Pan Ocean registered a 1Q22 earnings surprise, backed by fleet expansion, accurate market forecasts, and cost competitiveness. With the firm’s profit-generating power standing intact, we anticipate further OP expansion in 2Q22 amid improving market conditions. We raise our TP by 23% to W10,000.
Boasts unparalleled cost competitiveness; bulk carrier market entering upward upcycle from 2Q22
Adhering to a Buy rating, we raise our TP on Pan Ocean by 23% from W8,100 to W10,000. The firm delivered eye-catching 1Q22 results on: 1) its securing of cost competitiveness via long-term chartering deals and pre-emptive obtaining of second-hand vessels; 2) contracting high fares for shipping based on accurate market forecasts; and 3) favorable exchange rates. With recent freight rate hikes to be reflected from 2Q22, earnings momentum is set to accelerate. Accordingly, we upwardly adjust our 2022 OP estimate by 66% to W755.2b and our 2023 OP forecast by 55% to W823.7bn.
Due to a decrease in ship orders (reduced supply), the balance between supply and demand is growing better. Demand for raw materials remains volatile, but freight rates for bulk carriers have turned strong since 2Q22 on increased cargo volume in response to expanding raw materials inventory. Despite a drop in cargo volume (due to the Russia-Ukraine conflict and lockdowns in China), global trade is showing fragmentation, in turn boosting long-distance freight volume. We see this as being the major reason for the ongoing improvement in shipping market conditions.
1Q22 results evidence firm’s cost competitiveness and market forecasting acumen
Pan Ocean delivered an earnings surprise for 1Q22, announcing consolidated sales of W1.44tn (+112% y-y) and OP of W169.1bn (+246% y-y; OPM of 11.7%).
Even though the number of bulk carriers operating was similar to that in 4Q21, the firm successfully controlled costs during the quarter by increasing its portion of small and medium-sized vessels and by expanding its number of long-term charter vessels. Its strategy to expand its number of small and medium-sized vessels proved successful as volume for such vessels shipping steel or cement remained strong in 1Q22. Pan Ocean secured high freight rates in advance, and favorable exchange rates also had a positive effect on earnings. Its tanker domain, which previously had recorded operating losses, also succeeded in turning to profit (y-y), helped by both the introduction of new VLCCs and strong MR tanker freight rates. The scale of profitability deterioration (which was feared in the course of rapid fuel cost fluctuations) was limited, and the strategy of expanding the operating fleet and pre-emptively securing high-fare contracts stands out. Given this backdrop, overall OP is set to expand further in 2Q22.
Source: BusinessKorea
