Pacific Basin Shipping: A Strategic Play in Dry Bulk with Caravel's Backing

Caravel Group's 7.5% stake in Pacific Basin Shipping (HKG: 0535) signals a compelling opportunity in the undervalued dry bulk sector. The investment underscores confidence in the company's fleet modernization via methanol-fueled newbuilds, disciplined capital allocation, and its ability to capitalize on rising tonne-mile demand. With a stock price trading at a significant discount to its peers and a shareholder-friendly buyback program underway, Pacific Basin presents a rare intersection of strategic value and growth catalysts.

Why Pacific Basin is Undervalued

Pacific Basin's stock has lagged behind peers like Star Bulk Carriers (SBLK) and DryShips (DRYS) despite its strong fleet renewal trajectory and asset-backed balance sheet. Key valuation metrics highlight this disconnect:

• Revenue Growth: Analysts project a modest 1.3% annual revenue decline through 2025, but earnings are expected to grow 14.6% annually, driven by cost discipline and higher margins.
• ROE Improvement: Return on equity is forecasted to rise to 7.9% within three years, up from current levels, reflecting better capital efficiency as older vessels are retired.
• Buybacks and Dividends: Pacific Basin's 10% equity buyback program (launched in May k) and consistent dividends (e.g., HK$0.057 final dividend in March 2025) signal confidence in its valuation. The company's net debt-to-EBITDA ratio of 1.2x leaves ample room for further shareholder returns.

At a price-to-sales (P/S) ratio of 0.4x, Pacific Basin trades at a 40% discount to the dry bulk sector average, making it a prime candidate for mean reversion.

Fleet Modernization: Methanol as a Strategic Advantage

Pacific Basin's order of four 64,000-dwt methanol-fueled Ultramax vessels (2028–2029 delivery) is a game-changer. These dual-fuel ships align with IMO's 2028 decarbonization targets, ensuring compliance while reducing fuel costs over time. Key benefits:

1. Regulatory Safety: Methanol-powered vessels can operate under EU ETS and CII requirements without carbon credits purchases, shielding the fleet from rising compliance costs.
2. Fuel Cost Savings: Green methanol's price parity with traditional fuels by 2030 (per industry forecasts) will enhance margins as fossil fuel costs rise.
3. Market Differentiation: Only 1.5% of global dry bulk vessels are dual-fuel capable, giving Pacific Basin a first-mover advantage in securing charters with environmentally conscious customers.

The partnership with Mitsui & Co. for methanol supply ensures reliability, while the vessels' design (optimized for fuel efficiency) positions them to outperform older tonnage.

Strategic Synergies with Caravel Group

Caravel's stake highlights its belief in Pacific Basin's asset-backed business model and tonne-mile demand tailwinds:

1. Red Sea Rerouting: Geopolitical instability in the Red Sea has forced ships to reroute via the Cape of Good Hope, boosting tonne-miles by 10–15% for dry bulk voyages. Pacific Basin's modern fleet—averaging 7 years of age—is better suited to handle longer voyages efficiently.
2. Minor Bulks Growth: Rising demand for manganese ore, cement, and fertilizers—key Pacific Basin commodities—is outpacing coal and iron ore declines. Minor bulks now account for 40% of its cargo mix, up from 30% in 2020.
3. Buybacks as a Catalyst: Caravel's involvement likely accelerates the buyback program, reducing shares outstanding and amplifying EPS growth. With 28 older vessels retired since 2021, Pacific Basin's fleet is leaner and more profitable.

Caravel's expertise in shipping and infrastructure could also unlock synergies, such as joint ventures for green fuel infrastructure or route optimization.

Risks and Considerations

• Freight Rate Volatility: Spot rates for Handysize and Supramax vessels remain depressed, though Pacific Basin's 77–95% cargo coverage in 2025 at premium rates mitigates this risk.
• Green Fuel Adoption: Methanol infrastructure is nascent. However, Pacific Basin's partnership with Mitsui & Co. and its phased rollout (2028–2029) reduce execution risk.
• Interest Rates: Higher borrowing costs could pressure margins, but Pacific Basin's low leverage (net debt/EBITDA <1.5x) buffers against this.

Investment Thesis

Pacific Basin Shipping is a buy at current levels, with a target price of HK$1.50 (25% upside) based on peer valuations and its improving ROE. Key catalysts include:

1. Fleet Renewal Finalization: Methanol ships will begin delivery in 2028, aligning with IMO deadlines and boosting charter rates.
2. Buyback Completion: Reducing shares by 10% will amplify EPS growth, potentially triggering a valuation re-rating.
3. Tonne-Mile Demand Surge: Red Sea rerouting and minor bulks growth could push TCE earnings back to $12,000+/day by 2026, exceeding break-even costs comfortably.

Conclusion

Caravel Group's stake in Pacific Basin Shipping is a vote of confidence in a company that's undervalued, strategically positioned for decarbonization, and capitalizing on structural tonne-mile demand. With a shareholder-friendly capital allocation policy and a modern fleet on the horizon, Pacific Basin is primed to outperform as the dry bulk sector transitions to a greener, more regulated future. Investors seeking exposure to this niche but essential industry should consider a position in Pacific Basin before its valuation catches up to its fundamentals.

Disclosure: This article is for informational purposes only and should not be construed as personalized investment advice.