Not Rated with TP of RM0.82. The outlook for dry bulk and the Baltic Dry Index (BDI) appears unexciting in FY16-17 due to oversupply of vessels and lacking demand, affecting charter rates. We are projecting losses of RM53.8-24.8m in FY16-17E as MAYBULK would be unable to cover operating cost, while contributions from associate POSH is insufficient to churn net profits. As such, we believe the worst is not over and do not discount further impairments. Our TP is based on PBV of 0.70x (-1SD) to Fwd BV/share of RM1.18.

Outlook for dry bulk unexciting. Although the Baltic Dry Bulk Index (BDI) has picked up from a low of 290 in Feb-16, to 660 currently, we believe that there may still be some downward pressure on the BDI and dry bulk shipping charter rates as the industry is expecting large orderbooks to enter the market in FY16-17, further adding to the vessel oversupply issue the industry is currently facing. The industry is expecting an orderbook of c.45m dwt in FY16 and 20m dwt in FY17, which is even higher than deliveries seen in FY14-15 of 30-32m dwt.

Delaying plans to replace old tonnage due to weak market conditions. MAYBULK is in the process of selling off older assets (>10years) to lock in the value at current rates, which would help manage the groups borrowings (at 0.49x currently), while the group is delaying the delivery of 4 new fleets to FY18-19 (initially expected by FY16-17) due to current slower market conditions. These new fleets were pre-ordered back in FY12-13 when prices were attractive with a view of replacing tonnage as they age as part of the fleet renewal programme. MAYBULK currently has 19 bulk carries and 2 tankers.

Committed to investment in POSH, the only bright spot for now. MAYBULK has no plans on paring down their 21% stake in the associate company, POSH, as it may be a bright spot in coming quarters as POSH’s profit in 1Q16 (RM4m) helped narrow MAYBULKs losses, while POSH continues to have a diversified fleet specialising in OSV, and Harbour services, and is operating in the right markets such as Brazil and the Middle East.

Recent 1Q16 results saw widening losses of RM25m (-9.7% YoY) due to; (i) higher operating expenses (ii) higher finance cost for payment of newbuildings, and (iii) weaker dry bulk segment on low charter rates. QoQ, losses narrowed from RM1.1b loss in 4Q15 from; (i) loses from associate POSH in 4Q15 (RM120.8m loss in 4Q15 vs. RM4.0m profit in 1Q16) and (ii) higher impairments and provisions in 4Q15. Additionally, while management refused to comment on further impairments going forward, they did no discount the possibility that there may additional impairments, suggesting that the worst may not be over yet.

Projected losses of RM53.8-RM24.8 in FY16-17E as the low dry bulk TCE (Time Charter) rates which dropped >30% YoY to average USD6407/day in FY15 is insufficient to cover operating cost and we expect rates to remain under pressure in FY16-17E, while contributions from associate POSH may narrow losses but is insufficient to churn net profits. MAYBULK saw operating profits back in FY11-FY12 when TCE rates averaged USD16,519-9,530/day, respectively.

Not Rated with a TP of RM0.82. We believe the company warrants to trade below its Fwd PBV 5-year mean valuations (0.95x) and we opt to peg valuations to close to -1SD or a Fwd PBV of 0.70x due to; (i) weak market conditions on the back of vessel oversupply as highlighted above outpacing vessel demolitions, and waning demand, lowering charter rates, and (ii) risks of further impairments in coming quarters which may erode the group's book value. With no major convincing catalyst and an unexciting BDI outlook, we believe the stock is fairly valued. Our applied PBV of 0.70x is on Fwd BV/share of RM1.18, translating to a TP of RM0.82 (Not Rated). We believe investors should re-look at the stock once the BDI sees a steady increase and above the 1000 level, which hinges on; (i) stronger demand for dry bulk, driven by China and the overall global economy, and (ii) end to the vessel oversupply issue, which is unlikely to happen by FY16-17.

Source: Kenanga Research - 4 Jul 2016