Pacific Basin Shipping's surprise US$375 million decision to jump into the roll-on roll-off business has raised questions in the investment world about the carrier's commitment to the dry bulk sector.
The Hong Kong-listed handysize specialist last week (Feb 13) announced that it would acquire four ro-ro vessels, taking over the resale contracts of two ships and ordering two more. The vessels will be delivered between 2009 and 2011 and one of the resale ships has already been contracted for three years when it comes onstream.
The investment banks raced to issue reports on the acquisitions this week and while the consensus was positive, the dry bulk commitment query was raised repeatedly.
Goldman Sachs said in a research note that diversifying outside of dry bulk raised questions about Pacific Basin's outlook for the sector and its longer-term strategy.
"Our discussions with management lead us to believe that Pacific Basin may be seizing an opportunity to enter a niche market that has favorable supply characteristics, which could lead to attractive returns for shareholders," the bank said.
"While we prefer pure plays and would rather see Pacific Basin focus on its core handysize business, we see certain merits of diversification within this sub-segment of shipping that could buffer potential oversupply in dry bulk that we envision during 2009E-2010E."
Credit Suisse's transportation research analysts felt that diversification into non-bulk would help reduce earnings volatility, but raised concerns about the carrier's commitment on dry bulk going forward.
"While we see little synergy between the dry bulk and the Ro-Ro business, we think this latest move helps reduce Pacific Basin's reliance on dry bulk earnings," the research summary said.
UBS Investment Research said in a report that the move into ro-ro was "a surprising development which creates some uncertainty over company strategy.
"However, ro-ro sector fundamentals appear attractive albeit with financial contribution is some way off. One vessel is already fixed on a three-year charter," the report said.
"Pacific Basin will act as a provider, not operator of vessels, so risks should be limited. If dry bulk margins are low in 2010, ro-ros could be a welcome diversification."
JP Morgan Casenove believes contributions from the new ro-ro deliveries will partially offset earnings decline should the dry bulk rates weaken in 2009.
"The dry bulk shipping is cyclical and we expect rates to be more volatile in the years ahead," its report said. "Pacific Basin has participated in different businesses including investments in Chinese bulk terminals, Australian tug business, Panamax vessels, and ro-ros, to diversify its earning risks."
Pacific Basin spokesman Klaus Nyborg emphasised that the carrier was fully committed to the dry bulk market and had a huge newbuilding orderbook.
"We want to build the business and grow the handysize and handymax market in the future," he told Cargonews Asia.
Nyborg said the ro-ro vessels would enable the company to establish a foothold in a shipping sector characterized by good demand prospects, an ageing fleet with 44 percent of ships aged 25 years and over. The ro-ro market also had a small orderbook comprising 17 percent of the existing fleet. "This means demand will outstrip the supply side," he said.
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