TRIS Rating has assigned the company rating of Precious Shipping PLC (PSL) at “BBB” and has also assigned the “BBB-” rating to PSL's up to Bt4,000 million in senior unsecured debentures with “stable” outlook. The ratings reflect PSL’s long track record and competitive position in dry-bulk shipping business, plus its ability to control its costs. However, these strengths are partially offset by the volatility of shipping industry and the slowdown of global economy amid bulk carrier oversupply situation. The ratings also take into consideration PSL's weakened profitability and the large capital investments needed for new fleet acquisition. The issue rating is one notch below the company's rating reflecting the subordination of senior unsecured debentures to PSL's secured bank loans. The outstanding balance of the bank loans was 42.5% of PSL's total assets as at the end of September 2015.
The “stable” outlook reflects PSL's competitive position in the dry bulk shipping industry and its financial discipline management. The fleet rejuvenation plan is expected to support PSL's cost advantage. The rating upside case is driven by the stronger-than-expected operating performance and improved liquidity. The ratio of FFO to total debt is expected to stay over 25% on sustained basis. The rating downside case will be triggered if the market conditions remain unfavorable and PSL’s operating performance and liquidity continue to deteriorate.
PSL was established in 1989 and listed on the Stock Exchange of Thailand in 1993. PSL is a shipping company, owning and operating dry-bulk ships as a tramp shipper. At the end of October 2015, PSL had 47 vessels with a total of 1.68 million deadweight tonnage (DWT) in its fleet, comprising 18 small handy vessels, 12 handymax vessels, four cement carriers, nine supramax vessels and four ultramax vessels. At the end of September 2015, PSL’s major shareholder comprised Ms. Nishita Shah and group, holding 43.29% of PSL's shares, followed by Mr. Khalid Moinuddin Hashim with 8.43% of shares.
PSL’s above average business profile is supported by its long track record and established competitive position in dry-bulk shipping business, as well as its ability to control its costs. PSL’s operating performance fluctuated over the past five years due largely to the prolonging down cycle economy and imbalance of demand and supply in the shipping industry. The Baltic Dry Index (BDI), used as a reference for the time charter (TC) rate, has decreased from an average of 2,758 point in 2010 to an average of 746 point for the first nine months of 2015. PSL’s average TC rate has declined from US$12,304 per ship per day in 2010 to US$6,373 per ship per day for the first nine months of 2015. PSL's TC rate dropped at a slower pace as PSL had secured long-term contracts at high TC rates during the period. In terms of cost, PSL has managed to control its average operating cost (opex) in the range of US$4,481-US$4,725 per ship per day over the same period. PSL claims this figure is lower than the industry average. Affecting by declining TC rate, PSL’s operating margin (operating income before depreciation and amortization as percentage of revenue) decreased from 59.68% in 2010 to 19.96% in the first nine months of 2015. PSL's financial profile was further pressured by a rise in borrowings to finance its fleet rejuvenation program. PSL’s total debt increased from US$221.7 million in 2011 to US$384.9 million at the end of September 2015. Thanks to its strong equity base and a US$63 million capital increase in June 2015, PSL’s capital structure remained acceptable. At the end of September 2015, the ratio of debt to capitalization was 43.53%. However, liquidity weakened. The ratio of funds from operations (FFO) to total debt has stayed below 10% since 2013.
Going forward, PSL will continue its fleet rejuvenation plan. The company plans to sell up to 20 old and less economical ships while acquiring 21 new ships. This will reduce the average fleet age from approximately 10 years to approximately five years. The fleet adjustment will increase PSL's total capacity, average fleet size, and efficiency. During 2015-2018, TRIS Rating expects PSL’s revenue to grow by at least 7%-10% annually, driven by larger vessel sizes, a gradual recovery in the global economy, and expected improving in shipping demand and supply situation. With PSL's prudent cost management, the operating margin is expected to improve and stay over 30%.
Over the next 12 months, the outlook for the dry bulk shipping industry is expected to remain fragile. PSL will need additional financing to support the new fleet acquisitions and make its scheduled debt repayments. PSL plans to spend US$400-US$460 million on new vessels during the next 12-18 months, which will necessitate new borrowings. As a result, the ratio of debt to capitalization is expected to peak in 2015-2016, but the ratio is not expected to stay above 50% on a sustained basis.
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