Value Mercator at S$0.42

Wednesday, September 16, 2009

Mercator mentioned in its results briefing that there was expiration of long term contracts and the contracts were renewed at lower rates. This was a concern as up to 70% of its revenue was from long term contracts. Moreover, spot market rates had declined sharply from last year that affected up to 30% of its revenue. Despite the difficult operating conditions, Mercator was able to report a profit compared to most of its peers that incurred losses.

Due to the fall in dry bulk shipping rates, net profit is expected to decrease to US$45.4m in FY2010F. After that, rates are anticipated to gain slightly with the increase in demand for shipping. This is likely to cause the profit to rise to the same amount of US$48.1m for FY2011F and FY2012F.

Recommendation. We value Mercator at S$0.42, which is 1.0 time book value for FY2010F. We expect Mercator to report a profit for the next three years despite the tough conditions in the dry bulk shipping industry. This is attributed to its ability to maintain long term contracts with its customers. Given the recent correction in the share price, we upgrade the stock from hold to buy as there is upside of 23.5% to its fair value.


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