Research Notes

Notwithstanding the steadily rising deadweight of the global fleet, dynamic growth of international trade has pushed up freight rates to new records. The Baltic Dry Index, the universal benchmark for the global freight market, has gained more than 150% YTD. Given a seasonal spurt in demand for sea shipments in the past few months freight rates have grown at a faster pace, as a result of which the Baltic Dry Index has climbed slightly less than 30% since early September. In view of the favorable market conditions we expect earnings of shipping concerns to rocket.

Novoship, one of the most active players on the spot market, was the first to react to robust expansion of the freight market, whose shares have soared over 20% since early autumn and still holds upside potential of some 14%. An upswing in FESCO stocks (nearly 40% in the same period) is attributable, as we think, to the implementation by the company of an intensive investment strategy geared towards establishing a multi-pronged transportation group. According to our estimates, other Russian fleet operators (especially Murmansk Marine Shipping Company and Primorie Marine Shipping Company) will also gain from stable growth of the freight market, whose strength has not yet been priced into the stock valuations of the above companies.

Murmansk Marine Shipping Company. The company’s operations are concentrated in Russia’s only year-around northern port. In recent years, the company has broadened the scope of its activities, rolling out tanker shipments and efficiently operating the state-run nuclear icebreaking fleet apart from metal transportation. Strategic expansion of the tanker business will enable the company to conquer a niche in the segment of crude transportation from northern fields and continental offshore areas. The major risk factor will be a reduction in metal transportation volumes as cooperation ties with Norilsk Nickel are deteriorating.

Primorie Marine Shipping Company specializes in oil and oil product tanker shipments all around the world. The company has been rolling out corporate activities under Sakhalin projects placing orders for tanker production and intends to gain a share in the hi-tech segment of LNG transportation. According to our estimates, the aggregate deadweight of the company’s fleet will expand 60% from the current 1.25 mln tons to nearly 2 mln tons by 2009. We believe that the solid proportion of long-term contracts in the company’s revenue mix will stabilize future cash flows, laying a stable groundwork for further business expansion.

In our view, shares of Murmansk Marine Shipping Company and Primorie Marine Shipping Company have undeservedly lagged behind the market primarily due to their limited liquidity and their current price levels look fairly attractive on the buy side.

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Vladimir Sergievskiy

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