Cosco Shipping Holdings (CSH) and Orient Overseas International Ltd (OOIL) still offer investors the potential for good returns despite the recent weakness in freight rates, says a top analyst.
UOB Kay Hian analyst Roy Chen says the Shanghai Containerized Freight Index and China Containerized Freight Index have peaked in recent weeks.
“Though the August 2024 freight rate futures contracts have held firm, far-end futures contract prices pulled back significantly in the past month amid the ongoing Gaza truce talks, with prices of Shanghai-Europe freight futures contracts expiring between October 2024 and June 2025 retreating between 22% to 49% from the 5 July 2024 levels,” he said.
As a result, he has cut full-year 2024 and 2025 earnings forecasts for CSH by 20% and 57%, and for OOIL by 23% and 57%, reflecting the updated freight rate futures price curve and the high sensitivity of shipping companies’ earnings to freight rate due to high operating leverage.
Despite the earnings cut, Chen said 2024 should still be the third-best year of earnings performance in the container shipping industry’s history, just shy of the two exceptional years in 2021 and 2022 during the pandemic.
“Since our last update one month ago, share prices of CSH and OOIL have declined 22% and 21% respectively,” he said.
“Both CSH and OOIL have significant net cash positions, forming about 70% and 85% of their respective market caps.
“Even if CSH and OOIL only pay out 50% of their earnings as dividends, their 2024 dividend yields stand at 17.2% and 17.8% respectively. Given their significant cash piles, both have the flexibility to pay out even more.”
In addition to the attractive valuations, Chen says investors cannot rule out the upside risk from a possible escalation of tensions, since the Gaza ceasefire talks have not been concluded.
“There is also uncertainty whether a Gaza ceasefire deal will automatically lead to an end to the attacks by the Iran-backed Houthis in the Red Sea,” he said.
In its recent update, AP Moller-Maersk said it expects the Red Sea disruptions to last at least until the end of 2024.
“CSH’s and OOIL’s valuations are already palatable, and we think that investors may start to accumulate shares,” said Chen.
“Their first-half results for 2024 expected later this month might appear to miss market expectations, as the second quarter of 2024 has yet to see the full impact of the recent freight rate surge, but we believe that the share price weakness, if any, could present a good buying opportunity for investors to position for a strong second half and a lucrative final dividend,” he added.
Chen also continues to like Hong Kong-listed Chinese port operators Cosco Shipping Ports (CSP) and China Merchants Port (CMP) due to the cheap valuation, steady cash flow and sustainable dividend yield.
“With stable dividend yields of 5.9% offered by CSP based on a 40% payout ratio and 6.2% offered by CMP based on a 45% payout ratio, the two port companies should enjoy some re-rating as the expected US Federal Reserve rate cuts are drawing near,” he said.
“The potential resumption of CSP share purchase by Cosco Shipping Holdings, CSP’s major shareholder, after the first-half results should provide [further] support or even upside to CSP’s share price.”
