The Baltic Dry Bulk Index has  recently  surged due to  a  significant rise in Chinese iron ore imports. We do not expect sharp seasonal drops in shipping rates as  aggressive spot prices  have been locked in through forward freight agreements (FFAs). Moreover,  the gap between demand and  supply  is  narrowing.  Nonetheless,  we  are  downgrading  MBC  to SELL as its earnings are still expected to disappoint.

- Seasonal rush.    Since the beginning of September, the Baltic Dry Bulk Index has soared 86% to 2,127 points,  hitting a 21-month high. This was largely  due to strong rates hikes for Capesize vessels, driven by a surge in  Chinese  iron  ore  imports  (+27%  y-o-y  in  August;  16%  YTD)  on restocking  activities.  This,  combined  with  the  relatively  stable  iron  ore prices, has absorbed the excess supply of spot iron ore in the short  term. The upward trend in  rates  brought joy to vessel owners, helping them to increase  their  cash  earnings  well  above  breakeven  levels ,  notably  for those with Capesize and Panamax vessels in their fleet. 

- Pullback in rates unlikely to be  sharp.   Looking ahead, we expect the daily  earnings  of  Capesize  vessels  to  hover  at  the  sustainable USD35,000 level. This is reflected in the aggressive spot prices locked in through  forward  freight  agreements  (FFAs)  for  October  and  4Q13  –  at daily  rates  of  USD36,250  and  USD32,000  respectively.  Time  charter deals  are  also  being  concluded  at  levels  not  seen  since  2010.  This  is also  the  case  for  the  Panamax  due  to  higher  grain  activity,  while  the Handymax  is  expected to see weaker rates as charterers are in no rush to  cover  forward  rates.  Though  the  seasonal  year-end  pullback  in  dry bulk shipping is expected  from  November  onwards, it will unlikely be a sharp one. Capacity growth in dry bulk shipping will continue to exceed demand growth this year, albeit with a narrower gap. 

- Downgrade to SELL.  We make no changes  to  our  earnings  forecasts. As  the  stock  has  been  on  an  uptrend,  we  are  downgrading  our recommendation to a SELL,  albeit  with a slightly higher FV of MYR1.70 (from  MYR1.66),  as  we  roll  over  our  valuation  to  0.9x  FY14F  P/BV, in line  with  peer  average.  We  believe  MBC’s  earnings  could  continue  to disappoint as it has no exposure to Capesize  vessels where the spike in shipping rates is the strongest. 

Source: RHB