TA Research said, in the event of an all-out war, global trade disruptions would be inevitable and this would have a profound effect on the global supply chain.
PETALING JAYA: The ongoing tensions in the Middle East are having limited impact on the earnings growth of local shipping and aviation companies operating in the transportation sector.
According to TA Research, there is no immediate threat to sector earnings unless the tit-for-tat actions escalate into a full-blown war between Israel and Iran, and their respective allies.
“With the limited exposure, we continue to believe sector earnings will grow by 68%, thanks to the robust trade and overwhelming demand for air travel, which are spurred by the state of the US and China economies,” the research house said, citing the International Monetary Fund’s growth projections of 2.7% for the US economy and 4.6% for China in 2024.
In a report yesterday, TA Research said, in the event of an all-out war, global trade disruptions would be inevitable and this would have a profound effect on the global supply chain.
“As such, we continue to think that third-party logistics in Malaysia will play an important role in strengthening the overall supply-chain management,” the research house said.
“Third-party logistics operators enable various warehousing processes, procurement and distribution of raw material, a unification between freight and Customs and expedite shipment of goods. Importantly, the additional cost of having third-party logistics services is insignificant compared to the cost of disruptions in operations, which could unbearable,” it said.
TA Research reiterated its “neutral” stance on the transportation sector, with Westports Holdings Bhd
as its top pick with RM4.26 target price.
The research house said the port operator would be one of the beneficiaries of foreign direct investment in Malaysia as well as its new concession agreement, which bodes well for its earnings growth.
TA Research said while shipping operations remained intact, it would expect shipping costs to remain elevated amid ongoing tensions in the Middle East.
“At this juncture, we are inclined to believe that shipments of goods would remain fully operational but the cost of shipment is expected to rise due to geopolitical risk,” the research house said.
“After many incidents of shipping attacks in the Red Sea and the subsequent re-routing of cargos around Africa early this year, the cost of shipping has increased sharply,” it added.
TA Research said if there were any more serious attacks on Israel and Iran, the shares of shipping liners on Bursa Malaysia would respond in tandem with the rise in global shipping costs.
On aviation, the research house said, the direct impact on Capital A Bhd would be relatively small compared with major airlines in the Middle East such as Emirates, Etihad, Qatar Airways, Salam Air and Air Arabia.
For Malaysia Airports Holdings Bhd’s (MAHB) wholly owned subsidiary, Istanbul Sabiha Gokcen International Airport (ISG), which contributed to 14% of MAHB’s revenue in 2023, the impact would likely be insignificant too, TA Research said, as Iranian passengers constituted less than 1% of total seat capacity for ISG.
Nevertheless, TA Research conceded that unfavourable oil price movements arising from the geopolitical tensions could distort the recovery trend in air-travel demand.
The research house’s base forecast for crude oil stood at around US$85 per barrel for 2024.
For every US$1 increase in fuel cost, TA Research said, its earnings estimates for Capital A would be reduced by 15.4% without any cost pass-through.
“In our opinion, the overwhelming demand for air travel in this region after the implementation of visa-free entry for travellers from China means the fuel surcharge imposed by Capital A currently would remain intact. In other words, the increase in fuel costs will be passed on to passengers by raising airfares,” the research house said.
“As such, we do not think the surge in oil prices will affect margins this time around unless there is an exorbitant rise in jet fuel prices that will affect the demand,” it added.
