We are initiating coverage on MAYBULK with an OUTPERFORM call based on forward FY14PBV of 1.3x at a target price of RM2.53. We believe that its valuation is still compelling despite the strong performance in 2013 as the stock is currently trading at close to 1.1x PBV which is below the six-year average forward PBV of 1.3x. We selected the PBV methodology as our valuation basis as the cyclical shipping industry causes huge earnings volatility, thereby making the less volatile PBV valuation a more viable option. We like the MAYBULK for its: (i) healthy net cash balance sheet position, (ii) efficient fleet management with average fleet age of 5.9 years, which is considered young, and (iii) exposure to the recovering dry bulk shipping market. We believe that MAYBULK at current level is a compelling investment as the dry bulk shipping market has yet to fully recover to even half of precrisis level, which means more upside. Another highlight of this company is its 21%-owned, associate POSH, which provides MAYBULK some exposure to the booming offshore marine vessel industry. Aside from robust earnings at associate level, MAYBULK also has the option to list their associate, POSH, at favourable valuation due to the booming Offshore Support (OSV) vessel market driven by higher upstream oil and gas activities.

Largest bulk carrier in Malaysia and pure dry bulk shipping play. MAYBULK is the largest operator and owner of dry bulk vessels in Malaysia and they primarily charter out their vessels on both spot and time charter basis. This provides the company a balanced exposure to the cyclical shipping market in which investors could capitalise on to ride the wave of a recovery in the market in the event of the rebalancing of demand and supply of vessels in the market.

Net cash company with more room for fleet expansion. MAYBULK is at a net cash position with RM50.1m as at end 3Q13. This gives MAYBULK more headroom for expansion of their dry bulk fleet in the event of strong recovery of dry bulk shipping rates or price of newbuildings becomes attractive. This provides them the flexibility to maximise returns on fleet investments by expanding their fleet only when vessel prices are attractive and they can also use the extra cash to fund more acquisitions if necessary.

POSH, crown jewel in MAYBULK. Apart from the dry bulk and clean tanker shipping market, MAYBULK also has exposure in the currently booming Offshore Support Vessel (OSV) through its 21%-owned associate, PACC Offshore Service Holdings (POSH) which was rumoured to be a listing potential late last year which has yet materialise. Given that the put option has lapsed, we opine that the best option for MAYBULK is to hold on to their crown jewel, for the time being, unless they are able to fetch a much higher valuation.

Turnaround in earnings expected. We have forecasted earnings of MAYBULK to grow at 2-year CAGR of 26.4% to RM80.3m in FY15 from FY13 based on assumptions of: (i) 11.3% 2-year CAGR in dry bulk time-charter-equivalent to 11,812.0 to be driven by improvement in supply and demand balance of dry bulk vessels in the global market, (ii) 9.8% 2-year CAGR in clean tanker time-charterequivalent to 15,039.0 in FY15, and (iii) 20.9% 2-year CAGR in total hire days of vessels on the back of additional vessels to its dry bulk fleet and less dry docking days as the dry docking days in FY13 is higher than usual due to scheduled maintenance.

Undemanding valuation. MAYBULK’s valuation looks lofty on PER basis in excess of 30x currently. However, on PBV basis, MAYBULK’s valuation looks reasonable as it is currently trading at 1.1x compared to its six-year average forward PBV of 1.3x. Given (i) the better prospects of dry bulk shipping market moving forward, (ii) its net cash position, and (iii) relatively young fleet, we believe that the company deserves to trade at a forward PBV of at least 1.3x, which translates into a Target Price of RM2.53.

Source: Kenanga