UOB Kay Hian says it is time to take profits on Orient Overseas International Ltd after the company’s shares surged over the past three months.
The Hong Kong-liner giant has been a key beneficiary of the Red Sea rally with its shares up over 35% since the Houthi attacks on commercial shipping began.
UOB Kay Hian said the acute shortage of shipping capacity supply following the outbreak of the Red Sea attacks led to a surge in ocean freight rates.
The Shanghai Containerised Freight Index (SCFI) and China Containerised Freight Index (CCFI) increased by 103% and 68%, respectively, between 15 December 2023 and 2 February 2024.
“The Red Sea crisis is still ongoing, but both SCFI and CCFI have been on a normalising trend since early February, as the shipping industry has gradually adapted to the situation,” said analyst Roy Chen.
“Latest readings of SCFI and CCFI on 8 March 24 were still 51% and 72% above mid-December 23 levels, and are set to normalise further, in our view, given the container shipping industry’s overcapacity situation in the medium term.”
Chen said therefore he was downgrading OOIL to sell as he believes the positives from surged freight rates have been priced in after OOIL’s recent share price outperformance.
In addition, the Singapore-based analyst said the container shipping segment is facing overcapacity in the medium term.
Chen said investors should switch from OOIL to its parent company Cosco Shipping Holdings, which has a “stronger and more diversified business profile”.
The analyst adds that Cosco Shipping also trades at a cheaper valuation of 0.63 price to book, a 30% discount to OOIL’s valuation of 0.90 price to book.
In early January 2024, OOIL’s Orient Overseas Container Line logged a steep drop in revenue in the fourth quarter, with income down 49% to $1.62bn compared to the same period in 2022.
