KENANGA Research has downgraded Malaysia’s largest port operator, Westports Holdings Bhd, as the Red Sea crisis in the Middle East continues to impact global trade, particularly affecting the Asia-Europe shipping sector.
In a note issued yesterday (July 9), Kenanga highlighted that the diversion of shipping routes from the Red Sea has significantly disrupted global trade. The crisis began last November when Yemen’s Houthi militants launched attacks on merchant and naval vessels in the Red Sea, aligning with the Israel-Hamas conflict.
The Houthis have stated they will continue their attacks until Israel halts its operations against Hamas, targeting any Israel-linked ships including those from the US and UK.
To avoid these attacks, many commercial vessels have rerouted to sail around the Cape of Good Hope in South Africa instead of using the shorter Suez Canal route.
“The diversion from Suez Canal to the Cape of Good Hope has resulted in a longer voyage for the Asia-Europe route, reducing the frequency of calls shipping lines can make at Westports’ ports and all other ports in the region,” said Kenanga, noting that the Asia-Europe route contributes to 30% of global container volume.
Kenanga also mentioned that the World Trade Organisation in April reduced its projection for global merchandise trade volume growth in 2024 to 2.6% from 3.3%.
Kenanga has maintained its “neutral” rating on the seaport and logistics sector but downgraded Westports to “underperform” from “market perform” with an unchanged target price of RM3.80 following the recent increase in its share price.
Westports’ shares have risen 27% year-to-date, closing 5 sen or 1% higher at RM4.59 yesterday, valuing the company at RM15.65 billion.
In May, Westports EC and group managing director Ruben Emir Gnanalingam Abdullah acknowledged that the Red Sea developments have had “a marked influence on container shipping,” noting that the Asia-Europe trade lane experienced lower volume due to the initial adjustments as liners opted for the longer route around the Cape of Good Hope.
“During the first quarter, the terminal had some peaks and troughs in its utilisation because of disruption to shipping schedules and subsequent vessel bunching. However, the adverse effects should taper off once services have been regularised,” he added.
Despite the crisis, Westports’ first-quarter results remained robust. The net profit for the quarter ended March 31, 2024, rose 11.4% to RM204.51 mil from RM183.59 mil a year ago, driven by higher container revenue, higher finance income, and the share of results of a joint venture.
Revenue for the quarter increased by 5.9% to RM543.15 mil from RM512.92 mil, with container volume up 5% to 2.67 million 20-foot equivalent units and bulk cargoes amounting to 2.76 million tonnes.
“Barring a significant escalation of conflict beyond the Middle East and a sharp reduction in economic growth in many major developed economies, the company is cautiously forecasting a low single-digit growth rate over the previous year,” Westports said in a statement in conjunction with the release of its Q1 results in May.
On a brighter note, Kenanga sees potential in the domestically driven third-party logistics sector, which is less vulnerable to external headwinds and is being buoyed by booming e-commerce.
“Industry experts project the local e-commerce gross merchandise volume to grow at a compound annual growth rate of 7% from 2023 to 2027, with size reaching RM1.9 tril by 2027 from RM1.4 tril in 2023,” it said.
Kenanga noted this boom will drive demand for distribution hubs and warehouses to enable just-in-time delivery, reshoring/nearshoring to bring manufacturers closer to end-customers, and warehouse decentralisation to reduce transportation costs and de-risk the supply chain.
Furthermore, there is strong demand for cold-storage warehouses due to the proliferation of online grocery start-ups.
While Kenanga remains neutral on the logistics sector, it has not identified a top pick for the sector. – July 10, 2024
