STX : Results in line in 2Q09; Maintain Sell

STX reported a loss of US$35.9m in 2Q09 with US$0.18 loss per share in-line with the market expectation. Total revenues US$805, down 70.1% yoy and up 4.7% qoq, of which revenues from bulk business up 24.5% qoq and that from non-bulk business (including container, tanker and pure car/truck carrier) down 2.7% qoq. Loss in gross profit expanded qoq, from US$4.1m in 1Q09 to US$52.3m in 2Q09.

Rebound in freight rate improves bulk business: BDI rebounded from 1562 in 1Q09 and 2714 in 2Q09 help STX's bulk business. STX's bulk revenue improved that much as BDI because, in our view, 1) STX reduced chartered-in activities 2) STX did not put all capacity in the spot market.

Weak non-bulk business contributed more to the loss: We saw a sharp decline in container freight rate as well as Tanker rate hit a historical low level in 2Q09. We think the non-bulk business contributed more loss when compared with 1Q09.

Outlook in supply-side needs to be verified: Management gave positive outlooks on both demand-side and supply-side. We do believe there is a strong demand for dry bulk shipping form China steel production, but we need to see the actual cancellation/delay from greenfield shipyards in China, which is the key factor impacting the fleet growth in 2H09 and 2010.

Maintain Sell but raise price target to SG$11.0. We raise the price target to SG$11.0 based on 1x 2010F P/B, on expectation of 1) strong commodity demand from China 2) recovery of global economy. The stock is current trading at 1.3X 2010F P/B. Maintain Sell.

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STX Pan Ocean - notwithstanding a short-term rally in the BDI

According to the management, the Baltic Dry Index (BDI) has bottomed in Dec 08. STX Pan Ocean (STX PO) has an operating fleet of 306 vessels. Out of which, 70 are owned and 236 are chartered-in vessels.

Of the chartered-in fleet, 206 are dry bulk vessels. Twenty two of these have a hiring period of more than one year and the others are chartered out for an average period of three months. Due to the high chartered-in cost for nine dry bulk vessels and low profit margin for its chartered-in fleet, the management expects a recovery in earnings in 2H09. These nine vessels were secured when BDI was at 3000-4000 level.

Twelve vessels are scheduled for delivery in 2009 and 2011 while 18 vessels are scheduled for 2010. STX PO has not cancelled any of their vessel orders but they are looking to delay some of the deliveries for 6-18 months.

For the US$600m CAPEX allocated for 2010, the Company has secured US$70m financing and have issued Corporate Bonds of KRW200b on 8 May 09 (US$157.5m) at an interest rate of 7.95%.

In our opinion, notwithstanding a short-term rally in the BDI on China's higher iron ore imports, freight rates will likely be soft when vessel oversupply hits the market from 2H09 onwards. Maintain SELL and fair price of S$4.35 based on 0.4x P/B (a typical shipping cyclical trough valuation).

STX Pan Ocean: Sink with BDI (Fully Valued; S$8.26)

STX Pan Ocean’s FY08 earnings of RMB494m came in 15% below our expectation and 26% below consensus, hit by unexpected crash in BDI in 4Q08. We are concerned that STX could gear up sharply to almost 100% by 2010 to fund its huge capex of US$1.8bn. We believe share price is vulnerable to downside risk as BDI is expected to retreat from current level. Maintain Fully Valued. We have trimmed our earnings and cut our TP to S$6.00, still pegged to 0.4 FY09 P/NTA.

4Q08 swung into losses of US$94.2m. In line with its own profit guidance on 11 Feb 2009, STX reported a net loss of US$94.2m in 4Q08, down from net profit of US$131m a quarter ago. We believe the losses came from unprofitable owned and short-term charter-in vessels that were placed on spot market. The operating cost exceeded revenue earned by these open vessels as BDI crashed from 3000 to 800 points in the quarter. Gross margin plummeted 8.2ppt qoq to a mere 0.6%. A significant forex loss of >US$40m as a result of KRW depreciation also dragged on earnings in 4Q08.

High capex, high gearing. We expect STX to gear up sharply in the coming two years, from net gearing of 20% currently to almost 100% by 2010 to fund its huge capex of US$1.8bn during 2009-10 periods. The group is expected to take delivery of 30 bulkcarriers by 2011, which represents 65% of its own dry bulk fleet currently. While most of the 12 Capesize deliveries are already covered by profitable long-term COA, the remaining deliveries are likely to be unprofitable in 2009-2010 based on our forecast of depressed BDI level averaging 900-1100.

Maintain Fully Valued; TP reduced to S$6.00. 4Q08’s lower profitability of owned vessels and more aggressive cutback in short-term charter-in fleet led us to revise down our earnings assumptions. We now expect STX to slide into marginal loss in 2009 and incur higher losses of US$117 in 2010. We believe BDI has approached its near term peak and will retreat from 2000 currently to our forecast of 1100 level. As such, we see downside risk to STXPO’s share price, which is highly correlated to BDI (>0.9). Maintain Fully Valued. TP reduced to S$6.00, still pegged to trough valuation of 0.4x FY09 P/NTA.