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Rates boost outlook for logistics companies

Update: April, 02/2012 - 10:09
Analyst's Picks

A number of shipping companies were on the brink of bankruptcy last year due to high debt levels and foreign exchange losses – the fourth year some of these companies had suffered under these forces. This year, an improved balance of trade to stabilise the dong, along with a decrease in interest rates, will create more favourable conditions for the shipping industry.

Foreign exchange losses compounded the difficulties for the logistics industry in 2011. The dong was devalued by 9.3 per cent against the US dollar over the course of the year, and many companies in the industry complained that foreign exchange costs accounted for up to half of their losses. Petrovietnam Transportation Corp (PVT), Viet Nam Tanker (VTO), Viet Nam Ocean Shipping (VOS) and Viet Nam Sea Transport and Chartering (VST) all reported financial costs of VND200 billion (US$9.5 million) or more.

Financial forecaster BMI has predicted that the dong would be devalued by only about 1.7 per cent against the dollar in 2012. Foreign exchange losses for shipping companies this year would correspondingly fall to about 1/5 or 1/6 of what they were in 2011.

With interest rates stabilising alongside the foreign exchange rate, interest costs for the industry were also expected to decrease this year by about 50 per cent compared to last year.

It remains too early to gauge the overall prospects for the shipping industry, but the industry could experience a rebound if the public debt crisis in Europe doesn't disrupt international trade. The IMF is cautious in its forecast for growth in global commodities trade, predicting a growth rate of just 5.8 per cent in 2012 compared to 7.5 per cent last year.

Shipping industry may need one or two more years to recover, but with lower financial costs in 2012, they should see great improvements in profits this year. This will be the beginning for a recovery for the industry, even prior to positive signals from increased freight indices.

Listed shipping companies can be classified into four main groups corresponding to their transport capacity. In these groups, we rate Group 1 and Group 2 significantly higher than the remaining two groups.

Groups of stocks

Group 1 – Group of companies leading in bulk shipping, such as VOS and VST. This group has advantages in long-term experience in the industry, international competitiveness, professional crew teams and rejuvenated fleets. Hence, these would essentially be the best stocks during the market recovery.

Group 2 – Group of liquid shipping companies with stable capital sources from the parent company, including PVT, Viet Nam Petroleum Transport (VIP) and VTO. With the advantage of stable financial sources from the parent company, this group has barely suffered from the effects of the recession, but will recover more slowly than Group 1.

Group 3 – Group of companies with average transport capacity, such as Vinaship (VNA). This group is not as competitive as Group 1 but can still operate on short routes or transport to a fixed number of customers.

Group 4 – Group of companies with weak transport capacity. These companies are characterised by old fleets operating on short routes. This group is facing the threat of bankruptcy or delisting due to consecutive losses and includes Viet Hai Shipping (VSP), Ha Noi Maritime (MHC), Dong Do Marine (DDM) and Seagull Shipping (SSG).

Compared to the VN-Index overall, shipping stocks have experienced a deep and prolonged downturn and have yet to witness any significant recovery. However, this appears to be the lowest in the long run to the bottom for these stocks, making this an appropriate time for investment in these shares.

We recommend investors consider buys in Groups 1 and Group 2, the groups best positioned to benefit when the economy recovers. — BVSC

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