The  much  anticipated  recovery  in  dry  bulk  freight  rates  failed  to materialise in 1H14. The daily BDI average was down by  29% q-o-q in the 2Q2014, thus suggesting that earnings for 2Q could end up weaker q-o-q. We lower our  FY14/FY15  estimates by 22%/6% respectively. The earnings cut is attributed to lower  time charter earnings assumptions. As such we reduce our FV to MYR2.17 (from MYR2.48). Maintain BUY.

• Dry freight rates looking depressed. The much anticipated recovery in dry  bulk  freight  rates  failed  to  materialise  in 1H14.  After  the  Baltic  Dry Index  (BDI)  reached  its  peak  on  the  first  day  of  2014  at  2,277pts,  the index  has  since  tumbled  by  67%  to  755pts.  Despite  China’s  iron  ore imports  still scaling  record highs y-o-y, concerns are  centred  on the lack of cargoes as tonnage builds up due to deliveries of new vessels into the market.  There is a glimmer  of hope that rates could potentially spike in the 2H as Brazil ramps up its iron ore exports. On a  YTD average basis, the BDI is notching up a  34% gain, primarily driven by Capesize vessels  (+36% YTD). Panamax vessels are seeing the lowest YTD average gain(+9% YTD) only.
• Disappointing  2Q  seen.  Approximately  46%  of  the  total  deadweight tonnage  (DWT)  of  Malaysian  Bulk  Carrier  (MBC)’s  vessels  are Panamaxes,  where  the  upside  in  freight  rates  so  far  have  not  been particularly  strong.  We  estimate  that  MBC  could  potentially  see  1H14 rates notching up by only 12% y-o-y  and down by 10% y-o-y  for 2Q14.The  daily  BDI  average  was  down  by  29%  q-o-q  in  the  2Q2014, suggesting that  2Q  earnings  could end up weaker  q-o-q.    For MBC, the upcoming delivery of five vessels (2014: three; 2015: two) is expected to boost capacity by 25%  (2014)  and 18% (2015). This  would give a  major  boost to 2H14 earnings, given the improved operating efficiencies.
• Earnings  trimmed,  BUY  maintained.  We  lower  our  FY14/FY15 estimates by  22%/6% respectively. The earnings cut is attributed to the lower  time  charter  earnings  assumptions  (by  18%  from  previous estimates).  W e  have  now  assumed  a  15%  charter  rate  growth  (from 40%) in FY14  and 25% (unchanged) in FY15. With rates likely to bottom soon  in  2H,  we  think  it  would  be  timely  to  take  a  position  in  MBC  in anticipation  of  an  earnings  uptick.  The  earnings cut  reduces  our  SOPderived  FV  to  MYR2.17  (from  MYR2.48).  The  downside  to  the  share price will is supported by its MYR1.86 RNAV. 

Not Seeing Higher Rates Yet
Dry  freight  rates  looking  depressed.  The  much  anticipated  recovery  in  dry  bulk freight  rates has  failed to materialise in 1H14. After the BDI  reached its peak on the first day of 2014 at 2,277pts, the index  has since tumbled by 67% to 755pts. Despite China’s iron ore imports still scaling record highs y-o-y, concerns  are  centred  on the lack of cargoes as tonnage builds up due to deliveries of new vessels into the market.There  is  a  glimmer  of  hope  that  rates  could  potentially  spike  in  the  2H  as  Brazil ramps up its iron ore exports. On a YTD average basis, the BDI is notching up a gain of  34%,  primarily  driven  by  Capesize  vessels  (+36%  YTD),  with  Panamax  vessels seeing the lowest YTD average gain, ie only 9%.

Disappointing 2Q seen.  Approximately 46% of the  total DWT of MBC’s vessels are Panamaxes, where the upside in freight rates so far has  not been particularly strong. We estimate that the company could potentially see rates notching up by only 12% yo-y for the 1HFY14 and down by 10% y-o-y  for 2Q14. The daily BDI average was down by 29% q-o-q in 2Q2014, suggesting that  2Q  earnings could end up weaker. For MBC, the upcoming delivery of five vessels – three in 2014 and two in 2015 – are expected to boost capacity by  25%  (2014)  and 18% (2015).  This would give a  major boost to earnings in 2H14, given the improved operating efficiencies. 
Bargain opportunity to buy cheaper vessels. On the plus side, a weak depressed market  brings  opportunity  for  dry  bulk  players  to  continue  to  optimise  their  fleetsfurther  by  ordering  new  vessels  that  are  more  fuel  efficient  at  a  cheaper  price. However, this could lead to renewed concerns for  a further glut  in  vessel oversupply into the market over the coming years. This could  potentially cap the future upside to freight rates.  The percentage of  industry  orderbook to total fleet  has now been on a slow uptrend and could escalate to worrying levels if these supplies of newbuilds are not absorbed by more demand.

Earnings  trimmed.  We  lower  our  FY14/FY15  estimates  by  22%/6%  respectively. The  earnings  cut  is  attributed  to  the  lower  time  charter  earnings  assumptions  (by 18%  from  the  previous  estimate). W e have  now  assumed  a charter  rate growth  of 15% (from 40%) and 25% (unchanged) for FY14 and FY15  respectively. With rates likely to bottom soon in 2H2014, we think it would be timely to  take a position in MBC in anticipation of an earnings uptick. 
BUY maintained.  The earnings cut reduces our SOP-derived FV to MYR2.17  (from MYR2.48) premised on 15x FY15 P/E for its shipping division. The downside to share price will be supported by its RNAV of  MYR1.86. Valuing its stake in PACC Offshore 

(POSH  SP,  NR)  by  taking  its  21%  share  of  the  total  market  cap  of  SGD2,093m, MBC’s shipping division is trading at an attractive FY15 P/E of 11x (vs peers’ average of 14.4x) and FY15 EV/EBITDA of 5.3x (vs peers’ average of 8.1x). 

Source: RHB