Following a recent drop in share prices, CIMB has upgraded its call on Asia’s container shipping sector to “neutral” from “underweight”.
In a July 9 note, analyst Raymond Yap points out that Q2 earnings for the sector is likely to remain weak, as spot rates have been “mauled”. He flags the risk of further downgrades of his forecasts if the rates could not recover in a meaningful way this current quarter.
“But, the industry is now beginning to come to its senses and has taken action to curb capacity growth during 3Q, while more action could follow in 4Q so that the carriers will not face another bleak year in 2016,” he writes.
While price targets and earnings forecasts remain unchanged, Yap has upgraded SITC from “hold” to “add” and upgrade OOIL and CSCL from “reduce” to “hold”. However, he is staying his “hold” call on NOL.
Spot rates for the Asia-North Europe route is now US$879 per Teu, up from US$205 over the past fortnight; while Asia-West Coast route is now US$1,421, up from US$1,229.
Even with the recent gains, these rates are still lower than what the industry was able to charge in previous years. “The immediate outlook for the industry remains poor,” writes Yap.
“The only positive is the low bunker price, which helped carriers particularly during 1Q15, although by the 2Q, carriers effectively ceded all the cost savings to their customers,” he adds.
Due to the low rates and expectation of poor Q2 showing, share prices of the industry had reacted by dropping very quickly over the past month, leading Yap to believe that a lot of the risks have been priced in already.
“At the same time, freight rates may already be past their low for 2015 because of unprecedented action by carriers to remove capacity during the 3Q peak season, so we think further share price downside will be limited.
“For share prices to recover and move up strongly, investors need to be convinced about a better 2016 outlook, either with import demand from Europe and the US growing faster than the languid 3-4% pace expected in 2015, or with carriers restraining their capacity growth,” he adds.
Within the sector, Yap’s top pick is SITC International Holdings. He has an “add” call on this stock but with an unchanged target price of HK$5.80. Yap likes this stock for its ability to suffer less volatility than other players as SITC concentrates on intra-Asian routes and not the trans-continent lines.
Yap has also upgraded the following two stocks from “reduce” to “hold”: Orient Overseas (International) Limited and China Shipping Container Lines, with unchanged price targets of HK$36.60 and HK$2.18 respectively.
However, he is maintaining his call on Neptune Orient Lines at “hold” call and target price of $1.05. Yap notes that this counter is now trading at a price to book value of 0.8 times, which is one standard deviation below its average since 2001. The stock traded at its peak price to book value ratio of 1.1 to 1.2 times back in early 2012 and earlier this year.
However, Yap believes NOL may not trade back to this earlier price to book value multiple as the company has on its books a US$900 million gain from the sale of its logistics business, which has been ignored by the market.
As at 12.36 pm, OOIL traded at HK$38.85, up 80 HK cents; CSCL was at HK$2.58, up 18 HK cents; SITC was HK$5, up 12 HK cents, and NOL at 90 cents, down 0.5 cent.
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