[Click eStock] "Pan Ocean, Focus on Q2 Earnings... Target Price Up 13%"

[Asia Economy Reporter Minji Lee] KTB Investment & Securities maintained a buy rating on Pan Ocean on the 14th, expecting an increase in second-quarter earnings, and raised the target price by 13% to 8,500 KRW.

In the first quarter, Pan Ocean recorded an operating profit of 48.9 billion KRW, a 29% increase compared to the same period last year, but it fell short of market expectations (56.9 billion KRW). Bulk sales amounted to 429.9 billion KRW, up 6% from the previous quarter, but operating profit decreased by 32% to 35.6 billion KRW during the same period. The average BDI (Baltic Dry Index) stood at 1,728 points, showing a super boom with a 188% increase compared to a year ago, but the first-quarter performance was disappointing.

Researcher Hanjun Lee of KTB Investment & Securities explained, "Spot charter cargo operations and long-term cargo transport contracts (COA) are factors behind the poor performance," adding, "Contracts were signed considering that January to March is the off-season at the turn of the year, but the unexpected strong market conditions made the charter fees at the time of shipment a burden." In the case of COA, sales are fixed over several months to a year, and deploying expensive charters or own vessels to fulfill contracts results in opportunity costs.

The worse-than-expected performance was due to the sharp market surge forming at the end of the quarter, causing costs to be reflected in advance. For contracts extending from the end of the quarter to the second quarter, sales are recognized over the period, but costs are recognized in advance as service loss provisions. The first-quarter cost provision amounted to 11.9 billion KRW, which is interpreted as causing a larger-than-expected decline in performance.

In the second quarter, it is expected to show performance improvement commensurate with the elevated BDI due to position building in anticipation of market rise. Researcher Hanjun Lee said, "Since costs were reflected in advance, there will be contracts in the second quarter where only sales are recognized without costs," adding, "Securing 19 long-term charters for one year and 47 charters for about six months during the first quarter is also a factor that raises expectations for second-quarter performance."