Initiate with Neutral-weight. We initiate on the dry bulk shipping sector in Thailand with a Neutralweight rating. In our view: (1) strong supply will continue to cap any sustained pickup charter rates and risk is biased to the downside; (2) we expect BDI to trade range-bound from 1,500 to 2,000 points despite positive development from record scrapping and China’s plan to slowdown shipyard output. (3) We initiate coverage on Precious Shipping Limited (PSL) with a NEUTRAL rating (TP: THB16.80) and Thoresen Thai Agencies (TTA) with a SELL rating (TP: THB13.90). Thai-based shipping companies are not highly leveraged but we think TTA’s shipping unit could continue to struggle due to high operating costs and continued restructuring. PSL’s share price is fairly valued, in our view.
BDI had a good run-up from Aug-Oct 2011 but losing steam. A bright spot seemed to emerge in the dry bulk space as the index rallied 73% from its Aug 2011 low of 1,253 points to a high of 2,173 points in Oct 2011, driven by Japan’s demand spike, strong bulk volumes from China, higher scrapping and credit concerns on selected charter contracts. However, since hitting its peak of 2,173 points, the index has fallen 14%. In our view, a sustained pickup in the BDI is difficult given huge supply growth and concerns over demand growth. Elevated BDI levels can be negative in the long run as owners will put off plans to take away excess capacity and which may prolong the process to reach demand-supply equilibrium.
Downside risk to charter rates as oversupply persists. Recent spike in the Baltic Dry Index (BDI) should not be taken as a clear indicator of improving conditions in the sector. Dry bulk capacity grew +9.7% in 9M11 to 609m DWT with another 117m DWT (+19%) and 48m DWT (+8%) to be delivered in 2012 and 2013. Close to 20m DWT of dry bulk carriers were scrapped in 9M11 but this is still insufficient to take away the supply growth.
Key upside risks are: (1) Strong rebound in the global economy; (2) higher-than-expected slippages; and (3) accelerated scrapping of older ships.
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