We expect the impending listing of associate, POSH,  to  crystallise  our SOP-derived  FV  of  MYR2.48  for  Malaysian  Bulk  Carriers  (Maybulk), backed by its  RNAV of MYR2.52. The Baltic Dry Index surged 77% y-o-y in  1Q14,  which  should  lift  the  company’s  overall  rates,  for  which  we forecast  a  40%  growth  this  year.  This  will  underpin  a  163.8%  jump  in overall FY14 earnings growth. Maintain BUY, with a FV of MYR2.48.

• POSH  listing to  boost value.  Starbiz  reported that  the listing of PACC Offshore  Services  (POSH)  could  potentially  fetch  a  post  money  equity value of USD1.7bn (MYR5.58bn)  to  USD1.8bn (MYR5.9bn),  based on a P/E  valuation  of  8-9x  FY15  earnings.  Our  valuation  of  Maybulk’s  19% post  diluted  IPO  stake  in  POSH  of  MYR1,023.7bn  appears  to  be  4% lower  than the low range of the  company’s listing valuation. According to the  Starbiz  report,  the listing  –  scheduled for  25 April and  whose base offer  involves  some  USD325m  (MYR1.07bn)  worth  of  POSH  shares  –could potentially raise proceeds of up  to  USD370m  (MYR1.21bn)  if the over-allotment option is exercised.
• Higher rates seen. The daily average Baltic Dry Index soared 77% y-o-y in  1Q14,  although  it  was  seasonally  weaker  by  25%  q-o-q  due  to  the Chinese New Year slowdown.  As the respective vessel class indices of Maybulk’s  fleet  of  Panamax,  Supramax  and  Handysize  vessels  are  up 51%,  46%,  50%  y-o-y,  this  should  lift  the  shipper’s  overall  rates,  for which we  are  forecasting growth of  40% this year  and 25% next  year. These,  together  with  the  increase  in  hire  days  of  9%/31%  for  FY14/ FY15 and the absence of any significant dry docking activities after  the major one in 2013, should give a strong lift to overall earnings, for  which we project 164%/75% growth over the next two years.
• Maintain  BUY.  We  maintain  our  call  BUY  on  Maybulk  with  a  SOPderived FV of MYR2.48,  based on our  valuation of its  stake in  POSH at MYR1023.7bn –  or MYR1.023 per share. This is at a 4% discount  to  the low range of its post money equity value of  POSH’s IPO. To cross check this,  we derived  a RNAV of MYR2.52  for the stock,  based on the market value of Maybulk’s vessels and the equity value of its stake in POSH. 

Key Highlights
POSH’s listing  to perk up  value.  We understand that POSH is in the midst of a major fleet expansion  that  will see an increase of 12 new vessels  this year  and  two more in 2015. Starbiz said POSH could potentially fetch a post money equity value of USD1.7bn  (MYR5.58bn)  to  USD1.8bn  (MYR5.9bn),  based  on  a  P/E  range  of  8-9x FY15 earnings.  Our valuation on Maybulk’s 19% post diluted IPO stake in POSH (of MYR1,023.7bn) appears to be 4%  lower  than the low range of the valuation  to be fetched.  According  to  the  news  report,  for  the  listing  scheduled  for  25  April,  some USD325m (MYR1.07bn) worth of  POSH shares  will be offered under the base offer.

It  added  that  this  could  potentially  go  up  to  USD370m  (MYR1.21bn)  if  the  overallotment option is exercised.Rates to go up.  The daily average of the Baltic Dry Index, which  measures dry bulk sea freight rates, rose 77% y-o-y in 1Q14, although it was seasonally weaker by 25% q-o-q due to the Chinese New Year slowdown.  The  indices of the  respective vessel classes of Maybulk’s fleet of Panamax, Supramax and Handysize vessels  have risen 51%, 46%, 50% y-o-y respectively,  which  should lift  the shipper’s  overall rates, for which we are forecasting  growth of    40% this year and 25%  in 2015.  These, coupled with  the  increase  in  hire  days  of  9%/31%  in  FY14/  FY15  and  the  absence  of  any significant dry docking activities after  the  major one in 2013, should give a strong lift to  overall earnings, for  which we project growth of  by  164%/75%  over the next two years.

Macroeconomic outlook  for dry bulk  remains solid.  Established shipping broker Clarksons expects total dry bulk trade to grow 4% y-o-y in FY14 (FY13: +5%), driven by the iron ore trade, which is led mostly by firm Chinese demand  for stockpiling, and the  ramp-up  of  Australian  iron  ore  and  coal  supplies.  Given  the  anticipated  firm demand in dry seaborne trade, the global bulk carrier fleet is projected to expand by 4% y-o-y, marking  the first time in several years  when  demand and supply growth match.  In  addition,  recent  tension  between  Ukraine  and  Russia  has  driven  away China and Middle Eastern grain buyers. In the Black Sea region, Ukraine and Russia have been the main exporters of wheat and barley to the Middle East. We see the US –  another grain exporter  –  filling the gap. This has helped sustain the rally in freight rates, notably for smaller-sized vessels.

Forecasts.  We maintain  our earnings  forecasts  but  see  potentially more  upside  to POSH’s  earnings once the prospectus  is issued. We have a conservative earnings growth forecast of 24% in FY14 and 10% for FY15 for POSH. Our oil and gas team is considering  potential  coverage  on  POSH,  following  which  we  will  incorporate  its earnings  forecasts  into  our  estimates.  Based  on  the  newspaper  report’s  claim  that valuation could  reach  at least 8x FY15, we  may see  a significant earnings boost in 2015  after  POSH  takes  delivery  of  new  vessels  (12  in  FY14  and  two  in  FY15), combined with the higher rates and economies of scale in costs savings achieved.

Maintain BUY. We maintain BUY on Maybulk,  with a SOP-  derived FV of MYR2.48, in  which we value its  stake in POSH at MYR1023.7bn,  or MYR1.023 per share. This is at a 4% discount of the low range of its post money equity value of  the  IPO.  We peg  Maybulk’s FY15 shipping division earnings at  a  19x P/E, which is at a premium to  the  sector’s  15x  FY15F  P/E  average.  We  believe  this  is  warranted  given  the company’s  healthy net cash,  as opposed to the majority of dry bulk players, which are  in net debt positions.  To cross check our  SOP  valuation,  we compute Maybulk’s RNAV based on the market value of  its  vessels,  and adding the equity value of  its stake in POSH. From this, we derive an RNAV of MYR2.52 per share.

Financial Exhibits

SWOT Analysis

Company Profile
Malaysian Bulk Carriers (MBC) is Malaysia’s largest dry bulk player which also operates chemical tankers and owns an associate stake in Kuok Group’s offshore support vessel provider, PACC Offshore Services (POSH).

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Source: RHB