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Container Shipping - Where will freight rates go?

Shared By Stock Fanatic on Thursday, June 20, 2013 | 20.6.13

 Asia Pacific  Sector Flash Note

Container shipping share prices reacted very positively in Tuesday afternoon trading after news emerged that the top three liners will be forming a mega-alliance on the three main trades. Meanwhile, the 1 July rate hikes are expected to be partially successful.

But without more serious capacity discipline, the rate hikes could fade quickly. As a result, we maintain our Neutral sector rating, with OOIL and SITC as our top Outperform picks given their lower-risk profiles. In the short term, high-beta CSCL may do well but investors trading the sector need to be nimble as valuations are not as attractive as in late-2011. Also, CIMB and consensus EPS forecasts will likely need downgrading to reflect the very poor spot rates.

What Happened
The announcement of the proposed alliance between Maersk, MSC and CMA CGM triggered a very strong share price response for the Asian container shipping names, with CSCL up 13.7% yesterday, OOIL up 8.1% and NOL up 4.3%. This alliance comes on top of large general rate increases planned for 1 July on all the major trades, with Asia-Europe to rise up to US$1,000/teu and Asia-USWC to rise US$400/feu.

SCFI Asia-North Europe rates (US$/teu) - is history going to repeat itself?
What We Think
The mega-alliance is beneficial for the sanity of the industry but it is not a panacea for the current weak freight rates as it will only take effect earliest in 2Q14. And while spot freight rates are expected to rise significantly on 1 July given the current desperate situation, their sustainability is in question as carriers have barely reduced their capacity deployment in any material sense. The contrast to late-2011, when carriers made massive capacity adjustments that set the stage for a powerful five-month rate rally, is too glaring to ignore.

What You Should Do
From a purely trading perspective, we prefer CSCL to OOIL or SITC as it has a higher adjusted beta of 1.6x against 1-1.1x for the latter two. Furthermore, CSCL is currently trading at a historical P/BV of 0.74x, which is 26% below the peak P/BV of 1x in March 2012. 

On the other hand, OOIL is currently trading at a historical P/BV of 0.93x, which is merely 15% below the peak P/BV of 1.1x in April 2012. Assuming that both stocks trade to 90% of the early-2012 peak multiple, CSCL’s share price could reach HK$2.54 in the very near term (22% upside) while OOIL’s could reach HK$55.30 (6% upside). These are not substantial upsides for such a volatile and risky sector. (Read Report)

Source : CIMB Research


Posted on Thursday, June 20, 2013 | 20.6.13


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