STX Pan Ocean - Another quarter of losses (CIMB)

UNDERPERFORM Maintained

S$7.53 Target: S$9.80

Mkt.Cap: S$1,581m/US$1,295m

Dry Bulk Shipping

• Below; maintain UNDERPERFORM. STXPO recorded another loss-making quarter, taking its 1H11 core net loss to US$104m, significantly worse than the US$133m loss we had expected for the full year. This is because of larger-thanexpected tanker and container shipping losses. We will await this morning’s conference call before likely lowering our forecasts and target price of S$9.80, based on a 20% discount to SOP. Pending clarification on the size of vessel disposal gains, we estimate that STXPO made core operating losses at its bulk, tanker and container shipping businesses in 2Q, squeezed by high fuel costs and low freight rates. Consensus earnings downgrades as well as a weak momentum in bulk and tanker shipping rates could be de-rating catalysts, hence we maintain our Underperform rating.

• Bulk shipping in the red for second consecutive quarter. After recovering from the red during the global financial crisis, STXPO’s bulk operations had been profitable for six consecutive quarters before falling back into losses in 1Q11 and 2Q11. This coincided with a period of weak spot rates and rising bunker costs. About 80% of its contracts of affreightment (COA) do not have bunker adjustment factors, and rates have been fixed for the duration of the COAs regardless of bunker cost changes. This hit STXPO very hard in 1Q11 when oil prices spiked, and bulk shipping lost US$40m in 1Q11 alone. In 2Q11, the bulk operating loss narrowed to an estimated US$3m (this figure is subject to confirmation of vessel disposal gains), because some of the loss-making COAs may have expired. Gross margin on owned fleet recovered to 12% in 2Q from 8.8% in 1Q, while gross loss on its chartered-in fleet fell from -4.7% in 1Q to -1.6% in 2Q. For the entire fleet, gross margin recovered from -1.7% in 1Q to +1.5% in 2Q, but this was too marginal to cover the depreciation and interest expense.

• Tanker and container shipping also in the red. Tanker shipping’s 2Q operating loss increased 5x from a year ago, and almost doubled qoq on the back of low rates and imperfect fuel cost pass-through. Container shipping loss rose 50% qoq probably due to global oversupply and high fuel costs. STXPO lumped roro and LNG shipping together this quarter, and its EBIT of US$17.8m unexpectedly increased from just US$2m last year. This item requires clarity from management.