Thursday, July 14, 2011

Maybulk ... Jul11

The company, which transports dry bulk cargoes such as iron ore, coal and grains between continents, was badly hit by the global financial crisis in 2008. Its earnings have declined substantially over the last two years.

The group is not the only one suffering post crisis as other shipping companies, such as Swee Joo Bhd, have been in the red in the last two years.

While the global economy has picked up since then, the shipping industry is still reeling from the overbuilding of vessels during the glory days. The shipping industry, which was badly hit by the global financial crisis, seems far from a recovery as the Baltic Dry Index (BDI) continues to trend south.

Note that while commodity prices have skyrocketed since the 2008 financial crisis, shipping rates have moved in the opposite direction, pointing to severe over-capacity in the shipping industry.

The BDI, which tracks various dry bulk rates over routes on a time charter and voyage basis, is also trading near the post-crisis level at about 1,413 points. The index peaked at 11,793 points in May 2008 before plunging to a low of 663 points in December that year.

However, given that the index and Maybulk’s share price are close to their lows of December 2008, when every indicator was at its bleakest level, the question now is whether this is the bottom of the down-cycle.

Although Maybulk has been heading south, there is limited downside as prospects of lower earnings have already been priced in.

From a share price perspective, it is already (early July 2011) near liquidation level. Even if sentiment is badly affected by a potentially bad 2Q, the price may quickly rebound to its asset value.

As at end-March 2011, Maybulk’s net assets per share was RM1.71.

Although earnings prospects may not be at their best, note that Maybulk is in the process of expanding its fleet, which may indicate that prices are at very depressed levels and may be near the lows.

Maybulk CEO Kuok Khoon Kuan has said now is the best time to buy vessels again as prices have come down and the company is looking at rebuilding its fleet after disposing some of it in 2008 at a good profit. Maybulk is mainly capitalising on the weakness in freight rates rather than looking at it as a bottom. So this appears to be an opportune time for them to buy vessels.

Maybulk has sailed through the tides well and has been credited with being able to read the cycles well. While shipping companies were buying vessels when freight rates were at their peak, Maybulk made good money by reducing its fleet.

Although the company’s net profit halved in FY09 ended December, to RM243.8 million from RM460.9 million in the previous year, it was because there was a substantial gain from the disposal of vessels in 2008. In FY10, net profit fell only marginally to RM242.7 million.

Maybulk’s 1QFY11 results were a pleasant surprise despite the lull in the shipping industry. Thanks to foreign exchange gain, net profit for the quarter rose 2.5% to RM52.7 million from RM51.4 million in the previous corresponding quarter. This is despite revenue coming in lower at RM84.9 million from RM114.4 million previously, the result of a 28% fall in the hire rates.

Early 2011, Maybulk’s directors expected the BDI to remain volatile and likely to get worse, citing overcapacity as a main concern.

It is worth nothing that mid 2011 is expiry of the lucrative Tenaga [Nasional Bhd] contract. In addition valuations for Maybulk were rather pricey at over 20 times price-earnings multiple compared with regional peers at 15 times. Maybulk would be a laggard in an up-cycle because of its high valuations.

At the moment, recovery seems more likely to come later rather than sooner. But if you hold a long-term view, then Maybulk is worth a look now. More importantly, Maybulk is in a better position to leverage the up-cycle.

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