Losses in 1H09, recovery in 2H09. STX Pan Ocean (STX PO) posted a net loss of US$94.2m in 4Q08. Excluding FFA, forex and other losses, net loss would have been US$14.3m. Management expects further losses in 1H09 due to 17 vessels chartered in last year when the Baltic Dry Index (BDI) was at the 3,000-5,000 level. The BDI currently stands at 2,014 (2 Mar 09). Management expects an earnings recovery in 2H09 upon contract expiry of these vessels.

Managing razor-thin margins. STX PO has an operating fleet of 272 vessels. Out of these, 70 are owned and 202 are charter-in vessels. Of the charterin fleet, 166 are dry bulk vessels. Thirty-two of these have a hiring contract period of more than one year whereas the other 134 are on short-term contracts of less than one year. Since 2H08, STX PO has adopted a conservative approach by first securing cargo shipments before chartering vessels to ensure revenue can cover charter hire costs. Nonetheless, margins of these vessels remain razor-thin.

Flat or negative cargo growth in 2009. Management expects flat (in the best case scenario) or lower cargo volume in 2009, in view of the current global economic downturn. STX PO achieved a 28% volume growth in 2008.

Maintain SELL. Our fair price of S$4.35 is based on 0.4x 2010 P/B. This is a typical shipping cyclical trough valuation.