Leading Indian-owned dry bulk shipping company. Mercator Lines (Singapore) Limited is an Indian-owned dry bulk shipping company that is focused on the Indian and China markets. Most of its revenue is derived from India with the rest from other parts of Asia. It has established a strong presence in the transportation of coal into India and grown its young and modern fleet to its current size of 11 vessels. Its fleet consists of nine owned vessels with average age of four years and two chartered vessels.

Long-term contracts with reputable customers. It services primarily large thermal-based power plants and steel companies directly such as Global Chartering Limited (a wholly-owned subsidiary of Arcelor Mittal Group) and Tata Power Company Limited and indirectly companies such as MahaGenco and North China Shipping Limited. It also has short-term charters to customers such as Glencore International AG. Up to 70 percent of its revenues are derived from long-term fixed rate contracts, including time charters and Contracts of Affreightment for periods ranging from 11 months to five years. Such long-term contracts allows for stability in its revenues and cash flows. The balance of 30 percent of revenue is derived from deployment of its fleet on the spot market. In fact, with the long-term fixed rate contracts, it is protected from the recent sharp falls in the dry bulk shipping spot rates.

Slowdown for FY2010 and FY2011. Based on our forecast, Mercator Lines (Singapore) Limited is likely to experience slowdown for FY2010 and FY2011. We anticipate that demand for commodities and dry bulk shipping will continue to remain weak. This will affect the shipping volumes and the rates that it can bill its customers. Given the uncertainties, we expect a smaller profit of US$39.0m and US$41.8m for Mercator Lines (Singapore) Limited in FY2010 and FY2011 respectively.

Improvement in FY2012. We expect the demand for commodities to start recovering in 2011 and Mercator Lines (Singapore) Limited is expected to benefit from the increase in demand for dry bulk shipping. We anticipate shipping volumes to increase, and rates to stabilise and improve from FY2012 (which is for the period 1 April 2011 to 31 March 2012) onwards. As a result, we expect the profits of Mercator Lines (Singapore) Limited to increase beginning from FY2012.

Initiate coverage of Mercator Lines (Singapore) Limited with a HOLD rating and a target price of S$0.16. We believe that Mercator Lines (Singapore) Limited is faced with the slowdown in the global economy. However, it is protected from the drop in dry bulk shipping rates as up to 70 percent of its revenue is from long-term fixed rate contracts of 11 months to five years. Only 30 percent of its revenue is subject to fluctuations in spot rates. In other words, it has a smaller exposure to the volatility in spot rates compared to other shipping companies. It also manages to report a profit in contrast to shipping companies that have excess capacities and report losses. Nevertheless, the risk is high as the shipping sector is challenged by low demand for goods (including commodities) and higher supply of ships as new ships enter the market. Therefore, we have a hold rating on the stock and we are valuing it at 0.4 time book value. This gives us a fair value of S$0.16.