Monday, November 24, 2008

Shipping sector riding on choppy seas

KUALA LUMPUR: The local shipping sector has hit some rough seas with freight rates expected to experience a choppy phase stemming from the disruption in trade globally.

RAM Holdings Bhd chief economist Dr Yeah Kim Leng has a negative outlook on the local shipping sector, due to lower traffic volume as well as lower Baltic Dry Index, the general rate for dry bulk carrier.

“The sector has seen a double impact. Contraction of trade is severe and demand has fallen to negative territory. The lower oil prices can’t offset the drop in shipping rate either,” he told The Edge Financial Daily.

“The slowdown on the sector will depend on how long and how prolonged the economy turmoil will be.” Yeah added that shipping companies with global trade would a see sharper downturn, compared with companies with involved in regional trade.

“Shipping companies with trade within the Asian countries as China and India will see a lesser impact, compared with companies in global trade involving advanced countries such as Japan, the United States and United Kingdom,” he said.

Yeah said Asian countries, except for Hong Kong, Japan and Korea, were expected to post low to modest growth next year.

His view is in tandem with the recent Moody’s Investors Service’s rating on the Asia-Pacific shipping sector.

Moody has a negative outlook for all three shipping sectors of dry bulk, tankers and liners in the Asia-Pacific over the next 12 to 18 months, due to the global economic downturn, tightening bank credit, increased volatility in currencies and financial markets.

The Baltic Dry Index has plunged more than 90% in end-October from its peak of 11,793 points on May 20 this year. It stood at 847 last Friday.

OSK Research analyst Chris Eng has pegged a neutral call on the industry, saying that local small players would face less volatility, compared with the volatile global industry.

“There are only two major shipping companies in Malaysia, which is MISC Bhd and Malaysian Bulk Carriers Bhd (Maybulk). MISC is chartered by Petronas Bhd and they are paid at market price. They are somehow protected from the volatility,” he said.

Eng said the order book going forward was large for new ships and there was concern of an over capacity.

He said some excitement might descend upon MISC upon the completion of its subsidiary Malaysia Marine & Heavy Engineering Sdn Bhd’s reverse takeover of Ramunia Holdings Bhd.

He held a “defensive buy” call on MISC at RM8.20 with a target price of RM9.75, after paring down its price-earnings ratio valuations for the oil and gas section. MISC fell 10 sen to RM8.25 last Friday.

On Maybulk, Eng said the company “traditionally outperformed their peers” and it had a contract of affreightment from Tenaga Nasional Bhd awarded in April 2005 for the transportation of about two million tonnes of steam coal annually to Malaysian ports. Maybulk fell six sen to RM2.19 last Friday.

With a neutral call on Maybulk at RM2.36, he has lowered the stock’s target price to RM2.22, from RM3.58 previously, due to the fall in its share price as well as its decent yield. He added that all bulkers might report losses if the Baltic Dry Index stayed below 1,000 points, but expected it to recover by year-end.

Source: Edge Daily

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