China's Steel Demand Will Boost Dry Bulk Shipping, But Oversupply Risks May Impact Earnings

Key Takeaways

• Strategic fleet upgrades and long-term charters enhance efficiency, reduce costs, and ensure steady revenue growth for Precious Shipping.
  
• Favorable supply-demand dynamics and geopolitical developments could further boost Precious Shipping's revenue and earnings potential.
  
• Rapid fleet growth could lead to oversupply, impacting freight rates and revenue amidst geopolitical tensions and uncertain demand forecasts.

Catalysts

Owns and operates dry bulk ships on a tramp shipping basis worldwide.

• China's increased steel exports and infrastructure development, particularly in shipbuilding and electric cars, are driving demand for dry bulk shipping, benefiting Precious Shipping's fleet utilization and potentially boosting revenue.
  
• The projected global trade growth in dry bulk, driven by low commodity prices and high demand, exceeding fleet growth, suggests a favorable supply-demand dynamic for Precious Shipping, improving net margins.
  
• The company's strategic acquisition of eco-engine ships to replace older, less efficient vessels is likely to reduce operating costs and enhance earnings by improving fleet fuel efficiency.
  
• With a significant portion of the fleet on long-term and index-linked charters, Precious Shipping benefits from steady cash flow and mitigates risks from fluctuating spot rates, supporting stable revenue growth.
  
• Potential geopolitical developments, including a resolution to the Russia-Ukraine conflict, could lower oil prices and boost dry bulk trade flows, positively impacting Precious Shipping's future earnings potential.

Precious Shipping Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Precious Shipping's revenue will decrease by 1.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 24.5% today to 21.9% in 3 years time.
• Analysts expect earnings to reach THB 1.3 billion (and earnings per share of THB 0.81) by about April 2028, down from THB 1.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.7x on those 2028 earnings, up from 5.6x today. This future PE is greater than the current PE for the TH Shipping industry at 5.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.85%, as per the Simply Wall St company report.

Precious Shipping Future Earnings Per Share Growth

Risks

• The rapid fleet growth potential, with the dry bulk fleet expected to grow by 3.2% in 2024 and 2.9% in 2025, could lead to an oversupply situation, potentially impacting freight rates and reducing overall revenue.
  
• The inability of industry forecasters like Clarksons to accurately predict tonne-mile demand and fleet growth introduces significant uncertainty, which could affect market conditions and ultimately impact earnings.
  
• The continued geopolitical tensions, such as U.S.-China tariffs and potential increased tariffs under a Trump presidency, pose risks to global trade flow and could negatively impact cargo volumes, affecting revenue.
  
• The reduction in net profit from USD 14.4 million in Q2 to USD 8.2 million in Q3 2024 despite a moderate increase in demand suggests vulnerability in maintaining profitability, which could impact net margins.
  
• The slower than anticipated economic growth rates forecasted by the IMF and unreliable growth indicators in global dry bulk trade pose risks to future earnings, hindering sustainable revenue increases.

Valuation

• The analysts have a consensus price target of THB6.575 for Precious Shipping based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of THB7.7, and the most bearish reporting a price target of just THB4.2.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be THB5.8 billion, earnings will come to THB1.3 billion, and it would be trading on a PE ratio of 10.7x, assuming you use a discount rate of 9.8%.
• Given the current share price of THB5.25, the analyst price target of THB6.57 is 20.2% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.