KGW : No sign of slowdown

No sign of abating. Ocean freight rates continue their upward trajectory in July, showing no signs of abating due to the ongoing supply crunch. Shipping timetables are being disrupted, with missed sailing schedules and fewer port calls, as vessels take longer routes around Africa to avoid Houthi attacks in the Red Sea. As ships fail to unload cargo at ports in the Middle East, more vessels are pushed to Asian maritime hubs. This spike in unloading and reloading at transshipment hubs has caused significant congestion in places like Singapore. The growing logjam at these ports will result in delays in goods delivery, creating a domino effect that further pressures shipping rates upwards. Despite the crunch in shipping capacity, demand for shipments to the US remains strong due to seasonality and a rush in shipments from China following the announcement of tariff hikes. Channel checks reveal that the Malaysia-US route rate has surpassed the $10k mark (vs Covid-19 peak of $20k) with another round of price hikes is set to take effect on 15 July.

To persist until 1Q25. The buoyant ocean freight rates are not expected to ease off in the near term, even after the peak shipping season in July and August. Sea-Intelligence has issued a note forecasting that rates on the Asia-Europe route could exceed $20k due to the Red Sea crisis (news). Additionally, DHL says that ocean freight rate inflation might not ease up before the CNY in 2025.

Strong earnings anticipated. We highlight that KGW is the only direct beneficiary of the higher US-MY freight rates listed on Bursa Malaysia. As the Malaysia-based company handling the most TEU on the US-MY route, which accounts for 70% of KGW's top line, KGW enters into a one-year contract with global shippers for committed TEU and charge clients based on a percentage markup on global freight rates, a method that positions the group to capitalize on the surging freight rates. Considering that freight rates have been on an upward trajectory since 1Q24, rising from USD 4-5k to the current USD 10k, KGW is set to post strong sequential earnings in Q2 FY24 and Q3 FY24.

Higher high formation. In anticipation of a higher high formation, KGW is poised to advance further towards RM0.29-0.30-0.33 before experiencing a healthy pullback. Cut loss at RM0.240.

Collection range: RM0.250-0.260-0.265

Upside targets: RM0.290-0.300-0.330

Cut loss: RM0.240

Source: Hong Leong Investment Bank Research - 4 Jul 2024