KGW: More to come

1QFY24 review. As anticipated in our previous report dated 24 May, KGW achieved a turnaround in its 1QFY24 earnings, posting a net profit of RM984k. The group's bottom line could have reached RM2m if not for a one-off bonus expenses amounting to RM1m. Notably, revenue surged by 68.9% QoQ and 62.7% YoY, driven by higher freight rates in global carriers due to disruptions in major sea routes.

Outlook. Looking ahead to 2QFY24, we believe KGW is poised to post even stronger earnings due to (i) the absence of one-off bonus expenses and (ii) higher freight rates during the period. To recap, KGW prices its services based on a percentage mark-up on global freight rates, a method that has positioned the group to capitalize on the anticipated upswing in global freight costs caused by major sea route disruptions. With the continued disruption in major sea routes and strong global demand amid the recovery in trade, further freight rate hikes were announced in May (see figure #1). This buoyant freight rate is expected to persist into 3QCY24 with an upside bias, as Chinese exporters expedite shipments ahead of the recently announced US tariff hikes on certain Chinese goods. Consequently, a surge in demand has led to congestion in major ports, resulting in exporting countries facing a shortage of ships and container equipment, as vessels endure longer sea voyages. Moreover, the forthcoming peak shipping season for holidays and back-to-school in the US is expected to further propel freight rates to new heights.

Set to advance further. Following our initial trading buy call on KGW, the stock has surged impressively by 16% over the past two weeks. From a technical standpoint, KGW appears primed to establish a higher high formation, having broken out above the long-term resistance level of RM0.20 on 24 May 2024. A decisive breakout above RM0.22 would signal further upside potential towards the RM0.24-0.26-0.30 range. Cut loss at RM0.155.

Collection range: RM0.18-0.20-0.21

Upside targets: RM0.24-0.26-0.30

Cut loss: RM0.155

Source: Hong Leong Investment Bank Research - 4 Jun 2024