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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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 is 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. 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.
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.
