Shipping industry set to report drop in profitability going forward as rates normalize, analysts put ‘hold’ rating on stocks

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The recent high flying shipping industry’s earnings are starting to normalize, and analysts anticipate the overall revenues to start to decline as global economies slow and shipping congestion starts to ease.

The 1st of the earnings was reported by Precious Shipping Plc (PSL) which reported that its Q3 profits declining by as much as 10.4% year-on-year as it reported 1.35 billion Baht against 1.5 billion Baht it reported in Q3 2021.

PSL in a statement to investors said that the earnings per day per ship for Q3 2022 stood at US$ 19,840, lower than the US$ 23,901 and US$ 24,722 figures recorded in Q2 2022 and Q3 2021, respectively.

The firm also said that its operating costs was at US$ 5,159, which were higher than the management’s target of US$ 4,960 and higher than the US$ 4,683 and US$ 5,136 figures recorded in Q2 2022 and Q3 2021, respectively.

These figures were in line with what Kijapat Wongmetta, analyst at Bualuang Securities said in a note to his clients, whereby he stated that the ongoing geopolitical crisis, tight monetary policies, China’s slowing economy, and increasing supply (easing port congestion) are squeezing dry bulk shipping rates.

He further added that in his view the revenues for PSL, which is a dry bulk carrier, could continue to weaken year-on-year (YoY) but would likely rise quarter-on-quarter (QoQ).

Kijaphat’s views on the container freight liners were bleaker as this segment has seen its benchmark rates dive more than 60% from the peaks this sector had seen earlier this year.

He says that the southward movement of the container freight liners was caused by the slowdown in shipping demand (tied to a softening global economy and lockdowns in China) and the expanding effective supply (easing port congestion and the launch of new vessels).

“But container freight rates are still far above pre-COVID era levels. We expect RCL’s 3Q22 core earnings to rise YoY but fall QoQ, in tandem with freight rate trends. And we anticipate that its 4Q22 core profit will decline YoY and QoQ,” he said.

Dimmer Outlook

The sea freight rate downtrend means that the outlook for freight forwarders is dull. Kijaphat says that Bualuang expects the Q3 2022 core earnings of Triple I Logistics Plc (III) and LEO Global Logistics Plc (LEO) to rise YoY but decline QoQ, in tandem with sea freight rate movements.

“The Q4 2022 core profits of III, LEO, and Wice Logistics Plc (WICE) will probably decline YoY and QoQ, led by slumps in sea freight rates. In contrast, we expect JWD Infologistics Plc (JWD)’s Q3 2022 and Q4 2022 core earnings to increase YoY and QoQ, driven by new capacity,” Kijaphat says.

Normalizing freight rates will prompt street valuation downgrades for some logistics stocks, so Bualuang says that they have de-rated their price earnings ratio (PER) pegs for III, LEO, RCL, PSL, and WICE and shifted down its calls from BUY to HOLD for LEO, PSL, and WICE.

“But our BUY calls stand for RCL (its current price is almost at its cash level) and III (improving air freight business should outweigh the effect of lower sea freight income),” Kijaphat says.

“We have also upgraded our JWD call from HOLD to BUY, as its current price implies a good capital return against our 2023 target price (its stock price has declined by 9.7% since we shifted down our call from BUY to HOLD).”

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