Mercator Lines is currently valued at 4.25 times P/E

1Q FY2009 results. Mercator Lines (Singapore) Limited (“Mercator”) reported 1Q FY2009 revenue of US$35.5m (-31% yoy) and net profit of US$10.0m (-54% yoy). Revenue dropped because of the decrease in spot market day rates and the renewal of long term contracts at lower rates. Net profit fell due to lower revenue as well as higher voyage and depreciation expenses. The increase in expenses was the result of the acquisition of three vessels.

Earnings estimates for FY2010F to FY2012F. Due to the downturn in the shipping industry, we expect Mercator to report a much lower profit of US$45.4m in FY2010F. As the global economy is expected to recover in 2010, we anticipate that Mercator will report higher profit of US$48.1m in FY2011F and FY2012F.

Mercator is currently valued at 4.25 times P/E and 0.95 time P/B. Maintain HOLD with fair value raised from S$0.16 to S$0.42. We maintain our hold recommendation as the share price has risen rapidly in the recent rally and upside may be limited. However, we raise the target price of Mercator from S$0.16 to S$0.42, which works out to 1.0 time book value for FY2010F. The change is an increase from our earlier valuation of 0.4 time book value. This is because Mercatoris able to report a profit despite the difficulties faced by shipping companies. In fact, it benefits from having up to 70 percent of its revenue from long term fixed rate contracts of 11 months to five years.

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