- Middle East uncertainty fans oil price concerns but higher bunker costs may not severely affect profitability, as long as trade demand stays firm
- Short term outlook on freight rates and demand/supply balance not favourable though
- We cut our FY11 EPS estimates by 8%; TP cut to S$2.15; Downgrade to HOLD
The rebound continues, but not as smoothly. While volumes continued to surprise in 4Q10, largely driven by Intra-Asia trade growth, freight rates have continued to weaken in recent months as supply has held steady despite the weak season. Operating costs per FEU were down 4% q-o-q in 4Q10 as a result of a change in trade mix and better cost controls, but the higher oil price environment puts that at risk.
Uncertainty on all fronts. While volume growth will continue in FY11, the current key concern is potential fuel price spike amid political uncertainties in the Middle East. Oil prices have now risen 15% since the start of the Libyan crisis and this will affect sentiment for the liners, as they may not be able to fully pass on the higher fuel costs in the short term, especially given the seasonally weak period now. While demand is of course the key driver for profitability, and our views on the US recovery and Intra-Asia trades remain relatively firm, the oil price volatility does add a higher degree of uncertainty than before. The sector outlook is uncertain in the near term with high number of new containership deliveries expected in 1H-2011.
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