This article first appeared in The Edge Malaysia Weekly, on February 15 - 21, 2016.

The Baltic Dry Index (BDI) sank to a new low of 290 points last week. Likewise, Malaysian Bulk Carriers Bhd’s (Maybulk) share price skidded to an all-time low of 56.5 sen last Friday.

The shipping group has seen RM1.59 billion of its market capitalisation wiped out in the past two years. Its share price had plunged from a high of RM2.15 in April 2014.

Bear in mind that Maybulk was trading between RM3 and RM3.40 in its heyday when the BDI was at above 10,000 points in 2008, thanks to the global commodity boom and the rapid economic growth in China. When the BDI collapsed in late 2008, Maybulk’s share price followed suit.

The good old days are apparently history now. And the glaring fact is that Maybulk is sailing in rough waters and the stormy weather is likely to stay for some time.

Recently, Maybulk warned of possible “substantial loss” for the fourth quarter of 2015 (4Q2015) and the financial year ended Dec 31, 2015 (FY2015).

MIDF Research has cautioned its clients that Maybulk is currently under a review of potential downgrade “due to the uncertainty surrounding the size of the write-down of its associate’s carrying value”. The research house has a “neutral” call on the stock, with a target price of 77 sen, based on a sum-of-parts valuation.

More alarming is that the shipping group’s operating loss has been rising since FY2012, from RM7.65 million to RM34.1 million in FY2014. For the nine months ended Sept 30, 2015 (9MFY2015), its operating loss ballooned to RM61.89 million from RM34.1 million in the previous corresponding period due to depressed freight rates.

Maybulk posted a net loss of RM59.9 million or loss per share of 5.81 sen for 9MFY2015, compared with a net profit of RM39.32 million or earnings per share of 3.39 sen in the previous corresponding period. Accumulative revenue dropped to RM176.7 million from RM196.1 million a year ago.

The group’s earnings prospects are bleak and management will not dispute this. However, when contacted last month, CEO Kuok Khoon Kuan told The Edge that the company will ride out the bad cycle. “It’s no secret that the dry bulk market is hurting from overcapacity. We have to ride it out. In any downturn, there will be a recovery.”

For the investing fraternity, recovery seems to be far-fetched for Maybulk, at least for the moment. Because of the depressed BDI over the years, many analysts have ceased their coverage on Maybulk.

To say that the dry bulk shipping industry has been on a roller-coaster ride is an understatement. It is more like a water flume ride — a rapid descent before hitting the water with a big splash, and everyone is wet, tired and cannot wait to get off.

A shipping industry observer opines that it may not be the right time to buy the stock, even though it appears to be cheap. “Shipping rates are still depressed, and as for dry bulk shipping overcapacity, it will take a long time for it to normalise,” he says.

Currently, the global shipping industry is undergoing consolidation. An increasing number of Chinese shipping firms, including state-owned enterprises, have gone belly up. These include dry cargo shipper Winland Ocean Shipping Corp, which filed for bankruptcy protection in February last year, and state-owned shipbuilder Wuzhou Ship Repairing & Building Co Ltd, which went bust last month.

Outside China, a New York-listed shipping major, Scorpio Bulkers, has reportedly sold all of its 28 “capesize” vessels, at a loss of US$400 million (RM1.65 billion). In India, Mercator Ltd has decided to exit the dry bulk cargo business carried by its Singapore unit, Mercator Lines (Singapore) Ltd, in a restructuring exercise.

All said, is Kuok, who has more than 40 years of experience in the shipping industry, being too bullish, expecting a recovery on the horizon, considering the BDI has slipped into uncharted territory?

Kuok, 68, began his career with Malaysian International Shipping Corp Bhd (now known as MISC Bhd) in 1971. Seven years later, he joined Pacific Carriers Ltd and is now its executive chairman.

Based on last Friday’s closing share price of 56.5 sen, Maybulk was trading at barely a quarter of its book value of RM2.37 per share as at Sept 30, 2015, valuing the company at RM565 million.

The current valuation is rather decent, considering Maybulk’s fleet size of 22 vessels with an average age of 6.3 years as at end-2014 — a view that many will beg to differ. An average fleet age of 6.3 years is relatively young, given that a vessel could be good for charter up to 25 years, at least.

As indicated in its 3QFY2015 results, its joint venture took delivery of a new Supramax, Alam Mulia, last October and a new Handysize was expected to be delivered last month.

In addition, Maybulk’s 21.23% stake in Singapore-listed PACC Offshore Services Holdings Ltd (POSH), which operates offshore supportive service vessels for deep-water oil exploration and production activities, is worth RM343.5 million, based last Friday’s closing of 27.5 Singapore cent or a market capitalisation of S$498 million (RM1.48 billion).

POSH’s share price has also been on a slippery slope shortly after it was listed, falling from S$1.12. The sharp fall is mainly due to the slump in crude oil prices. Is POSH also undervalued? This depends largely on one’s expectation of the movement of crude oil prices.

In short, when crude oil prices recover, so will POSH’s earnings and share price.

Meanwhile, the consolidation of the global shipping industry will shake out the weaker players. This will help ease the severe overcapacity that has been plaguing the industry.

China is another important factor to watch. Consensus view has it that China will slow down its imports of commodities such as coal and iron ore. Interestingly, the country’s imports of coal have been shrinking in 2014 and 2015, but not for iron ore. Its imports of iron ore grew 18.4% in 2014 and 10.8% in 2015.

Maybulk will release its fourth-quarter results soon. FY2015 will be the first financial year that the company, which is controlled by tycoon Robert Kuok, is seeing red ink.

In its earnings warning, the company says the substantial loss to be announced is related to provisions for onerous contracts and impairments made on its investment in POSH.

As Maybulk’s share price continues to drift downward, should long-term investors see beyond the red ink? Perhaps, the point to drive home is whether Maybulk will be resilient enough to survive the current downturn.

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