This article first appeared in The Edge Financial Daily, on July 1, 2016.

Malaysian Bulk Carriers Bhd
(June 30, 86 sen)
Maintain buy with an unchanged target price (TP) of RM1.04: The Baltic Dry Index (BDI), which measures charter rates across dry bulk ship sizes and routes, has been maintained above 600 for the majority of the second quarter of financial year 2016 (2QFY16) (last closing as of Wednesday was 640), above its low of 290 recorded on Feb 10, 2016. Translated into one-year time charter rates of US$4,700 (RM18,894)/day, US$5,800/day and US$6,400/day for Handysize, Supramax and Panamax vessels, which Malaysian Bulk Carriers Bhd (Maybulk) operates, the rates are still below our estimated average fleet break-even cost of US$7,500/day for Maybulk. However, we believe losses could have bottomed for the dry bulk segment in 1QFY16, while associate PACC Offshore Services Ltd (Posh) could spring some positive surprises.

A repeat of the mini rally that took place in June to August 2015, when the BDI rose sharply from 589 to 1,222, and fizzled out is unlikely to transpire. However, we are not disheartened as we believe the prospect of a sustained recovery is more important for the company in the long run.

China’s average monthly iron ore import volume has grown at a pace of +4% year-on-year (y-o-y) at 82.5 million tonnes per month in 2016, double the growth rate registered in 2015 of +2% y-o-y.

The growth in imports bodes well for dry bulk shippers as it increases demand for shipping tonnage. The positive growth comes amid concerns about China’s economy losing steam, coupled with capacity cuts in steel mills. Iron ore prices at the Port of Qingdao trading at US$54/tonne are also firmly above the low of US$38/tonne registered in December 2015.

Growth in coal imports is positive, despite the shift to cleaner energy, at +1.4% y-o-y for the average monthly imports in 2016, compared with 2015. This is a welcomed sight after a -30% y-o-y drop in average monthly import volume in 2015, compared with 2014. Similar to iron ore, a positive growth in the volume of coal imports in China augurs well for the dry bulk industry, especially considering China’s 0.13% decline in thermal energy generation. Meanwhile, thermal coal prices at China’s Qinhuangdao Port are currently at 394 yuan (RM237.54)/tonne after reaching a low of 345 yuan/tonne in November 2015, indicative of rising demand.

Maybulk has disposed of three vessels so far in 2016, with an average age of 13 years, namely Alam Budi Product Tanker (US$13 million), Alam Pesona Post Panamax (US$6.9 million) and Alam Murni Supramax (US$4.65 million). While second-hand vessel values are unlikely to revisit prior-year highs, they have certainly come off their lows. For example, the price of 10-year-old Panamax vessels bottomed at US$6.15 million in February 2016, but has since rebounded to US$7.9 million in June 2016, a swing of 28%.

Singapore-listed Posh has gained 24% year to date, riding on a recovery in crude oil prices and leveraging its young fleet, which is customised to fit the specifications required by customers. In 1QFY16, the contribution from its associate amounted to RM4 million, and we are expecting this to rise to a conservative RM5 million per quarter for the remaining quarters in 2016, based on its secured order book, which would cushion weakness from the dry bulk segment until time charter rates recover further.

Our TP of RM1.04 is based on a five-year average price-to-book (PB) ratio of 0.88 times. We believe the worst could be over for the dry bulk shipping sector and that valuations of Maybulk should revert to their five-year mean. In addition, Maybulk has taken steps to impair various items on its balance sheet, making PB valuation more reflective of current market prices and conditions. Meanwhile, dry bulk shipping overcapacity issues are set to ease with a forecast net capacity addition of +1.3%, versus a higher +2.4% growth in demand. This bodes well for Maybulk, the sole dry bulk shipper under our coverage. — MIDF Research, June 30