Surprisingly disappointing quarter. Excluding the net exceptional gains amounting to RM2.1m, Maybulk reported a core loss of RM1.2m versus a profit of RM17.4m in 1QFY12 and RM22.7m in 2QFY11. The losses, which took us and consensus by surprise, were largely attributed to the 45% drop y-o-y (2.6% drop q-o-q) in time charter rates fetched by its dry bulk vessels on the back of the high charter costs booked earlier.  In tandem with the drop in rates, its revenue sank almost by half. We understand that the plunge in time charter equivalent (TCE) was caused by the 40% dive in Post Panamax daily hire. Similarly, the tanker side also went into the red as rates remained on a downtrend. Meanwhile, contributions from Maybulk's associates cushioned the losses somewhat, as the offshore services market continued to improve.

Market fraught with challenges. The BDI fell 31% in 1HFY12 owing to an oversupply of vessels as well as the economic slowdown in China, while the ongoing US drought resulted in a drop in demand for Panamax and Supramax vessels. With demand being lackluster amid overwhelming supply, the weak steel prices had somewhat discouraged scrapping. One positive development that may cushion the pressure on rates is the higher demand expected from thermal coal imports into India due to the nation's pressing need for energy following a massive power outage recently. Nonetheless, the dry bulk shipping sector is not likely to see any recovery in the next two years at least, due to the supply and demand imbalance.

Not the time to be snapping up vessels. As the prevailing weakness is expected to persist into 2H, this has discouraged management from aggressively looking for vessels to acquire or long term charters. That said, management is currently negotiating two long-term charters with purchase options and two potential acquisitions. Note that conserving cash is crucial during this difficult time, and Maybulk's operating cash flow turned negative in 1H. Fortunately, unlike some highly leveraged players, Maybulk is one of the few dry bulk shippers that is sitting on net cash. 

Trimming earnings. Maintain SELL. Our FY12 and FY13 earnings are slashed by 54% and 35% respectively. We also do not expect any dividends now for FY12. Following the earnings revision, our FV is downgraded to RM1.27, premised on a lower P/B multiple of 0.7x vs 0.8x earlier. We remain bearish on the dry bulk sector.