, though better than the market’s average by 19%. The quarter was affected by seasonality (Chinese New Year holidays) and COVID-19 resulting in Dry Bulk Freight Index (BDI) averaging 592 points, down 62% QoQ and 26% YoY.

Weakness continued in April when lockdown became more widespread and just started to recover at the end of May when many countries began to ease lockdowns. BDI has recovered 14.6% from the 1Q20 average, but still too low for PSL to turn into profits.

Maybank saw BDI at around 1,500-2,000 points as the profitable level. However, Maybank expected PSL to report lower losses from 2Q20.

 

Earnings revision, maintain BUY

Due to the greater-than-expected COVID-19 impact, Maybank revised down the freight rate assumption by 14% to USD9,398/ship/day.

In addition, Maybank factored in the 150bps increase in coupon rate on the THB1.9b debenture extended for another 1.5 years, while seeing losses continuing this year. However, given the debenture extension, improving outlook and EBITDA of THB1.6b, PSL can weather this difficult period and participate in the upcoming recovery in freight rates. BUY.