This article first appeared in Corporate, The Edge Malaysia Weekly, on May 30 - June 5, 2016.
CMA CGM SA, the world’s third largest container shipping firm, will roll out a plan to cut costs by US$1 billion later this year after the French company plunged into the red in the first quarter of this year. Will the plan affect Westports Holdings Bhd’s business?
While details about the planned measures have yet to be revealed, industry officials generally believe that they will have a positive impact on Malaysian ports, which have some of the lowest tariffs among transhipment ports in the region.
“When shipping liners are hurt, they look for cheaper options to improve their margins. Singapore’s loss [because its port charges are higher than Malaysia’s] is our gain,” a local port executive tells The Edge. Malaysian ports, such as Port Klang in Selangor and Port of Tanjung Pelepas (PTP) in Johor, have been gaining market share in transhipment volume in Southeast Asia over the last decade.
The growth of the country’s two major container ports has affected Port of Singapore’s throughput over the years. Nevertheless, Singapore still dominates in the region, although its transhipment volume is gradually declining.
In a Straits Times report on May 16, Ocean Shipping Consultants director Jason Chiang was quoted as saying that Singapore’s market share in the region’s transhipment volume had declined last year, relative to Port Klang’s and PTP’s share.
“Transhipment volume for the three ports combined, in fact, grew from 42.4 million TEUs (20-foot equivalent units) in 2014 to 43.5 million TEUs last year, but Singapore’s share of this shrank from 65% to 61%.”
A study by the United Nations Economic and Social Commission for Asia and the Pacific states that Malaysian ports accounted for 15.4% of the transhipment throughput in Asia last year, compared with Singapore’s share of 37.1%.
However, while Westports recorded a 9% increase in transhipment volume in 1Q2016 to 1.8 million TEUs, Port of Singapore registered a decline of the same quantum to 7.4 million TEUs.
CMA CGM reported a net loss of US$100 million (RM409.7 million) in 1Q2016, compared with a net profit of US$406 million a year ago, due to falling freight rates as a result of ample capacity in the industry. Core operating profit fell to US$3 million from US$406 million a year ago while sales declined 15.3% to US$3.4 billion. Its operating margin was reported to be 0.1%.
Amid the challenging outlook, CMA CGM said it planned to launch an 18-month programme to slash its costs by US$1 billion from US$14.4 billion last year.
The group has adopted cost-cutting measures to manage the falling freight rates since 2009. However, none of the measures were given a target amount.
For example, in 2013, CMA CGM managed its costs through hundreds of small initiatives, from bunkering and chartering to operational management. Most of the measures were aimed at improving efficiency in the group’s internal processes rather than services to customers.
When contacted, Westports declined to comment on the impact of CMA CGM’s cost-cutting programme on its business, saying that it does not disclose revenue contributed by clients. It says the number of containers from CMA CGM handled by Westports has been growing in tandem with the total volume.
It adds that Westports is unperturbed by CMA CGM’s planned cost-cutting programme, despite the French liner accounting for a third of its container throughput, noting that it has among the most competitive transhipment tariffs in the region.
A November 2013 research report by Credit Suisse states that CMA CGM contributed 23% to 25% to Westports’ revenue between 2010 and 2012. The figures for last year are not available.
“We believe we have contributed to CMA CGM’s cost-reduction measures for its operations here and will continue to do so going forward,” says Westports CEO Ruben Emir Gnanalingam in an email reply to The Edge’s questions regarding the possible impact of CMA CGM’s cost-cutting programme.
“Besides costs, productivity is also crucial. Westports’ average productivity has reached 35 moves per hour — the fastest in the region. The faster we load and unload for CMA CGM, the faster they can sail and manage their overall schedule integrity.”
The container liner industry has been grappling with slowing traffic growth and rates decline since the 2007/08 global financial crisis. AP Moller Maersk, the world’s largest container shipping group, reported a 95% decline in net profit in 1Q2016 to US$37 million from a year ago.
Maersk Line’s average container rate dropped 26% to US$929 per TEU in 1Q2016 from a year ago. CMA CGM’s average container rate fell 20% to US$1,034 per TEU in 1Q2016 from a year ago.
Besides CMA CGM, Hapag-Lloyd — the fourth largest container shipping line in the world — reported a net loss of US$48.8 million during the quarter, with its average container rate falling 20% from US$1,067 per TEU a year ago.
South Korean container liners are among the worst hit. Hanjin Shipping Co Ltd’s net loss widened to US$221 million in 1Q2016 from US$36 million in 1Q2015. The group surrendered its management right to its main creditor, Korea Development Bank, on April 22 as part of its voluntary restructuring process. As at end-2015, Hanjin’s debt stood at US$4.78 billion, with more than 55% considered short term.
Hyundai Merchant Marine Co Ltd (HMM) is also undergoing a restructuring exercise with Korea Development Bank. In 1Q2016, HMM’s net loss widened to US$234 million from US$42 million a year ago.
Westports’ share price has been on an upward trajectory since Jan 15, adding 14.32% to its market value when the stock closed at RM4.27 last Thursday. The stock is trading at a projected end-December 2016 price-earnings multiple of 23.99 times.
Out of 17 analysts covering the stock, seven have “buy” calls and eight have “hold” recommendations. The rest are calling for a “sell”. The 12-month consensus price target for Westports is RM4.46.