Period  4Q14/FY14

Actual vs. Expectations  Core net loss of RM4m (vs FY13 net profit of RM44.5m) after stripping one-off gain of RM16.2m was below both our and consensus’ expectations. The negative deviation could be attributed to the lower-than-expected charter rate in the dry bulk segment and lower-than-expected earnings contribution from associate POSH.

Dividends  DPS of 1.0 sen (vs FY13: 3.0 sen) was declared, in line with our expectation.

Key Results Highlights  YoY, FY14 revenue of RM255.7m was marginally higher by 3.6%, driven by deliveries of two new build vessels thus higher hire days while the average charter rate in FY14 was 5.2% lower. The Group slumped into a core net loss of RM4m mainly due to the higher LBT in the dry bulk segment of RM48.8m as compared to RM25.6m on the back of lower time charter market, initial expenses for new deliveries and higher compliance costs. Furthermore, earnings contribution from associate, POSH also declined 24.5% to RM36.7m due to the full recognition of Mexican JV losses in 4Q14.

 QoQ, seasonal hikes in dry bulk rates narrowed 4Q14 operating losses lower to RM11.9m from RM17.6m. However, losses reported by major earnings contributor, POSH pushed the total Group’s losses further into the red with losses of RM21.7m in 4Q14 as compared to losses of RM2.6m in previous quarter.

Outlook  Baltic Dry Index (BDI) collapsed to a 29-year low in Feb 2015, due to substantial drop in iron ore shipments, slack activity in coal transportation coupled with tonnage capacity. Together with the slower global growth, the dry bulk charter rate could continue to see weakness in the foreseeable future.

 Meanwhile, the offshore sector, in which POSH will also be facing a more challenging outlook after being adversely impacted by the oil price slump which prompted capex and opex cuts by oil majors.

 Moving forward, the Group is banking on the deliveries of 5 new vessels in the next 3 years to drive the earnings growth with time charter rates not seen to be favourable in light of the overcapacity of vessels as well as the slower growth in global economy.

Change to Forecasts  We cut our earnings forecast following the weaker-thanexpected results by revising down our charter rate assumption by 27% lower to be in line with the movement of Baltic Dry Index. We also assume lower earnings contribution from POSH in view of the more challenging outlook. All in all, we expect the Group to post bigger losses of RM29.7m in FY15. We also roll out our FY16E with net losses of RM38.8m.

Rating Downgrade to UNDERPERFORM (from OUTPERFORM)

Valuation  We downgrade our TP to RM1.09 (from RM2.50) as we peg the TP against lower 0.54x PBV FY15E, which implied -1.5x SD over its 5-year mean PBV (previously 1.2x, 5-year mean PBV) to reflect the negative outlook and the earnings disappointment.

Risks to Our Call  Higher-than-expected time charter rates

 Better-than-expected global economic growth. 

Source: Kenanga