>MERCATOR LINES LTD (PINC RESEARCH)

Pain in standalone business continues
Mercator Lines' Q4FY10 net profits of Rs214mn were above our expectations of Rs187mn mainly on account of sale of 3 ships in the quarter. Net sales decreased by 10% to Rs4.8bn in line with our estimates of Rs4.9bn. Operating profits decreased by 36% YoY and 8% QoQ to Rs1.2bn (estimated Rs1.6bn) due to negligible contribution from coal mining business and higher operating expenses. It sold 3 assets in the quarter resulting in a profit from sale of ships of Rs293mn which led to adj. net profits grow by 2.5x QoQ to Rs214mn, same as that in Q4FY09.
For the full year, adj. profits declined by 79% to Rs711mn.

Poor performance by the tankers and dredgers: Lower revenue days due to sale of 3 assets and continued pain in the dredgers reflected in the sequential drop in standalone op. profits to decline by 60% QoQ to Rs110mn.

Coal business still at trivial level: The coal mining and trading business generated revenues of Rs1.2bn but an operating profit of Rs16mn only.

Mercator Singapore’s (MLS) performance improves: MLS revenues grew by 12% YoY and 15% QoQ to USD40mn on back of 26% higher revenue days YoY to 1,225days and 21% sequential improvement in TCY to Rs29.7k/d. Sequential improvement in the day-rates also resulted in OPM expanding by 627bps to 56%. Operating profits rose by 29% QoQ to USD22.5mn. Subsequently, net profits surged by 72% to USD13mn.

Capex update: Mercator purchased a product tanker in Q4FY10 for USD9mn. It acquired a bulk carrier at the start of FY11 for USD38mn. In addition, it is also incurring a capex of USD130mn
related to a Mobile Offshore Production Unit (MOPU) and a Floating Storage & Offloading Unit (FSO) to be deployed in H2FY11.

Outlook: We believe the dry-bulk carriers and Jack-up rig are the two main earnings driver for the company as these are mostly contracted. The dredgers’ earnings would remain depressed for at-least next one year. We maintain our earnings estimates for FY11and FY12E.

VALUATIONS AND RECOMMENDATION
We upgrade our recommendation to 'HOLD' with a price target of Rs42, discounting FY11E EPS 5x.

To read the full report: MERCATOR LINES