POSH saves the day. Maybulk reported a FY12 core net profit of RM34.3m (after stripping off  disposal  and  investment  gains),  in  line  with  our  estimate  of  RM30.8m  but  below consensus  forecast  of  RM60m.  With  revenue  plunging  39%  y-o-y  on  weak  freight  rates, Maybulk's FY12 earnings plunged 67% y-o-y. Both the dry bulk and the tanker segments were in the red, although the overall impact was cushioned by higher contributions from its offshore associate POSH, of which earnings almost doubled to RM35.3n.

Rates  still  weak.  Maybulk's time charter rates for the  dry  bulk  and  tanker  segments declined  42.3%  and  11.6%  y-o-y  respectively. While  the  4QCY12  spot  rates  for  both  dry freight and the clean tanker segments remained weak y-o-y, we note a sequential pick-up in  demand  for  shipments, notably from China's iron ore thirst.  Nevertheless,  due  to Maybulk's 45% vessel exposure to period charters, the q-o-q movement in its average time charter rates continued to weaken.   

Modernizing  fleet  to  time  the  next  upcycle.  Dry  bulk  markets  continued  to  weaken  in January despite strong demand for iron ore from China but there are signs of freight rates possibly  bottoming.  Although  the  rates  are  still  depressed  versus  the  highs  seen  years ago, these appear to be stabilizing, prompting many strong dry bulkers with solid balance sheets  to  modernize  their  fleet  by  buying  newly-built  vessels  as  asset  prices  hit  rock bottom. With the newer vessels, the company can cut operating costs by almost half.  We understand that Maybulk has ordered three new vessels to be delivered from 2013-2015, on  top  of  three  new  ones  it  acquired  last  year,  of  which  two  are  a  JV  with  a  Mexican partner. 

Management  still  cautious.  Despite  improving  outlook  to  start  buying  new  vessels, management  reiterates  a  cautious  view  that  rates  will  not  likely  recover  soon  as  the demand and supply imbalance in dry bulk vessels persists. Last year saw a record delivery of  new  builds  into  the  market,  with  the  global  dry  bulk  fleet  increasing  by  12%  y-o-y  and this  year  this  year  the  gap  look  between  supply  and  demand  appears  to  be  narrowing. However, with many shippers in ailing financial condition due to the depressed market and unable to operate its fleet, this has bolstered scrapping activities to a record high, which is positive to attain a healthy balance between demand and supply eventually.

Update on POSH listing. To recap, back in October 2008, Management has decided to to proceed with its proposal to buy 22.08% of POSH from its shareholder, Pacific Carriers Ltd (PCL), at a US$221m price tag, or US$6.50 per share. The aim is to get POSH listed at a price of no less than US$6.50 per share. If POSH is not listed within 5 years, MBC has a put option to sell back its stake in POSH for US$8.125 per share (a premium of 25%). We understand that a decision on whether to exercise the option or hold its POSH share until listing will be made sometime in May or June this year. With POSH earnings to hit RM40m this year, at the acquisition price tag would imply a PE multiplier of 17x which we deem as a fair price. Management may prefer to hold a long term view to extract better valuation.

Trimming earnings. Due to housekeeping and accounting for higher depreciation charges and  interest  costs  to  finance  its  capex  expansion,  we  have  decided  to  trim  our  net  profit forecast  for  FY13  from  RM66.9m  to  RM51m. We  have  only  assumed  that  rates  will  grow by 10% in FY13 and 15% in FY14 and FY15. Earnings outlook moving into next year will be more favorable  of which we project to grow by 49% y-o-y as we think that the worse is over for the dry bulk shipping coupled by the higher contribution from POSH.

Upgrade  to  BUY.  POSH's  listing  is  a  catalyst  for  Maybulk  that  we  have  yet  to  input  into our  valuation.  At  the  current  exchange  rate,  the  company's  cost  of  USD221m  and assuming  a  25%  premium  exercise  option,  would  translate  into  a  valuation  of  about RM0.85  per  share.    We  like  Maybulk's healthy  net  cash  compared  to  other  regional  dry bulkers,  which  are  mostly  laden  with  net  gearing.  Premised  on  a  higher  P/BV  of  1x,  we upgrade  Maybulk  to  BUY  at  a  FV  of  RM1.85  (from  SELL  previously  with  FV  of  RM1.10). Maybulk's 5-year P/B average of 1.6x and is still below its -1 standard deviation of 1.07x. 

 Source: OSK