PSL Gains 7%, Analyst Expects a Turnaround in 2Q as Freight Rate Upsurge

The share price of Precious Shipping Public Company Limited (PSL) rose ฿1.40/share or 7.14% to ฿21.00/share as of 10:54 local time in Thailand, with a trading value of 689 million baht.

According to Maybank Kim Eng Securities (MBKET) research published on July 14, 2021, earnings forecast for PSL this year has been raised by 137.6% as the 2Q21 normalised profit will post a turnaround to 635 million baht from loss last year and up 134.6% QoQ. The main driver is the unexpected surge in freight rates, +151.2% YoY, on the back of continued recovery in the global economy. The sector’s current average P/BV is at 2.84xand on this basis, PSL’s target price has been raised to 21.90 baht. Upside to MBKET’s target price is just 9% but the analyst maintains its BUY rating as freight rate is still likely to continue rising. In addition, PSL could also resume paying dividends enhancing total returns.

MBKET expects PSL to report a 2Q21 net profit of 694 million baht, divided into normalised profit of 635 million baht reversing from a loss of 310 million baht last year and fx gains. The earnings turnaround is driven by the recovery of the world’s major economies such as the US, China and the Eurozone pulling up freight rates.  

The Baltic Dry Index (BDI) accelerated 60.0% QoQ and 255.1% YoY while the Baltic HandySize Index (BHSI), benchmark for PSL’s freight rate, rose 35.4% QoQ and 331% YoY. MBKET forecast PSL to realize freight rates of USD15,318/ship/day, +26.0% QoQ and +151.2% YoY, slower than the QoQ gains in BHSI but this is enough to deliver strong normalised profits. 

In addition PSL will record FX gain of c.58 million baht from the USD-denominated PSL211A debentures of USD70mas the THB depreciated vs the USD by 2.5%at the end of 2Q21.

Given ongoing global economic recovery, strong demand for dry bulk goods (ores, grains, coal, etc.) should continue. Meanwhile the supply picture looks favorable. At the end of 1Q21, the new shipbuilding orders were only 5.6% of the overall fleet while vessels over 20 years old (nearing scrap dates) is about 6.4% of the global fleet. 

Therefore, MBKET sees tight supply of vessels to last for at least more than a year and PSL’s freight rates could remain high. Thus, MBKET revised up its 2021-22 freight rates forecast by 19.1% &18.2% while cost is unchanged. Being a fixed cost business, the profit will rise disproportionately higher by 137.6% and 104.5%, respectively. Given strong trends in freight rate, the risk bias on PSL’s earnings remains positive “BUY”.