In a note yesterday, the research house said the shipping diversion from the Red Sea continues to weigh down on global trade, especially in the Asia-Europe sector.
The crisis began last November after the Israel–Hamas conflict erupted, when Yemen’s Houthi militants launched aerial attacks against merchant and naval vessels in the Red Sea in support of Hamas. The group has declared it will not stop the attacks until Israel ceases its war on Hamas.
The Houthis consider any Israel-linked ship a target, including merchant and naval vessels from the US and UK. To avoid the attacks, hundreds of commercial vessels have been rerouted to sail around the Cape of Good Hope in South Africa rather than through 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.
It added that the World Trade Organization in April had cut its projection for global merchandise trade volume growth in CY2024 to 2.6% from 3.3%.
Kenanga has maintained its “neutral” rating on the seaport and logistics sector. However, it has downgraded Westports to “underperform” from “market perform” with an unchanged target price of RM3.80 after the recent run-up in its share price.
Its shares have risen 27% year-to-date. It closed 5 sen or 1% higher at RM4.59 yesterday, valuing the group at RM15.65 billion.
In a statement in May, Westports executive chairman cum group managing director Ruben Emir Gnanalingam Abdullah acknowledged that the Red Sea developments have had “a marked influence on container shipping””, and its 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.
Results yet to be impacted
Nevertheless, the Red Sea crisis did not appear to negatively impact Westports’ first quarter results. Its net profit for the quarter ended March 31, 2024 (Q1 FY2024) rose 11.4% to RM204.51 million from RM183.59 million a year ago thanks to higher container revenue, higher finance income and the share of results of a joint venture.
Revenue for the quarter rose 5.9% to RM543.15 million from RM512.92 million. Its container volume increased 5% to 2.67 million 20-foot equivalent units while bulk cargoes amounted 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 more positive note, Kenanga sees a bright spot in the domestically driven third-party logistics sector, which is less vulnerable to external headwinds and 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 trillion by 2027 from RM1.4 trillion in 2023,” it said.
Kenanga said this boom will spur 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.
There is also strong demand for cold-storage warehouses on the back of the proliferation of online grocery start-ups, it noted.
While it is neutral on the logistics sector, it does not have a top pick for the sector.