The author is an analyst of NH Investment & Securities. He can be reached at email@example.com — Ed.
Pan Ocean logged a 2Q22 earnings surprise thanks to a clever market response. We lower our TP by 10% to W9,000 in consideration of concerns over slowing raw material demand. However, we maintain a Buy rating, as long-term growth still looks attainable thanks to the firm’s outstanding market response capabilities and its expansion of LNG business.
Differentiated strategy stands out despite demand concerns
We maintain a Buy rating on Pan Ocean but lower our TP by 10% from W10,000 to W9,000. The downward adjustment stems from: 1) lowering of 2023F OP by 4% to reflect global economic slowdown and sluggish demand for raw materials (centering on China); and 2) cutting of our target P/B from 1.3x to 1.1x in consideration of the rise in risk-free interest rate and increased capital costs.
With its profit generation capabilities strengthened by an expansion of operating fleet, Pan Ocean should maintain sound earnings even amidst market fluctuations, thanks to clever fleet management strategies such as an increase in chartered vessels and the fixing of high freight rates via the futures market. Over the mid/long term, the company is to boost its number of operated LNGCs (8 ships to be delivered by 2024, additional expansion possible in the future), as it both prepares a new growth engine and defends against a long-term slowdown in coal traffic. In the near term, weaker-than-expected raw material demand is to be successfully offset by adept ship management strategy. Although our TP has been lowered, we maintain a Buy rating, believing that ample room remains for mid/long-term growth.
2Q22 earnings arrive sound thanks to adept fleet operation; 3Q22 to be better than feared
Pan Ocean recorded a 2Q22 earnings surprise with sales of W1.72tn (+52.4% y-y) and OP of W238.8bn (+113.2% y-y; OPM of 13.9%).
In 2Q22, the firm’s number of operating bulk carriers totaled 278, up by 15 from 263 in the previous quarter; the portion of small/medium-sized vessels expanded while the number of long-term charter vessels was maintained at 69. At the bulk carrier division, profitability exceeded expectations on solid freight rates, an expansion of chartered vessels, and the securing of high-rate cargo, with divisional sales arriving at W1.2tn (+63% y-y) and OP at W178.4bn (+77% y-y; OPM 14.8%). At the tanker division, OP jumped sharply to W21.2bn (TTP y-y) thanks to brisk petrochemical carrier (MR) market conditions. In 3Q22, while profitability is likely to fall slightly (mainly at the bulk carrier division) due to freight rate decline, this negative should be offset by the tanker and containership businesses. In 3Q22, company-wide earnings should prove better than feared (concerns over a sharp contraction in profitability due to a drop in BDI) thanks to the preemptive securing of high-fare contracts and the confirmation of chartered vessel profits.