Forecast 1H22 profit growth of 140% compared with the same period last year
SITC International Holdings released a profit forecast. The company expects earnings in the first half of 2022 to grow by about 140% year-on-year to about $1.17 billion, exceeding our and market expectations. Bloomberg unanimously expects the company to earn about $1.76 billion for the full year. The company forecasts that profits in the first half of 2022 will account for about 66% of the consensus full-year profit, with the second half of the year as the traditional peak season.
The company attributed the strong performance to a significant increase in freight costs, improved operational efficiency and improved cost control. We believe that the profit contribution from the renewal of the contract price may exceed expectations.
Pay attention to the main points
Earnings are expected to remain strong in 2022, with increasing certainty. Considering that the current supply chain efficiency is still low and port congestion continues, we expect spot freight rates to remain high in 2022, and contract prices are expected to rise accordingly when the contract is renewed. Although chartering costs may also rise significantly in 2022, considering that the company is expected to deliver a new batch of low-cost self-owned vessels in 2022-2025, we expect the company to reduce chartering or lower-cost small vessels, thus limiting costs to a manageable level, which is good for full-year performance growth. While freight rates for long-haul routes such as trans-Pacific or European routes are falling, intra-Asian routes have rebounded since June.
The market is still divided on the demand trend and new ship delivery in 2023-2024. Even taking into account the potential increase in ship dismantling, Alphaliner still expects the global fleet to grow by 8 per cent year-on-year in 2023. New carbon reduction rules such as the energy efficiency index EEXI and the carbon emissions index CII will come into effect in 2023, which could lead to deceleration and early decommissioning of old ships. Considering that the order / capacity ratio of 3000 standard small vessels is lower than 8000 standard ships (15% vs. 36%), we expect that the Asian internal market (mainly deploying smaller vessels) may perform well due to relatively balanced supply and demand conditions. However, it remains to be seen whether the effective capacity loss caused by limited ship orders can support the current high level of freight rates.
Profit forecast and valuation
Due to strong freight rates, we raised our profit forecasts for 2022-2023 by 24% and 16% to $2 billion and $1.5 billion. At present, SITC International Holdings trades at 4.2x, 5.6x 2022 and 2023 P / E ratio.
Taking into account the declining market risk appetite, we maintain an outperform industry rating and target price of HK $38.60, corresponding to 7 times 2022 and 9 times 2023 earnings, which has 55.6% upside compared to the current share price. We advise investors to pay attention to bargain buying opportunities.
Risk
Port congestion alleviated or new ships delivered to release capacity