Mercator reported a disappointing set of results in 3Q09 (FYE ended March), with net profit dipping 9% y-o-y to US$13.1m. This was mainly due to higher than expected exposure of 33% to short-term charter contracts, which resulted in more vessel hire expenses and bigger exposure to depressed freight rates in 3Q09. The current cyclical downturn in dry bulk shipping and our expectation of a steep fall in asset prices would continue to put a dampener on the share price. Our fair value is now S$0.12. Maintain HOLD.

Net profit was weaker than expected. Mercator’s net profit in 3Q09 was hit by higher than expected vessel hire expenses, due to a spot chartered-in dry bulk carrier whose contract expired in November 2008. The group’s lower than expected exposure of 67% to long- term charter-out contracts (vs. 75% estimate) also contributed to the 9% dip in net profit.

Secondhand prices have started to fall. The secondhand prices for Panamax have fallen 20% by end October 2008, vs. the peak level in July 2008. While the latest secondhand prices were not available from Clarksons since then, presumably due to the lack of transactions, we expect the next update to reflect further price dip. We have kept our RNAV estimate for Mercator at S$0.04 per share, given our expectation on an 80% plunge in secondhand prices by 2010.
Mercator is worth more than its distressed value. Mercator offers investors longer-term value through its unique business proposition to offer end-to-end logistics solutions to customers with Mercator Lines Limited India (MLL), its India-based parent company. We continue to value Mercator at 0.3x blended FY09/10 Price/NTA, which gives a fair value of only S$0.12. Maintain HOLD.