The author is an analyst at NH Investment & Securities. He can be contacted at [email protected] — Ed.
Pan Ocean recorded a 2Q22 earnings surprise thanks to a smart market response. We are lowering our TP by 10% to 9000W due to concerns over slowing demand for raw materials. However, we maintain a Buy rating as long-term growth still appears achievable thanks to the company’s exceptional market-response capabilities and its expansion of the LNG business.
Differentiated strategy stands out despite demand worries
We are maintaining a buy rating on Pan Ocean but reducing our TP by 10% from 10,000W to 9,000W. The downward adjustment stems from: 1) the 4% drop in PO 2023F to reflect the global economic slowdown and weak demand for commodities (focused on China); and 2) the reduction of our target P/B from 1.3x to 1.1x given the rise in the risk-free interest rate and the increase in the cost of capital.
With its profit-generating capabilities bolstered by an expansion of the operating fleet, Pan Ocean is expected to maintain strong profits even amid market fluctuations, thanks to smart fleet management strategies such as an increase in the number of vessels. charters and the fixing of high freight rates via the futures market. In the medium/long term, the company must increase its number of LNG carriers operated (8 vessels to be delivered by 2024, additional extension possible in the future), as it is preparing both a new engine of growth and protects itself against a slowdown long-term in coal traffic. In the short term, a lower than expected demand for raw materials must be successfully offset by a judicious ship management strategy. Although our TP has been lowered, we maintain a buy rating, believing that there is still sufficient room for medium/long term growth.
2Q22 earnings arrive healthy thanks to savvy fleet management; 3T22 will be better than feared
Pan Ocean recorded a surprise in terms of earnings in 2Q22 with sales of 1.72 billion W (+52.4% YoY) and an OP of 238.8 billion W (+113.2% YoY) annual; OPM of 13.9%).
In 2Q22, the company’s number of active bulk carriers was 278, up 15 from 263 in the prior quarter; the share of small and medium-sized vessels increased while the number of long-term charter vessels remained at 69. In the bulk carrier division, profitability exceeded expectations thanks to solid freight rates, an expansion chartered vessels and securing freight rates, with division sales reaching 1.2 tn of W (+63% year-on-year) and OP at 178.4 billion W (+77% year-on-year); OPM 14.8%). In the tanker division, OP jumped to W21.2 billion (TTP yy) on buoyant petrochemical carrier (MR) market conditions. In 3Q22, while profitability should decline slightly (mainly at the level of the bulk carrier division) due to the fall in freight rates, this negative should be offset by the tanker and containership activities. In 3Q22, company-wide earnings should turn out better than expected (concerns of a sharp contraction in profitability due to a lower BDI) thanks to the pre-emptive securing of high-priced contracts and the confirmation profits from chartered vessels.